Taxes, Transparency, and Our Opaque Opulent

Mega-millionaire residents of Manhattan's finest luxury towers pay less of their income in federal taxes than the janitors in their towers do. Once upon a time, we had a law that discouraged that distinction.

By Sam Pizzigati

How much of their mega-million incomes did the billionaire Koch brothers — the secretive right-wingers who've been busily bankrolling [1] Wisconsin's now infamous governor Scott Walker — pay in federal taxes last year?

We have simply no idea. The IRS closely guards the confidentiality of income tax returns. So we have no way of knowing exactly what the Koch brothers reported in income for last year or how much — or little — of that they paid in taxes.

The U.S. Census Bureau guards rich people’s privacy even more zealously. The annual Census income reports have, in fact. essentially become useless — as snapshots of income at our nation’s economic summit — because the Census folks, as the Congressional Budget Office noted [2] earlier this month, do not even “report an individual’s earnings if they exceed a certain level.”

The Census Bureau, instead, only reports how many Americans make above that level, not how much they make. The result? We know from Census annual reports exactly how many Americans make between $50,000 and $100,000. But we have no clue how many make between $500 million and a billion.

The reason for the Census Bureau's hands-off approach to reporting data on high incomes? If more specific information about how much rich Americans are making ever became public, the argument goes, someone might be able to attach some names to the numbers — and violate the privacy of our wealthiest.

We certainly wouldn’t want that to happen. But why? Why not make public the incomes of the rich? As a society, after all, we show no similar privacy-protecting zeal on other personal economic fronts.

Take home values, for instance. You can go into county courthouses all across the United States and find out exactly how much our nation’s richest — and everyone else — have paid for the properties where they live.

So why the special treatment on income? In 1934, back in the Great Depression, lawmakers in Congress essentially asked that same exact question.

If rich people had to annually reveal both their incomes and their federal income tax, these lawmakers believed, the rich might think twice before conniving to cheat Uncle Sam — and Congress would be able to more quickly identify and plug whatever new loopholes the rich might be tunneling through the tax code.

A congressional majority would soon agree. The resulting 1934 Revenue Act would apply a disclosure mandate to all corporations, partnerships, and individual taxpayers subject to the federal income tax. At that time, only the nation’s most affluent 7.25 percent faced any income tax liability.

The new Revenue Act almost immediately outraged the richest of those affluent. They quickly began lining up friendly lawmakers to introduce legislation that would repeal disclosure and set about funding a campaign to push the legislation.

Observers gave this repeal campaign no chance. But the deep pockets behind the effort spent a fortune and tied their “cause” to the sensational Lindbergh baby kidnapping trial then filling the nation’s front pages. If the rich had to disclose their incomes, the argument went [3], kidnappers would gain a wider pool of targets.

[4]

This PR “juggernaut” would carry the day. In less than three months, historian Marjorie Kornhauser notes [5], the campaign to repeal the Revenue Act’s income tax publicity provision “went from hopeless to a complete success.”

Privacy for the privileged has reigned, on the federal income tax, ever since. But every once in a while an enterprising scholar will breach that privacy wall. Last week saw one such breach [4] — in the trade journal Tax Notes.

The author, economist Martin Sullivan, has placed his sleuthing skills to work on the Helmsley Building, a 35-story Manhattan art deco landmark now home to 130 of New York’s deepest pockets.

The IRS, if you ask, won’t tell you how much any of those deep pockets make. But the IRS, as Sullivan observes, does tabulate “individual tax return data by ZIP code.” The Helmsley Building just happens to have its own zip code.

In 2007, Sullivan discovered, the 130 federal tax returns filed from the Helmsley zip code averaged $1.17 million in income. The Helmsley deep pockets paid, after exploiting every tax code loophole they could find, only 13.7 percent of that income in federal income tax.

These fortunates paid another 1 percent of their incomes in Social Security and Medicare payroll tax. In all, their 2007 federal tax bill averaged 14.7 percent.

[6]Sullivan’s Tax Notes analysis places this 14.7 percent in a rather stunning context. New York janitors, Sullivan notes, averaged $33,080 in 2007. They paid 24.9 percent of their incomes in federal taxes. Security guards in New York made $27,640. They paid 23.8 percent of their incomes in federal taxes.

In other words, the residents of the Helmsley reported around 35 times more income than their janitors and 42 times more than their security guards, yet paid a substantially smaller share of their incomes in federal taxes.

Residents at the Helmsley are truly doing their building’s namesake proud.

“We don’t pay taxes,” as billionaire real estate baroness Leona Helmsley loved boasting. “The little people do.”

Years ago, amid the battle over repealing the 1934 tax disclosure mandate, progressive lawmakers offered up a compromise that would, in the end, not prevail. Let disclosure, they suggested, be limited to incomes over $25,000, a sum that would equal a bit over $400,000 in today’s dollars.

If we had disclosure at over $400,000 in effect today, maybe fewer little people would have heftier burdens, at tax time, than rich ones.

Sam Pizzigati edits Too Much, the online weekly on excess and inequality published by the Washington, D.C.-based Institute for Policy Studies. Read the current issue [7] or sign up [6] to receive Too Much in your email inbox.