Trying to tax the two per cent

Since his re-election in November, President Obama has been fighting against a bitter Republican opposition to enact any of his policies that voters demonstrated they had wanted during the election. However, most recently President Obama has made progress on his plans to tax the wealthiest two percent of Americans – a plan that he hopes will help cut the country’s deficit. Unfortunately, a cog in his plans comes from his own supporters as many of them attempt to avoid the coming tax.
President Obama signed the bill on December 21, 2012. Both before and after this signing, the tax hike was met with much controversy, as is common when any politician suggests an increase in taxes. However, with the recession still fresh in the publics mind, even more people are hesitant of any change that might unbalance an already fragile economy.
“The agreement being worked on right now would further reduce the deficit by asking the wealthiest two per cent of Americans to pay higher taxes for the first time in two decades, so that would add additional hundreds of billions of dollars to deficit reduction”, said Obama in a Presidential address.
The United States are currently faced with a staggering $292 billion deficit. The deficit grew by $260 million in December and this was at the same time the government revenue received a spike as many Americans paid their taxes early to avoid the higher rates being established in 2013. Unfortunately, it hasn’t just been the average American who has scrambled to make some end of the year financial transactions to avoid the new tax structure.
An issue that has arisen in the wake of this new bill, which undermines all the progress made by the Obama Administration, is the effort made by the wealthiest two percent, many of whom supported the President in the election, to skirt or otherwise avoid paying the increased taxes. An example of this can be seen in Costco’s co-founder, director and former CEO Jim Sinegal, who had advocated his support to the president’s economic plan. He had praised President Obama for “making an economy built to last” and continued to say that “in order for companies like Costco to invest, grow, hire and flourish, the conditions have to be right. That requires something from all of us.” However, the actions of Costco’s stakeholders suggest that the last sentence should be altered to read “something from everyone except us”.
Costco planned to pay a special dividend of $7 per share at the end of 2012, which avoided Obama’s proposed tax increase. Stakeholders were taxed at the then 15 per cent rate instead of the 43.4 per cent rate called for by the President. It should also be noted that dividends are typically paid out of earnings; however for this special dividend Costco borrowed $3.5 billion. That’s right, they went into debt just so they could afford to pay their shareholders one last lightly taxed lump sum. This can only be seen as a measure to avoid the coming tax. Mr. Sinegal himself, who had advocated for President Obama, took home approximately $14 million, of which he will only have to pay two million in taxes instead of the approximate six million that it would have been under the new tax structure.
Costco was not alone in their end of the year efforts as many left-wing millionaires and billionaires, who supported the President, have attempted to evade the coming taxes. Costco was not alone, even in this strategy, as a growing number of companies, including The Washington Post, chose to evade taxes by giving out their 2013 dividends in 2012.
Another common strategy seen to avoid this tax has been to relocate a company’s funds to another country with lower taxation. In December, a European Google subsidiary disclosed that it had shifted almost $10 billion in revenues to a Bermuda shell company. Dr. Dre, in an attempt to protect his revenue, has found refuge in Ireland. Facebook’s co-founder Eduardo Saverin went so far as to renounce his American citizenship. While the more prominent Facebook founder, Zuckerberg, has used a grantor retained annuity trust to make large financial gifts to family members without paying the U.S. gift tax.
One has to question how effective this new measure will be when the wealthiest of the one percent resort to unorthodox business practices in a last ditch effort to build on their already unfathomable wealth. Although it may not be unethical, it certainly is shameful. The wealthiest among us should be grateful of the opportunities they were given and give back to the country that allowed them to achieve so much success. If it had not been for the democratic government there would not have been a capitalistic economy that allowed for them to flourish. In addition, a capitalist economy will never flourish when billions of dollars are being hoarded by the wealthiest two per cent. This money needs to be trading hands, paying wages, buying products and taxed so that the government can provide essential public services without borrowing and building a deficit.

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