Understanding Wealth Defense: Direct Action from the 0.1%

Frank Pasquale

The OWS protests have provoked reflection on the morality of direct action and civil disobedience. How far should the police go to spy on, disrupt, or punish peaceful protesters? Is pepper spray a dangerous chemical agent or "a food product, essentially?" Does current American inequality merit a direct action follow-up to the Civil Rights Movement, whose mass-arrestees and water-cannoned marchers are now viewed as heroes?

It's difficult to answer these questions without understanding the past and present tactics of the groups OWS is protesting. We can learn something about those tactics from Jeffrey A. Winters' book Oligarchy and his recent articles. In Winters' treatment of America's politics of wealth defense, we can discern a transition from high-stakes defiance of government tax authority to an established position "inside the system."

Winters recounts how Congress passed a tax on the top 0.1% in 1894, only to be slapped down by a Supreme Court "which struck it down in a 5-4 decision." After the 16th Amendment effectively repealed that Supreme Court decision, Congress had the novel idea of actually helping pay for a war (WWI) with revenue from those best able to fund it. As Winters notes, "the highest rate [leapt] from 7 percent in 1915 to 77 percent in 1918," and "the number of brackets went from seven to 56 over the same period." This provoked direct action from the wealthiest "through tax avoidance and outright evasion." At this point, Winters writes,

The government faced a difficult choice. Basically, it could either beef up law enforcement against oligarchs and design better systems to track and tax their incomes to force them into compliance, or abandon the effort and instead squeeze the same resources from citizens with far less material clout to fight back.

Within a few years, the government chose to back down. By 1926, "the single most progressive economic policy ever enacted in U.S. history—--an income tax exclusively on the rich—--was slowly inverted into a mass tax that burdens oligarchs at the same effective rate as their office staff and landscapers."

New Deal policies helped level the playing field, as the gains from economic growth were spread relatively evenly between income groups between 1947 and 1974. But by the early 1970s, income and wealth gaps skyrocketed once again. Here, Winters adds evidence to the Pierson/Hacker and Bartels theses that the power (not the productivity) of the wealthy is the most important engine of our sky-high inequality. Winters describes the symbiotic and mutually reinforcing effects of legal, political, and cultural power here, coordinated by an "income defense industry:"

The income defense industry is comprised of lawyers, accountants, wealth management consultants, revolving-door lobbyists, think-tank debate framers and even key segments of the insurance industry whose sole purpose is income defense for America’s oligarchs. . . . In the 1970s, oligarchs paid an average effective tax rate of about 55 percent, which was almost 80 percent of the top published rate. By 2007, the top 400 income earners in America paid an effective tax rate of 16.5 percent, which was barely 50 percent of the top published rate.

Navigating through the almost 72,000 incomprehensible pages of tax code they had helped draft, industry specialists today structure complex partnerships and tax shelters that few IRS auditors can disentangle, or in some cases even fully understand. . . . The U.S. Senate estimates that the income defense industry helps America’s oligarchs avoid paying about $70 billion in taxes a year through what the IRS calls “abusive offshore tax avoidance schemes” alone. This is a sum equal to the boon the Bush tax cuts give to the entire top 2 percent of income earners (a group twenty times as numerous as America’s oligarchs). . . .

The top 0.1%'s share of society's wealth and power is a critical political issue. This top thousandth takes about half of all capital gains, taxed at a delightfully low rate. Although some academics in the wealth defense industry may explain that rate as "economically efficient," we can also see it as a direct result of plutocrats' defiance of the law. Tax evaders of the roaring 20s were the 0.1%'s Rosa Parks.

X-Posted: Concurring Opinions.
Posted 10:14 AM by Frank Pasquale [link]