The Beauty of High Marginal Tax Rates on the 1%

    Dewey-LeBoeuf-new-sign-New-York2-300x184Monday, the New York Times reported that the recently-concluded criminal trial against three former executives at the bankrupt Dewey & LeBoeuf law firm ended in a mistrial.  Last week, the jury hung on several of the 151 charged counts of fraud and acquitted on others.

    There were no convictions.  Now prosecutors must decide whether to devote another year or so and who knows how much money and energy on arcane charges that the jurors may have had trouble understanding and without a smoking gun.

    Manhattan District Attorney Cyrus Vance claims top Dewey managers directed their bean counters to revise various figures deep in the firm's 2009-2010 balance sheets.  The alleged intent was to defraud 1) the firm's creditors (big banks) by assuring them that Dewey was financially sound and therefore the creditors did not need to call in outstanding loans; 2) other lenders (insurance companies) who were considering, and ultimately approved, a proposal to issue a $150 million bond on the firm's behalf.  In the end, the banks and insurance companies may have lost $300 million when Dewey & LeBoeuf went belly up in 2012.

    The Times quotes several legal experts for the proposition Vance overreached by asking the jury to draw doubtful inferences regarding criminal intent.  Moreover, the experts say, even assuming the jury drew the requisite inferences, the jurors might not have agreed to convict.  In fact, counsel for defendants determined the prosecution's case was so weak that they did not call any witnesses.  As a result, the court submitted the case to the jury when the prosecution rested.  The jury vindicated the defense's strategy when it refused to convict anybody on any charges.

    The case does raise a number of pointed questions for Vance.  How smart was it to bring 151 separate counts against the defendants in one trial?  Why couldn't prosecutors distill the cases against each defendant down to a handful of specific incidents that would have justified a conviction?  Could the prosecution have obtained guilty pleas?  Was prosecuting disgraced attorneys, whose primary victims were financiers, even in the interests of justice?

    Perhaps even more interesting and instructive than these questions is the reaction of some of the commenters on the story at NYTimes.com.  A number share my perplexity over the prosecution's strategy and question the wisdom of trying the cases at all.  But the fact that white collar defendants escaped conviction – at least for the present – incensed others.

    “Who bought those jurors,” wrote one.  Another posted: “Good grief, this was the opportunity to get back at crooked lawyers and the jury gave the case away!”  These reactions don't jibe with the facts detailed by the Times which stress the inconclusiveness of the evidence and the failure of prosecutors to clarify why the defendants were guilty.

    Several other posters attributed the verdict to sharp mouthpieces.  A self-identified Bernie Sanders supporter noted:  “Another case of might makes right. Put a black kid in jail for 10 years at a cost of 120,000 a year for selling $10.00 worth of pot, justice served! Let a white collar criminal, banking, legal, healthcare, what ever off the hook because he had the right counsel”.  Still  another commented, “if you are wealthy and white and a banker with slick attorneys, you can slip and slide your way through, dancing around corners, tip toeing around laws that you're breaking, and manipulate the system enough so you can run free back to your yacht!”

    Notwithstanding such claims, defense counsel basically sat on their hands.  They let Vance's minions tie themselves in knots trying to prove over 150 counts.  In other words, lousy, not slick, lawyering led to the mistrials.

    Americans are irate that 1% of the people control 42% of our wealth.  They want pounds of flesh.  Regardless of whether the Dewey executives broke the law, they belong in jail seems to be a widespread sentiment.

    This reaction bring to mind Tom Wolfe's 1987 classic tale of Wall Street greed and injustice - The Bonfire of the Vanities - wherein philandering but not malevolent bond trader Sherman McCoy sees his whole world fall apart after he is charged with hit-and-run manslaughter.  Due to his elite status as a million dollar “Master of the Universe” living on Park Avenue and the fact that the victim is young, black, and impoverished, prosecutors, journalists, and religious hustlers all demand McCoy's head on a platter.  The novel ends with McCoy bankrupt, divorced, and awaiting retrial.

    In our winner-take-all economy, where the losers vastly outnumber the winners, who can question the etiology of anger at big-shot bankers, wise guy lawyers, and corporate titans?  But in sketchy complicated cases where the victims are banks and insurance companies, insisting on convictions as retribution for the sins of the 1% equates to extremely rough justice.

    What is the solution then?  It seems that much higher top marginal tax rates best answers that question.  If top partners at white-shoe law firms (and investment bankers and CEOs), start paying 50% on every dollar of annual income over their first $500,000 and 80% or more on every dollar over $1 million, they simply won't have enough to live the lordly lifestyle that so incenses the hoi polloi.  They'll also be less inclined to play accounting games since the ultimate reward for putting one over on creditors won't be nearly as great.

    The Dewey defendants may have cooked the books because they were desperate to hold on to their exorbitantly compensated positions as long as they could.  Indeed, prosecutors contended that the partners paid themselves an extra $125 million cash from funds they borrowed for the ostensible purpose of making long-term capital improvements.

    Unlike the rest of us, CEOs; managing partners at investment banks, accounting agencies, and mega-law firms; movie producers; hedge fund managers; and other top dogs, decide how much they get paid.  Low top marginal tax rates incentivize them to take as much for themselves as they possibly can as quickly as they can.

    The CEO class may muse: Maybe this strategy will bankrupt the firm within a few years.  Maybe the investment model I'm following in my contrarian high-risk hedge fund kills in a bear market but will die when prices go back up.  For now, I'm going to rake in as much as I possibly can.  To paraphrase Bill James on the late Billy Martin's managerial strategy: “Tomorrow may be a dream or a nightmare or it may never be.  I'm going to win today.”

    Here's where the beauty of ultra-high taxes on the extravagantly compensated comes in.  Facing a tax bite in excess of 80% or 90%, the elites may deem the game is no longer worth the candle.  Long-term thinking is no longer a sucker's game.  Better for the firm to be strong and vibrant for decades during which my family and I will be very amply compensated than to risk everything for one big pay check that's mostly going to go to the government anyway.

    There's another big benefit to nearly confiscatory tax rates for top income earners.  If they turn out to be crooked, they do far less harm to society at large since our government ultimately winds up with the bulk of their ill-gotten gains through their tax payments.  We can use these revenues to weave a tighter and more generous safety net, hire Americans to improve our infrastructure, and build a great society.  A financially secure citizenry contemplating venal sins committed by the once affluent but never gilded is less likely to call for heads to roll in the Place de la Guillotine or anywhere else.

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    Comments

    Thanks for posting Hal. And far be it from me to throw cold water on a great rant against the 1% but to be serious about remedies I don't think one can buttress an argument for higher marginal income tax rates with a rant against crooked lawyers and financial types because, well, they are crooked, and the vast majority of wealthy aren't. And when one speaks of wealth, is it income or assets?. Many of the wealthy, by virtue of assets, minimize, legally, their reported income---so it is capital gains taxes that are operative. Stiglitz concluded that most of the upward shift in "wealth" in the recent past resulted from the lowering of capital gains taxes.

    In any case, the starting point of five hundred K for confiscatory tax rates is ridiculously low. It would really hurt entrepreneurs and small business owners. (And please don't mess around with the capital gains exclusion on the sale of real estate.) The local hardware store owner is easily over that amount and he might decide to close the business and move to Santa Cruz.

    The Central banks pumped in 12 Trillion of cheap money into the system in order to pump up  asset prices, which it did, and my understanding is that most of it went to the already wealthy. Please tell me a good way to redistribute the 12 Trillion and you will have my undivided attention.

     


    One of several points I make is that much higher top marginal tax rates on top earners reduces their incentive to engage in shoddy accounting or as I wrote, "the ultimate reward for putting one over on creditors won’t be nearly as great."

    $500,000 per annum is an extraordinarily high income.  Only a miniscule number of Americans - about .5% (yes that's a decimal point in front of the 5) - come close to this figure.  I wish I was breathing the rarefied air where this is viewed as a "ridiculously low" amount to start taxing at 50% - which is certainly not a confiscatory rate. 

    Very successful small business owners, who are resistant to paying 50% marginal rates, are welcome to reinvest potential profits above $500,000 into capital improvements and higher wages for their employees.

    Regarding capital gains, I'm with you there.  Let's include them in regular income, as we should dividends, and tax all on the same schedule.

    The best argument against very high tax rates starting at or below $1 million is that they can really hurt people who make huge amounts of money but only for a short time.  Professional athletes, models, many pop stars all come to mind.  In order to protect them, top earners should have the right to take their income over a 20-year period.  So, a pop star who earns $20 million in one year but disappears the next could declare $1 million/year over two decades.  She'd still pay much more in taxes, under my proposal, than she does now but she'd end up with far more than if the entire $20 million had to be declared in the first year.

    I wasn't writing about the estate tax.  But, we need to have more and higher tax rates on very sizable estates as well.

    Obviously, what I propose would begin the process of redistributing the wealth that is in the hands of the few.

    Rant: "speak or shout at length in a wild, impassioned way".

    Maybe you can point to one sentence or phrase in my blog that meets this definition because I sure can't find any.


    My 500 K was for a joint return. (Not me by any stretch)

    What defines a pop star?

    "Rant" was a compliment. I take it back.

    Under your administration, businesses would be "welcome to invest profits as they see fit". Well, welcome to the Comintern, comrade.


    Per whatismypercent.com, only .5% of American households have an income at or above $500,000.  Again, the successful small business people who recoil at paying 50 cents on every dollar earned over the first half a million can plow the money right back into their business thereby avoiding the tax bite.  This is, as I point out, part of the beauty of high marginal tax rates on the 1% (actually it's .5%). 

    This sliver of the American populace, unlike every other, has a great deal of control over what it's actual Adjusted Net Income will be.  When faced with the option of reinvesting money in the business till or taking it as income and paying 1/2 or more to the government in taxes, many business owners will opt for the former.  Assuming thousands of businesspeople make a similar choice, we'll have more employment, higher wages, and stronger small businesses.  Win!


    You scare the hell out of me. Where's Jeb!?, might vote for him.

    By "plow the money" back in, you mean what's left after all the corporate taxes have been paid?

    BTW, you gonna eliminate corporate tax breaks--like accelerated depreciation?  

     

     

     

     


    Most small businesses are incorporated as LLCs.   Limited liability companies are not subject to corporate income taxes.  Instead, net revenue is passed through to the owners as taxable income.  If, towards the end of the taxable year, the books show that the business has done particularly well, the principal or principals may decide it would be sensible to make capital investments and perhaps hire a few people or give out bonuses rather than keep the cash for distribution to the owners if doing so means their total net income will be above the cut-off for very high rates.

    Regarding corporate tax breaks, the code is what several thousand pages long, I don't have the time, energy, or knowledge to rewrite every provision.  Generally, I recommend simplifying and reducing corporate tax rates.

    In response to your contention that a family with two highly paid professionals who together earn over $500,000 isn't that unique, I pointed out that only 1 out every 200 families earn this much or more.  There's a related reason not to be concerned about these very fortunate few.  Spouses who each earn $450,000 almost certainly file would file separately. 


     

    A one owner LLC is treated like a sole proprietorship.Even If the profit is left in the business it still has to be on the return.

    I don't think a co-owned LLC can simply leave profits in a business as retained earnings without paying taxes on it.

    If a co-owned LLC wants to retain profits, they can elect to file as a corporation and possibly get a lower tax rate than individual rates. Then they can use the balance for cap ex, etc.

    I think LLC losses can be taken onto individual returns---which is why folks in startup businesses like the form.

    Don't know the relative numbers of LLC's to Corporations. It's really not clear that this wealthier group we're talking about (Not super wealthy) would tend to have more LLC's. Doubt it.

    I'm more or less with you on more progressive income tax rates but the entire picture of capital gains, estate, state taxes, small business incentives, corporate taxes, real estate mortgage deductions---to mention a few must be part of a comprehensive plan. Otherwise, people will just shift around to try to get the best overall rate.

     

     


    And if that pop star makes $20 million and blows it all by the next year, where does the tax payment come from? Or you create a trust system for them? (I think this already exists)


    If you're suggesting that income can only be deferred to the extent that it's invested in an approved vehicle, this certainly seems sensible.  If the investments go south in a hurry, the losses could be deducted immediately so the taxpayer isn't stuck with an IRS bill she can't pay.


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