6. ILLOGICAL LEGAL TAX LAWS

Logical Vs Legal Tax Laws: Fair Share

A nation needs a public, governing process to provide problem- solving services which the citizens cannot privately provide them selves. Among the services are defense and education as well as community fire, health and police protection. Taxes are needed to pay the servants in these public agencies; if these services are under funded, people will continually lose funds because of the unsolved common problems, e.g., the needy turning to crime as a way of life, preying on the average citizen. Or, worse, the unsolved problems will result in economic instability which will destroy economic security.

To pay for public services, taxes must be collected. Logically, pragmatically and fairly, all should pay a percentage of their income which corresponds to the cost of government. If the government takes 14% of the Gross National Product, everyone should give 14% of their current income or current time to facilitate public services. To not pay one's fair share is self-destructive of one's future, economic well-being.

Underfunded public services means no public problem-solving at all, and this will lead to social and economic instability. This self-destructiveness of one's future is especially true of the wealthy who consistently use their money to buy tax-exemptions. This, jeopardizes public stability and forcing the under-connected middle class to pay more than their fair share of taxes. In his campaign and Presidency, Ronald Reagan enshrined tax avoidance as an anti- inflationary path for the individual to follow; this course ignores the role and cost of the public problems behind inflationary suffering. Reagan's course aggravates suffering and stability by undermining and disorganizing public services.

Many will object to the claim that the wealthy do not pay their fair share; after all, doesn't America have a progressive tax system which requires more taxes on each dollar as one's income increases? Is this claim true in economic fact and reality, or true just on paper and in rhetoric?

Tax-exemptions nullify the concept of a progressive tax on higher incomes because the loopholes allow one to reduce one's taxable income.

As a few people know, the claim that America has a progressive tax system is a falsehood.

America has a progressive tax system only for the lower income brackets. Tax rates progress only until one hires lawyers and accountants to utilize exemptions and loopholes. Or, if sufficiently well-fixed and unscrupulous, one can buy a politician to enact a custom, special tax-exemption.

The legal laws of an economy should describe and define the logical laws of production. Recall how legal and logic have the same Latin root which means "to gather." Logically, consumption or ownership of products cannot occur without someone first producing the goods or services. Logically, possession of the product should belong to the producer. Legal laws should reflect this logical relationship. If legalities don't, the producers will stop producing: Why produce if the end results are the same as if you had not worked at all?

By legal law, one should receive according to how one produces, that is, ownership of wealth should go to those who produce it. When the legal laws fail to observe the law of wealth production/ownership, illogical theft is occurring. The deregulation of oil prices during the Carter Administration allowed legal theft in which the oil companies were allowed to price-gouge the consumer. A more subtle form of legal theft involves tax laws which allow some to escape paying their fair share of public service costs, which forces others to pay more. The overtaxed are the victims of a form of theft, for more tax dollars are forced from them because the well-fixed are undertaxed.

Illogical, impractical and unfair tax laws are written by the modern politicians. The negative consequences of illogical tax laws are not limited to a few people escaping taxation. The ramifications involve an imbalancing of production. One clear example of how illogical tax laws have imbalanced production is on the farm where "capital gains law, not husbandry principles, determines how long a sow will be kept for breeding." Likewise, only a few years after tax-shelters were established for avocados, a harvest glut occurred which was four times the national consumption.

These examples of illogical tax laws imbalancing production are reminiscent of the roots to the Polish (1980's) economic mess. Poland was once self-sufficient in grain and livestock, even exporting some. However, misuse of subsidies prompted the peasant farmers to constantly shift production in pursuit of subsidies. In one case, livestock subsidies imbalanced grain production; both grain and live stock prices increased. Even more absurd was the government buying wheat at one price and then selling it at half the cost in the form of subsidized bread: Farmers sold their wheat to the government and bought bread to feed their animals.

The Polish debacle shows how people change their work based on government subsidies, whether these subsidies are direct support or indirect tax-exemptions. The overtaxed alter their work orientation in order to take advantage of the illogical tax laws. After all, more important than one's gross income is one's income after taxes. A very good example of increasing one's total income through tax-exemptions occurred when Congress in late 1981 increased its own tax-deductions, which amounted to a "15% pay raise" according to the Internal Revenue Service.

By definition and effect, illogical tax laws are counter productive, for if people shift their work habits in pursuit of illogical tax advantages, less production will result. This sequence is supported by the following accounts of "left-handed" financing and tax straddles. In reading the following analysis, please note how the tax laws have been structured to motivate acquisition of old production rather than spur creation of additional jobs and products. These laws divert the real capital--human intelligence, time and effort--from production to non-production.

Left-handed Financing: Robbing Peter ...

Through left-handed financing, corporations sell assets in order to remain solvent, as seen in the previously cited sale of the Pan Am building. Left-handed financing refers to how assets are listed on the left side of a financial balance sheet, and it describes how some ailing corporations finance day-to-day operations by selling their assets, thus the expression "left-handed financing."

Left-handed financing came into vogue because of a drought at the "three favorite financial watering holes--the stock market, the bond market and banks and other commercial lenders." Where has the money gone? Among the drains on the reservoirs of cash are trust funds which not only buy the assets of corporations but offer income to investors that is "80% to 90% tax free." The tax-favored nature and asset buying actions of certain trusts reveals the role of illogical, counterproductive tax-laws: these laws divert capital from production re-routing it through tax favored acquisitors. They reward the decapitalists who divest the capitalist of his production.

If manufacturing corporations were treated as favorably as the nearly tax-free income from the acquiring trust, would they need to sell assets? Or, if the trust were taxed more equitably, would corporations be so strapped for cash?--The taxes escaped by these trusts force a detrimental "enhancement" of tax pressure on the asset-rich. When tax laws force the more productive businesses to transfer assets to acquisitive trusts, the tax laws are not capitalism per capita but are capitalism for a fewer few: they allow a few to acquire the products of many.

The entitlement programs that transfer money through government agencies from the producers to the non-producers are petty in comparison to the tax laws that entitle private transfer of wealth from the capitalists to the decapitalists. The sacred cows killing America are not nickel-and-dime public programs but are private actions using illogical tax laws. Leading this herd of private cows is Merrill Lynch, the brokerage firm.

A top executive of Merrill Lynch's investment banking unit, which arranges left-handed financing, noted how his firm decided a decade ago that private investors would one day own the nation's earning assets, that is, people unassociated with industrial corporations would acquire corporations' assets. In addition, he recounted the range of assets and the source of funds for left-handed financing "included buildings, manufacturing and distribution facilities and transportation equipment with conventional providers of capital such as banks and insurers." This quotation not only shows the range of assets, but shows a reason why cash-starved corporations are unable to get reasonable loans from banks or insurers. Bankers are diverting the savings of America into left-handed financing.

Would production corporations be in financial binds if Wall Street investment bankers were not arranging for trusts to buy physical assets? Manufacturing corporations are ailing, in part, because people won't buy their stocks or bonds, nor will people put money in banks for low interest business loans. Why don't people put money in these traditional "watering holes?" The financial and tax systems illogically allow greater income from buying old existing assets (inflationary returns) rather than capitalizing additional assets by direct investment with existing corporations (production profits).

Corporations are hampered in borrowing operating funds directly from the banks or people. Implicitly, Merrill Lynch and the banking community prefer to first lend the money to tax-exempted acquisitive people who will then give the money to the corporations only if the latter sell their assets. Evidence of this preferential treatment in the banking community is the multi-tiered interest rate structure which benefits the paper manipulators, e.g., the brokers' lending rate. The favorable tax treatments allow the acquisitors, if need be, to pay interest rates higher than the average manufacturing corporation and thereby virtually monopolize the available money. The interest costs are written off as a tax-deduction which makes the effective cost of borrowing money lower. Absurd?

During the Reagan Administration, it is unlikely that any reform of left-handed financing will occur. The previously cited, left- handed trust was arranged by Merrill Lynch, which received three- quarters of a million dollars for setting up the trust under the stewardship of Donald Regan who is now Reagan's Secretary of Treasury. The decapitalists will not be stopped from within government, for Secretary Regan is not only in charge of the tax-collecting agency of government, but has a personal stake in the success of left-handed financing through his $10 million worth of Merrill Lynch stock. In addition, Donald Regan was a strong defender of expanding left- handed financing to new levels through the "leaseback" provisions of Reagan's National Recovery Act which legitimized previously illegal "sham" leases. Regan at the head of the Treasury is the proverbial fox in the chicken coop.

Left handed financing occurs on an international level. The U.S. federal and trade deficits represent a funding of daily operations by giving foreigners money with which they buy American factories and land. See the later essay on Monetary Colonialism.

Benefit Capital Creators Or Capital Manipulators

Under the present legal laws, and in order to survive, creators of capital have to sell capital assets to paper manipulators who are subsidized by decapitalistic bankers and illogical tax laws. Beyond the direct losses from an illogical tax and financial system, indirect losses accrue as the potentially productive and creative capitalists opt for the fast decapitalistic buck. Because the American tax system favors the manipulators of symbols, citizens increasingly pursue income from acquiring rather than from capitalizing production. Consequently, the system of production must contract with the undesirable factors of more unemployment and inflation.

Will Ronald Reagan stop the imbalance of the system of production through the tax and banking system? If one considers how Ronald Reagan (1) spent the two years prior to 1980 lecturing on avoiding long-term investment and pursuing liquidity, and (2) sold all his stocks in preference for certificates of deposit, one must realize that Reagan does not distinguish

symbol manipulation from production of substance, inflationary return from capital gain, and capitalism for a fewer few from capitalism per capita.

Reagan's orientation is obvious; in essence, his symbolic approach to economics reaffirms his past career grounded in symbols and acting, not substance and production.

Tax Straddles

As said previously, America is being trampled foremost by the private sacred cows, and Merrill Lynch is leading the pack, a breed apart. An exceptionally fine example of Merrill Lynch's role in the present illogical tax system is the issue of tax straddles. Merrill Lynch, again under Regan's tutelage, pioneered tax straddles.

The name straddle derives from how the transaction of any stock, bond or commodity involves two legs--buying and selling. A person can benefit by arranging the selling "leg" of one transaction to straddle the same tax period of the buying "leg" of another transaction. Straddles involve selling and buying similar items in the same month so that it appears that you bought and sold only one item, not two.

Tax-straddles are used most often to avoid paying taxes by converting short-term gains, which are taxed at high rates, into long- term gains for a lower rate of taxation, one straddler avoided taxes on $10 million gained in 1976. In addition, straddles can be used to generate artificial losses, e.g., selling gold at the beginning of April for $510 and buying gold later in the month at $610 with a claimed loss of $100.

Usually, losses on investments are claimed as a result of first purchasing and then selling a single item, and the person incurring the loss ends up with no item in his possession. With tax-straddles, one not only receives the tax write-off but one retains ownership of the item or a similar one. Thus, two logical differences distinguish the usual investment loss and a straddle loss: not one but two items are involved, and ownership of a higher priced item is retained. Yet, for tax purposes, an investment loss and straddle loss are treated the same.

For most people, it is hard to grasp the nature of a tax-straddle primarily because straddles involve commodities with which people are not familiar. In hopes of clarifying their nature, a few parallels will be drawn using objects more common in everyday life. For instance, suppose your neighbor sold his house in early April for $51,000 and then bought a second house for $61,000 declaring a $10,000 loss in real estate transactions. Or, suppose you sold a dinner ring for $5,100 at the beginning of the month and bought another ring for your wife that cost $6,100 declaring a $1,000 loss on precious gem dealings.

For the suffering tax-payer, the above tricks are expensive, for they force more taxation of those not using straddles. The tricks involve a combination of mixing and forgetting time frames so as to confabulate artificial losses. Was anything actually lost during the month of April? No, some item was retained at the end of the month.

The straddler avoids taxes by basically buying something he just owned at a higher price and declares the difference as a tax loss. He legally forgets the original purchase price and forgets that he still owns the product. He is able to use the second purchase price as the means for computing his taxable income.

What has been the legislative drift of Congress toward straddles and the effect on tax-payers? The national politicians are aware of the dubious nature of straddles, for in 1981 Congressional hearings were held on the issue. In response to the cries of unfair tax breaks for professional dealers, congress opened straddles to more people, in other words, rather than stem the cries of "Thief! Thief", the outrage was quelled by letting more people steal. This campaign was characterized by as an "old-style, big-money" lobbying effort. A major force to conserve the straddles was the National Conservative Political Action Committee, NCPAC. And, not surprisingly, a chief defender of straddles was the Secretary of Treasury, Regan, whose firm had pioneered straddles.

For a few, tax straddles are the convenient and gainful practice of both confusing and forgetting time frames. They are logical in the minds of the necronomists. After all, as we said in an earlier chapter, necronomists have lost, forgotten or ignored their sense of time ... if they ever had it.

More Vs Moral Laws: Tax The Counterproductive

The illogical tax laws that privilege a few with inflationary income are immoral in many ways. One can cite how the tax-exempted municipal bonds have been used to finance pornography stores, or how tax-shelters have been set up by con men whose fleeced victims don't contact the law because of potential IRS scrutiny. Similarly, the logic of high-income doctors becoming Amway distributors defies common sense ... unless one realizes the role of converting personal expenses into tax-deductible business expenses, e.g., "work, vacation travel and restaurant meals".

One taxpayer claimed $11,391 worth of deductions though he generated only $718 in business. Another example is the Reagan Attorney General, William Frank Smith, who availed himself of an oil depletion tax-shelter that only cost him $15,000 but gave him $66,000 in tax deductions. These people are in effect stealing from their fellow Americans by forcing the remaining tax-payers to suffer losses to higher taxation. Is this moral behavior?

Worst of all, illogical tax laws are immoral by influencing people to engage in less productive activity which reduces production. A crucial question for a system of production is what enterprises have the best tax-exemptions? Obviously, all enterprises are productive or counterproductive, or some degree in between. If the best tax- exemptions are given to the least productive or the counterproductive enterprises, it should be obvious which way the system of production is going to go--down. For instance, if farmers think they can make more money by speculating in commodities with the use of tax-straddles than in growing commodities, which way will America go?

Illogical tax laws are immoral when they prompt people to turn from producing more needed goods and services. As production and consumption per capita decline, less social and more primitive behavior becomes common place. In adding or retaining illogical tax laws, the politicians set in motion the train of events that brings out immoral behavior. Economic necrosis results from illogical, but legal tax laws--necronomics.


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