Social inequalities seem to typify the American society. The federal government is desperately attempting to raise the debt ceiling to cover up for high debt due to insufficient revenues. That notwithstanding, it is now apparent that myriads of billionaires and millionaires rarely pay their income taxes.
This is despite making huge incomes from their investments. Conversely, tax evasion amongst the middle and lower class is an offense that invites horrendous punitive measures (Kourvetaris, 1997). How do the rich avoid paying income tax to the government? Have people banded together to counter this source of social inequality?
Tax Avoidance by Billionaires
There are various ways that the rich are able to avoid taxation. In 2009, the IRS revealed that almost 1,500 billionaires and millionaires in the country did not pay a single dollar as income tax (Wilkinson & Pickett, 2009). First, the billionaires seem to be very philanthropic by contributing to charities and donating to ‘worthy causes’.
However, the tax regime dictates that such amounts that go directly to charity and other philanthropic activities are not subject to tax. Hence, many billionaires use this loophole to evade some significant percentage of their income from inviting taxation. Philanthropy has now become a way of improving the billionaires’ public image. Since they are the faces of their establishments and companies, they begin to make more sales and subsequent more profit in the name of Corporate Social Responsibility (CSR).
On the other hand, the middle class seldom make enough income to direct huge amounts to charitable events and organizations. The little they donate contributes a meager percentage of their income implying that the larger portion of their income is subject to taxation. According to Wilkinson & Pickett (2009), a middle class and lower classes are subject to an estimate of 35% in tax rate while the wealthy individuals only pay amount less than 17%. Besides, the middle and lower classes are not endowed with incredibly huge business ventures and companies that can invite higher returns because of improved public image (Chowning, 2001). This depicts the class disparities that fuel social inequalities within the American society.
The billionaires also evade income taxation by investing in foreign countries. In fact, they are well advised to which country they ought to locate their business. Mainly, they consider countries that charge least amount of income tax on their companies (Shapiro, 2004).
According to economists and tax experts, a company operating in foreign land pays the income tax to the host country and is not subject to paying tax in the United States (Bhim & Salvatore, 2009). The rationale is that a single company cannot pay twice in terms of income tax. They claim that, if that were to happen, it would result to double taxation.
Sidaneus & Felicia (1999) explain that the billionaires capitalize on this loophole and invest in countries with high return on investments and low income tax on foreign direct investments. This does not only increase their wealth, it also exempts them from income tax.
Take a scenario of a middle and lower class citizens whose wealth cannot allow them to invest in foreign countries. Hence, they invest locally where tax regime is significantly high. They end up paying more income tax for their companies (in terms of percentage of their income) than the billionaires and millionaires.
Third, the rich have a tendency of investing in statutory and government bonds. Bhim & Salvatore (2009) explicate that such investments bring immense income for the billionaires in the long term. However, the income is not a subject of taxation and therefore, all the millions that the wealthy make go untaxed. It is worth noting that the government and treasury bonds are very expensive costing millions of dollars.
This is dependent on their nature of the bonds. Subsequently, the low-income earners and middle class are unable to afford such bonds that are never a subject of tax (Wilkinson & Pickett, 2009). As such, the wealthy continue to become rich while the poor continue to struggle with high rates of inflation, unemployment and high tax rate. This is a source of social inequality.
Finally, the billionaires continue to wield huge influence on the policy making process of the government. While government economists and tax experts agree that there is a need for a change in the tax regime, there has been a momentous challenge in introducing the bill to the house.
In fact, President’s Obama articulated that it is only reasonable that the billionaires pay more tax than the lower income earners. The unseen hand of the billionaires has been apparent, owing to their resistance to agree with Obama’s assertion. The Republicans have opposed the move vehemently saying that it is sparking class wars. This has been acceptable amongst the society’s rich who find no problem with the continued social inequalities that are clearly entrenched in the current tax regime.
Have the people banded together against this inequality?
At the outset, numerous citizens mainly from the middle and lower classes have criticized the tax regimes. In 2011, numerous civil rights groups announced ‘Occupy the Wall Street Campaign’. There have been other calls to protest against the influence of the rich on the American society.
While the campaigns have been hugely unsuccessful, there has been debate about the authenticity of their protests. The budgetary team following the continued calls for change in government and tax policies came with budgetary estimates that seem to have the billionaires pay more taxes than the lower class and poor people in the society.
Although this is an indication that the people might win the war in the end, huge challenges remain on the way. The rationale is that not all the billionaires are in agreement with the government’s new directive. This means that they will continue to manipulate the policy-making processes.
In sum, the United States’ tax regime is a characteristic of social inequality. While the middle and the lower classes of the society struggle to make ends meet, they pay more taxes than renowned billionaires and millionaires. The billionaires have invested in foreign countries where income tax is low and the return on investments is extremely high. Thus, they evade paying income tax to the federal government due to the current tax regime principles of no double taxation.
Besides, they contribute significantly to charitable organizations and give donations, none of which is subject to tax. The billionaires continued investments in statutory and government bonds have seen them make more income that is not taxable. All this coupled with their growing influence on the policy making process has seen massive protests against the rich. The most notable one was ‘Occupy Wall Street Campaign’.
Bhim, A. & Salvatore, D. (2009). Social Inequality, Local Leadership and Collective Action: An Empirical Study of Forest Commons. European Journal of Development Research, 21(2), 178-179.
Chowning, D. (1971). When Men Revolt and Why: A Reader in Political Violence and Revolution. New York: The Free Press.
Kourvetaris, G. (1997). Political Sociology: Structure and Process. Boston, Massachusetts: Allyn and Bacon.
Shapiro, T. (2004). The hidden cost of being African- American. Oxford: Oxford University Press.
Sidaneus, J. & Felicia, P. (1999). Social Dominance: An Intergroup Theory of Social Hierarchy and Oppression. Cambridge: Cambridge University Press.
Wilkinson, R. & Pickett, K. (2009). The Spirit Level: Why More Equal Societies Almost Always Do Better. Boston, Massachusetts: Allen Lane.