As I See It: If You Can’t Be Rich, Be Unsuccessful
June 14, 2004 Victor Rozek
Most people who make their living in IT would say they belong to the middle class. And why not? It’s the broadest of the classes, spanning every economic station between the poor house and the penthouse. In good times, the ambition of the middle class is to move up. In bad times, it aspires to avoid slippage. And although Americans tolerate periods of economic stagnation, we thrive on upward mobility. The possibility and the promise of advancement is what keeps the lid on the pressure cooker of economic discontent.
When stagnation tips toward widespread slippage, tensions rise between the class that is perceived as having too much and the class that is losing too much. And when that slippage is the consequence of deliberate policies, we call it class warfare.
One person who doesn’t have to worry about class warfare is Warren Buffett; he’s in a class by himself. People obsessed with such things say he’s the second richest man on the planet. By recent accounts, his estimated wealth is $43 billion, which would allow him to hire Donald Trump as a nanny. Buffett is compelling as only a man who is immune to all realities except death can be. For one thing, he can speak the truth without fear of loss or regard for impact. He has no need to impress anyone, so he has no reason to lie. When asked about the economic policies strangling the middle class and whether they constitute class warfare, he spoke the blunt truth. “If class warfare is being waged in America,” Buffett intoned, “my class is clearly winning.” One reason why Buffett feels secure making that assertion is that he is paying about the same federal tax rate as his receptionist, which very likely means the average IT worker is paying a higher rate than Buffett the billionaire.
Holly Sklar, coauthor of Raise the Floor: Wages and Policies That Work for All of Us, quotes Buffett: “I pay a somewhat higher rate for my combination of salary, investment, and capital gain income than our receptionist does. But she pays a far higher portion of her income in payroll taxes than I do.” And so do we, because although few of us have noticed, since 1962 the share of total federal receipts from the regressive payroll tax has been quietly rising from 17 to 40 percent.
But for the receptionist as well as the programmer, that’s not the worst of it. The problems lie closer to home. For example, since Buffett’s headquarters are located in Nebraska, the receptionist already pays a higher rate in state and local taxes. In 2002, writes Sklar, the wealthiest 1 percent of Nebraska’s residents effectively paid 6.4 percent of their income to state and local taxes, while folks like Buffett’s receptionist paid 9.8 percent, and the bottom 20 percent paid an even higher rate at 10.2 percent.
Nationally, the ratio is even more punitive: 5.2 percent was paid by the wealthiest and 11.4 percent was paid by the poorest taxpayers. In fact, in recent years, 15 percent of the total tax burden has been pushed down to the state and local levels. And that percentage is sure to grow.
That, in a nutshell, illustrates the dilemma of the sliding middle class. In spite of the recent slew of federal tax cuts, the programmer and the receptionist will not find relief, because taxes have simply been shifted to the states.
The transfer of taxes to the middle class has been going on for decades, and both political parties were willing participants in the process. The incongruity of our present situation is that we have an administration that, on the one hand, is virulently against taxation but, on the other, has created record deficits. Ideological fixations die hard, but ideology notwithstanding, those who practice deficit spending can not simultaneously claim to be against taxation; they are simply in favor of deferred taxation. The result, Sklar writes, is that “federal tax revenues have fallen to their lowest level as a share of the economy since 1950.” Lower taxes, however, doesn’t mean lower indebtedness. Repayment of the debt is simply being postponed, and the average liability for a married programmer with two kids now stands at $52,000, which is disastrous news for the kids. So the compelling question Sklar raises is, can we have a 21st century country run on 1950s tax revenues?
The answer is, we can–at least for a while, until states can no longer find ways to fill the revenue gap by raising assorted fees and taxes and cutting services. For now, they have no choice. The $200 billion allocated for the invasion and occupation of Iraq is equal to half of the total federal budget for domestic programs. As those programs are cut, the states are obliged to make up the shortfall. Consequently, the people at the lowest levels of the economic scale take a double hit: not only are their taxes rising, but many of the services on which they rely are being eliminated.
And if the proposed federal budget for 2005 is any indication, the trend will continue, even though there are now 30 states facing an aggregate shortfall of about $40 billion. Cheryl Woodard, cofounder of PC Magazine and Macworld, and lately of the AskQuestions.org project, notes that next year’s budget would cut an additional $6 billion in federal aid to states. The response of states will be predictable, and Woodard offers two troubling examples of what the future holds for IT professionals and their middle class colleagues. One couple in California received a $100 federal tax refund “but paid $515 in new local taxes. A self-employed man living in Nassau County, NY got a $300 tax rebate last year, but his property taxes went up $2,250.”
It is painfully ironic for the struggling middle class that, between 2002 and 2004, as state governments raised fees and taxes and cut services by some $200 billion, American households scraping by on more than $337,000 of annual income enjoyed the benefits of over $197 billion in tax breaks. But the numbers reflect simple cause and effect. What should concern IT professionals, indeed the entire middle class, is that, if these tax breaks are extended, they will cost the treasury more than $1 trillion in the first decade. Assuming we want to maintain the infrastructure and services that that money would have otherwise supported, someone will have to make it up. Middle class, beware.
What this means for the average IT worker is that for the foreseeable future, the premise on which middle class striving was founded is no longer operative. Forget personal advancement; any excess dollars you earn will be coveted by the state. Remember, the rich won’t pay taxes because they don’t have to. The poor won’t pay because they can’t. That leaves you.
The inescapable conclusion is that generating income without counterbalancing expenses will make you a target for taxation. I’m neither an accountant nor an economist, but one would have to be pretty disconnected from reality not to see a clear need for the middle class to protect itself. Until some fairness and balance is restored to the system, our job is to live large and not be the only jerks paying taxes. One way is to dump as much income as possible into tax-deferred savings and other shelters and to create deductions by spending the rest on anything and everything you can write off. This is a great time for personal and professional development, attending conferences, and purchasing new hardware and software. Take a telecommunications seminar in Maui, buy the digital camera and color printer, get a new laptop every couple of years. It’s all work-related, and your story is that you have to keep yourself competitive and balanced on the leading edge of technology or face being outsourced.
Start a home business on the side, developing Web sites or doing contract programming, and you can write off a ton of expenses as well as your home office and a portion of your utilities. You don’t even have to be successful; you just have to run up a lot of expenses trying to become successful. Success is a bonus, but not essential for tax purposes. Meanwhile, while you struggle, you, too, can redecorate your home office and have three-martini client lunches in great restaurants and write it all off.
Spend some time with a good tax consultant. You are being prepared for the fleecing of a lifetime. At some point, federal taxes will have to be increased to service the debt. But that doesn’t mean state taxes will fall accordingly. The middle class will then be caught in a tax vise between state and local governments (which need money for education, police, fire protection, and human services) and the federal government (which needs money to repay the debt). We’re all going to need a few aces up our sleeves, because the deck is stacked.
How stacked? The government doesn’t even want to collect the money it’s owed. Woodard notes that the independent IRS Oversight Board reported that the government is defrauded of about $311 billion in taxes each year. Given our debt and the precarious financial condition of many of our states, you’d think someone might be interested in collecting that money. But the IRS enforcement budget has been cut, and the government is showing little interest in going after the perpetrators because some of the biggest tax cheats are also the largest campaign contributors. Which may explain why Kenny-boy Lay is still walking around free. And the Treasury Department has been ordered to no longer report the “benefits” of tax cuts by economic class. Imagine that.
It’s all a big scam, a sleight of hand. Now you see a tax break, and now you don’t. It’s robbing Peter so Paul can buy a new Lexus. You, on the other hand, are expected to practice rugged individualism in an uncertain job market, with declining real wages, during a period of inflation, while paying the taxes others decided they didn’t want to pay.
So if you can’t be rich, like Warren Buffett, the next best thing is to be unsuccessful. And, for tax purposes, that doesn’t mean not having any money. It means, as so many successful people have already discovered, living well and not showing any taxable income.
Good old Warren understood that the deliberate transfer of wealth through manipulation of the tax code is just another form of class warfare.
Don’t be a casualty.