David Cay Johnston

SEOUL — In March, the United States and South Korea implemented a Free Trade Agreement that President Barack Obama touts as more significant than the last nine such agreements combined. He also said it was central to his goal of doubling American exports within five years.

I think the president suffers from irrational trade exuberance, a view reinforced by my reporting in this city of 10 million people.

This deal is likely to turn out badly for American taxpayers and workers, especially autoworkers.

The president predicted 70,000 American jobs would be created as U.S. exports to South Korea grow faster than imports.

That would be terrific for generating taxes and reducing demand for government services like food stamps, which have become the sole income for about 6 million Americans.

But — based on previous major trade deals, the details of this one and a host of Korean business and cultural barriers — I think a much more likely scenario is the destruction of more than 150,000 American jobs over the next few years, as projected by the Economic Policy Institute, a Washington research organization that advocates for low- and middle-income workers.

TRADE PROJECTIONS

The president’s optimistic statements, made in December, drew on projections by the U.S. International Trade Commission. It predicted that U.S. exports to South Korea would grow at least 52 percent more than imports, creating tens of thousands of American jobs. A March update predicted that eventually exports of U.S. cars to South Korea will “likely increase significantly.”

This is the same agency that predicted that liberalized trade with China would result in a $1 billion annual trade deficit for the United States. The actual 2011 deficit: $295 billion.

And remember NAFTA? The United States ran a $1.6 billion trade surplus ($2.6 billion in today’s dollars) with Mexico in 1993, the year before NAFTA. Last year, the United States ran a $64.5 billion deficit.

The United States has consistently run trade deficits with South Korea – more than $13 billion last year, according to the U.S. Census Bureau. And, of course, the trade agreement has only been in place a few months. But it is worrisome that the deficit for April and May, after the agreement took effect, soared 63 percent compared with a year earlier.

The U.S.-South Korea trade agreement was reached in 2007, but implementation was held up by objections from some American companies. Notably, Ford Motor Co complained to Congress and in advertisements that South Koreans who bought Fords were hit with tax audits. Ford said the final agreement is much improved, but still not ideal.

In Seoul, local people told me that buying an American-made car risked opprobrium from employers and neighbors.

In three days in Seoul, as the video accompanying this column shows, I found very few American-made cars. Three, on a showroom floor, were Toyotas built in Ohio. On the streets, I counted a half dozen Chrysler vans, a similar number of Ford sedans and one Jeep but not a single American luxury car. I also saw a smattering of cars with Chevrolet nameplates, but they were built locally by the old Daewoo, now called GM Korea.

The foreign cars I spotted most often were Mercedes-Benz, BMWs and Bentleys, brands that seem to resonate more strongly with South Koreans eager to display their affluence.

That fits with the official South Korean data on auto sales. More than nine out of 10 cars sold here are made in South Korea. European luxury cars, sold under a European Union free trade agreement signed last year, far outsell any Detroit cars. Last year, American-made cars sold in the thousands, a fraction of one percent of car sales in South Korea. In June the best-selling American model was the Ford Explorer, with just 109 sold, less than a tenth of one percent of vehicles sold that month.

In the United States, sales of Hyundai Motor Co and Kia Motors Corp, which are owned by the same company, grew 26 percent last year and accounted for every 11th new car sold.

BARRIERS CITED

Sean McAlinden, chief economist for the nonprofit Center for Automotive Research in Ann Arbor, Michigan, which studies how public policy affects the industry, ticked off all sorts of non-trade barriers to American-made cars in South Korea. “There aren’t going to be any more American auto industry jobs because of this trade agreement,” he said.

Indeed, a report by the Congressional Research Service details subtle trade barriers.

Since 2000, the United States has lost almost a third of its manufacturing jobs. Those 5.5 million jobs are the equivalent of eliminating every non-farm job in Michigan and Iowa plus metropolitan Valdosta, Georgia, a serious crisis for blue-collar Americans.

President Obama, the White House told me, continues to believe that his trade policies will mean more American jobs, including manufacturing jobs. That sounds good but lacks factual support.

The opening of Hyundai and Kia assembly plants in the United States may seem like a benefit to the U.S. economy. But taxpayers covered much of the cost. And the value-added work in cars comes less from assembly than from making precision high-strength steel parts, especially in the drive train. To the extent that parts are made in South Korea and shipped to the United States for assembly, the added economic value tends to remain overseas.

One caveat: The way U.S. economic statistics are calculated may miss where value is added in manufacturing cars and other items because of subtle changes in licensing intellectual property, supply chains and other factors, as the Congressional Research Service explained in a report last year.

Jung Jong-yung, America division director at South Korea’s Ministry of Knowledge Economy, told me to expect more jobs in both countries, especially four years from now and beyond.

Maybe. But the evidence so far suggests this deal will be a boon for South Korea and another economic albatross for America.

IRS data suggests that, globally, U.S. nonfinancial companies hold at least three times more cash and other liquid assets than the Federal Reserve reports, idle money that could be creating jobs, funding dividends or even paying a stiff federal penalty tax for hoarding corporate cash.

The Fed’s latest Flow of Funds report showed that U.S. nonfinancial companies held $1.7 trillion in liquid assets at the end of March. But newly released IRS figures show that in 2009 these companies held $4.8 trillion in liquid assets, which equals $5.1 trillion in today’s dollars, triple the Fed figure.

Why the huge gap?

The Fed gets its data from the IRS, but only measures the flow of funds in the domestic economy. The IRS reports the worldwide holdings of U.S. companies, which I think is the more revealing measure.

From the companies’ point of view, it makes perfect sense these days to hoard cash.

First, Congress lets overseas profits accumulate untaxed, so long as offshore subsidiaries own the cash. Second, companies have a hard time putting cash to work because fewer jobs and lower wages mean less demand for products and services. Third, a thick pile of cash gives risk-averse CEOs a nice cushion if the economy worsens.

Given the enduring hard times, you might think that corporations have used up their cash since 2009. But real pretax corporate profits have soared, from less than $1.5 trillion in 2009 to $1.9 trillion in 2010 and almost $2 trillion in 2011, data from the federal Bureau of Economic Analysis shows.

That is nearly $1 trillion of increased profits over two years, while actual taxes paid rose less than a tenth as much, BEA reports show. Dividends, wages and capital expenditures all grew less than profits, while undistributed profits rose. The result: more cash.

Bigger profits are good news, but it would have been better news had those increased profits been put to work, not laid off in accounts paying modest interest. Hoarding corporate cash in bank accounts, Treasuries and tax-exempt bonds poses a serious threat to the economy, as Congress recognized when it enacted the corporate income tax in 1909.

Let’s get some perspective on these gigantic figures, all measured in today’s dollars.

The 2009 cash reported to the IRS equaled America’s entire economic output that year from New Year’s Day through May Day.

This cash pool came to $16,700 for every man, woman and child in the United States, a 53 percent real increase from 2004, my calculations from IRS data show.

Looked at yet another way, these companies had 11.3 percent of their assets in cash, or enough to pay their 2009 corporate income tax bills, which amounted to $148 billion, more than 34 times over.

In short, U.S. companies hold vastly more cash than is needed to finance their operations.

For investors, companies holding 11.3 percent of their assets in cash lowers returns. Did you buy shares of American Widget so executives could park profits in savings accounts?

For workers, idle cash means idle hands and minds. With one in five Americans unemployed or underemployed, and real median wages in 2010 back down to the level of 1999, this is no time for capital to go on an extended holiday.

For taxpayers, untaxed profits subtly reduce corporate tax burdens and increase the tax burden on individuals. Because taxes owed on offshore profits are not adjusted for inflation, they depreciate at the rate of inflation. That means a double whammy for taxpayers as government pays interest on money it borrows while its accounts receivable from multinational corporations lose value.

Since the income tax system began, Congress has authorized a tax on excessive accumulated earnings to limit damage to the Treasury — and the economy — when companies hold far more cash than their operations require. Without the accumulated earnings tax, corporations can become bloated tax shelters instead of engines of growth.

A business holding more cash than its operations reasonably require can be hit with a 15 percent levy under Section 531 of the Internal Revenue Code, on top of the 35 percent corporate income tax. The Tax Court even devised a mechanical test in 1965 for how much is too much.

Historically the IRS has levied only privately owned firms or publicly traded companies with few shareholders. But Internal Revenue Code Section 531 applies to all corporations. President Ronald Reagan signed Section 532 (c), which made that explicit, though with an exception for untaxed offshore profits.

After reviewing decades of literature on these code sections, I cannot fathom any rational basis for giving multinational companies an exception to the cash hoarding rules, which discriminates against purely domestic firms.

Some of the multinational corporations say they will bring home what could be more than a trillion dollars ifCongress will give them an 85 percent tax discount. The companies frame this as creating jobs. But as I showed in an earlier column, unless there are strict rules, the money can be used to buy back company stock while destroying jobs.

Want to motivate companies to put some of those trillions of dollars of idle cash to work creating jobs, paying dividends or sharing the burden of taxes? Call 1-202-224-3121 and tell your senator or representative you want Section 531 vigorously enforced – now – and the offshore loophole closed immediately.

A broad swath of official economic data shows that America and its people are in much worse shape than when we paid higher taxes, higher interest rates and made more of the manufactured goods we use.

The numbers since the turn of the millennium point to even worse times ahead if we stay the course. Let’s look at the official numbers in today’s dollars and then what can be done to change course.

First, incomes and jobs since 2000 measured per American:

Internal Revenue Service data show that average adjusted gross income fell $2,699 through 2010 or 9 percent, compared to 2000. That’s the equivalent of making it through Thanksgiving weekend and then having no income for the rest of the year.

Had average incomes just stayed at the level in 2000, Americans through 2009 would have earned $3.5 trillion more income, the equivalent of $26,000 per taxpayer over a decade. Preliminary 2010 data show a partial rebound, reducing the shortfall by a fifth to $2.8 trillion or $21,000 per taxpayer.

Wages per capita in 2010 were 4.3 percent less than in 2000, effectively reducing to 50 weeks the pay for 52 weeks of work. The median wage in 2010 fell back to the level of 1999, with half of workers grossing less than $507 a week, half more, Social Security tax data show. The bottom third, 50 million workers, averaged just $116 a week in 2010.

Social Security and Census data show that the number of people with any work increased just 1.5 percent from 2000 to 2010 while population grew 6.4 times faster. That’s why millions of people cannot find work no matter how hard they try.

In May, nearly 23 million workers, 14.8 percent, were jobless or underemployed, the Bureau of Labor Statistics reported. At shadowstats.com, a website dedicated to exposing and analyzing flaws in government economic data, economist John Williams also counts people who have given up hope of finding work. His figure for May brings the total to almost 30 million people, one in five.

PRESSURE ON WAGES

An economy with many millions more workers than jobs puts downward pressure on wages, especially for those without highly developed skills.

Now let’s look at debt per American since 2000 using Federal Reserve data:

Mortgage debt grew 51 percent through 2010, even though incomes and wages fell, which should result in steady or lower housing prices, not higher prices.

(In 2011, as banks foreclosed on more homes, mortgage debt per capita declined, but was still 42 percent greater than in 2000.)

Consumer debt was virtually unchanged, at nearly $8,300 in 2010, helping explain weak sales of automobiles, furniture and appliances.

Now how about trade? Exporting more than we import creates jobs and riches.

From 2000, the year before China joined the World Trade Organization, to 2011 imports from China grew 62 percent faster than exports to China, Census data show. The annual trade deficit soared to $302 billion from $112 billion.

U.S. exports to China in 2011 ($106 billion) were smaller than US imports from China back in 2000 ($133 billion), showing the lopsided nature of trade with China, where workers lack rights, safety rules are minimal and pollution rampant.

Some 56,000 American factories have closed since 2000, as jobs and the knowledge that goes with those jobs moved to China.

Trade with China has destroyed every 55th job in America, nearly 2.8 million positions, analysis of government data by Robert E. Scott of the Economic Policy Institute shows. That equals wiping out every job in the greater Philadelphia metropolitan area. Nearly two million of those jobs were in manufacturing, Bureau of Labor Statistics and U.S. International Trade Commission data show.

SHRINKING TAX REVENUE

And what of taxes? The 2001 and 2003 tax cuts were promoted as keys to prosperity. Now Mitt Romney, virtually all Republicans and a fair number of Democrats say more tax cuts will make us prosper. President Barack Obama wants to cut corporate tax rates by a third.

Again, measured per capita, the IRS data show a pattern of shrinking numbers, with modest upticks in 2010.

Individual income taxes in 2010 averaged $2,995, down $1,654 or almost 36 percent from 2000. Use 2001 as the base year — because it was both a recession year and the first year of the temporary George W. Bush tax cuts — and in 2010 per capita income tax revenues were down one third.

In 2011, as the economy improved slightly, income tax revenues rose, but were still 26 percent smaller than in 2000.

The bottom line: less income, hardly any more jobs, sharply increased mortgage debt and Washington ledgers awash in red ink as voters are asked to endorse even more tax cuts.

How many years of evidence does it take to establish that a policy worked or failed?

Will continuing our current tax, credit and trade policies produce favorable results in the future? Will they produce higher incomes?

My reading of this and tons more data is that the Bush tax cuts utterly failed, the Fed’s artificially low-interest rate policies under presidents Bush and Obama do far more damage than good (especially to savers), and that the United States is harmed both by the imbalance in the trade relationship with China and scores of trade agreements with South Korea and other low-wage countries that are deeply flawed at best.

We need to recognize that the tax cutters were snake oil salesmen, the Federal Reserve an enabler of damaging debts and that bilateral trade deals are written of, by and for global financiers, not workers.

To paraphrase the Huey Lewis song, we need a new policy.

JPMorgan Chase & Co blames its $2 billion, and maybe much larger, trading loss on mistakes made in hedging the market. Bill Black, a finance criminologist, calls this “hedginess.”

“Hedginess” riffs on “truthiness,” the word the comedian Stephen Colbert invented in 2005. Truthiness means favoring versions of events that one wishes to be true, and acting as if they were true, while ignoring facts to the contrary that are staring you in the face. Fake hedges are to real hedges as “truthiness” is to truth. Hence “hedginess.” JPMorgan’s trades got around the Volcker rule, which tries to prevent banks from speculating in financial derivatives, by labeling as “hedges” bets that were clearly not hedges.

As Black puts it, JPMorgan is now defining as a hedge “something that performs in exactly the opposite fashion of a hedge.” A hedge is supposed to reduce risk, but according to Black, the losses came from deals that “dramatically increased risk by placing a second bet in the same direction, which compounded the risk.”

Actually, it isn’t quite as simple as Black says. While JPMorgan did not respond to my questions on its strategy, Reuters and others have reported that the trade began as a standard hedge. Subsequently, the reports say, it morphed into speculation as the bank layered bet on top of bet.

Such doubling down is why Black says JPMorgan indulged in hedginess.

Who is Black to pronounce on such things? As a senior regulator at the Federal Savings and Loan Insurance Corp, he, more than anyone else, was responsible for the more than 3,000 felony convictions in the savings-and-loan crisis. Black now talks his walk as a law and economics professor at the University of Missouri-Kansas City.

WEAPONS OF MASS WEALTH DESTRUCTION

The S&L crisis of the late 1980s was a mere grenade compared to the weapons of mass wealth destruction that went off on Wall Street four years ago and the others that remain primed and ready to explode. But instead of facing indictments, JPMorgan and others face impunity. “It’s clear that JPMorgan has absolutely no fear that this might have consequences,” Black said. “And why should they?”

As Black is quite right to note, there are exactly zero reasons that Wall Street should fear the consequences of its compulsive gambling, be it with the money of shareholders or the deposits of its clients.  Chief Executive Officer Jamie Dimon is scheduled to testify before two congressional panels this week, where I hope he is asked pointed, nuanced questions that break through the veneer of his and the bank’s public remarks to date.

Too Big To Fail banks like JPMorgan enjoy an implicit federal guarantee in the event a manageable $2 billion loss becomes an unmanageable $20 billion loss. These banks have also delayed implementation of the Volcker rule, which bars some speculative trades, and other provisions of the Dodd-Frank law as they work to make it more loophole than law. Most disturbing is Wall Street’s success in blocking any move to restore Glass-Steagall, which required commercial banks to take deposits and make loans, not speculate like JPMorgan did. With Glass-Steagall restored we would not be talking about bailing out banks that speculate.

Headlines blare that the FBI is investigating the JPMorgan trades for evidence of crimes. But down in the fine print the bureau calls this routine. It’s show, not substance, our own Captain Renault rounding up the usual suspects in Casablanca.

Says Black: “There has not been a single investigation by the Justice Department worthy of the word investigation of any of the major entities whose frauds caused the financial crisis.”

STATUTE OF LIMITATIONS

Criminal investigations now hardly matter, because most of the frauds took place before 2008. Under the five-year statute of limitations for most federal frauds, governments let the crooks run out the clock. They keep their riches, their reputations, their jobs and, absent real reform and real regulation, plunder on. Both the George W. Bush and Obama administrations have let the crooks escape. The challenger who wants to replace President Obama would be even worse. Mitt Romney wants to repeal Dodd-Frank. Unless some determined and creative prosecutor finds a way to pursue the wrongdoers, there will be no justice, just more gambling with taxpayers on the hook to pay off the markers. Only Eric Schneiderman, the New York state attorney general, offers any hope, but his staff is tiny and the crimes are mighty. Keep in mind that in 2004 the FBI and the Mortgage Bankers Association in 2004 said there were only two kinds of mortgage fraud, both of them perpetrated by unqualified borrowers who could not repay their loans. The FBI said nothing about banks profiting off huge fees for issuing fraudulent “liar loans,” nor about why banks lacked standards and practices to turn away unqualified borrowers. I’ll call that “investigativeness.”

The Too Big To Fail banks’ triple play of lobbying, campaign donations and lucrative jobs for family and friends of Washington officials, elected and appointed, blocks real regulation.  Budget cuts and rules in fine print have declawed the SEC and the Comptroller while filing the IRS’s audit teeth down to nubs.  Washington regulators are looking for problems in all the wrong places, when they are looking at all.

That’s “regulationiness.” The JPMorgan derivatives debacle reveals how the appearance of banking regulation and reform, rather than actual regulation and reform, threatens the financial health of the entire nation. That’s what comes of “hedginess.”

Six American families paid no federal income taxes in 2009 while making something on the order of $200 million each. This is one of many stunning revelations in new IRS data that deserves a thorough airing in this year’s election campaign.

The data, posted on the IRS website last week, brings into sharp focus the debate over whether the rich need more tax cuts (Mitt Romney and congressional Republicans) or should pay higher rates (President Obama and most Democrats).

The annual report, which the IRS typically releases with a two-year delay, covers the 400 tax returns reporting the highest incomes in 2009. These families reported an average income of $202.4 million, down for the second year as the Great Recession slashed their capital gains.

In addition to the six who paid no tax, another 110 families paid 15 percent or less in federal income taxes. That’s the same federal tax rate as a single worker who made $61,500 in 2009.

Overall, the top 400 paid an average income tax rate of 19.9 percent, the same rate paid by a single worker who made $110,000 in 2009. The top 400 earned five times that much every day.

Just 82 of the top 400 were taxed in accord with the Buffett rule, which proposes a minimum tax of 30 percent on annual incomes greater than $1 million.

Let’s return for a moment to the single worker who made $61,500 in 2009 and paid 15 percent of his salary in federal income taxes. The top 400 made more every three hours than he did in a year, and yet many of them paid the same or a lower tax rate, according to the data in the report.

On top of his $9,225 federal income tax, he also paid $9,409 in payroll taxes, which include Social Security and Medicare taxes. Half of the payroll tax was deducted from his check. His employer paid the other half, which was really hidden wages taxed at a 100 percent tax rate.

His total federal tax burden was 30.3 percent, exactly 50 percent more than the 20.2 percent tax burden, measured the same way, on the 400 at the top.

TWO TAX SYSTEMS

This comparison illustrates how Congress has created two income tax systems, separate and unequal, burdening millions much more heavily than the few, those with gigantic incomes and a propensity to make campaign contributions.

One system is for wage earners and pensioners, whose taxes are withheld from their checks. This rigorous, efficient system taxes them fully.

The other system is for business owners, executives, managers of hedge and private equity funds, name brand athletes and entertainers, and many others with huge incomes. Congress lets them put unlimited amounts of income in sheltered accounts and put off paying taxes for years or even decades.

Deferral does not prevent these super rich Americans from spending their money. Hedge fund managers and others can borrow against their untaxed wealth, currently at interest rates close to zero. So long as their wealth grows faster than their borrowing their net worth continues to increase.

The IRS report covers only the 400 highest incomes reported on tax returns, not the 400 highest actual incomes, which I am certain are much larger on average because of deferrals. That means the report overstates the tax burdens of the richest Americans pay.

The issue we need to debate is not how much you earn — make all you can. The issue is that everyone should pay their taxes now, not in some far-off tomorrow, and as you go up the income ladder so should your tax rate.

By what economic, political or moral standard should working stiffs be forced to pay their taxes immediately, while plutocrats pay their taxes by-and-by? And why should anyone who makes more than $200 million live tax-free?

Those are questions to ask candidates on the hustings, insisting they give specific, focused answers.

To give this a sense of scale, the top 400 are financial giants compared to Mitt Romney. It took Romney a quarter century of smart work to build up a fortune that his campaign says is between $190 and $250 million. The top 400 made about that much in one year.

Romney says that those of us who tell these hard facts about the zero-to-low tax burdens of the richest Americans are promoting class warfare. Income inequality, according to Romney, should be discussed only “in quiet rooms.”

If you agree with Romney then keep quiet. If not, now is the time to spread the word and encourage robust and thoughtful debate, just as the framers of our Constitution intended.

IRONDEQUOIT, N.Y. — A proposal to spend $250 million of taxpayer money on a retail project here illustrates the damage state and local subsidies do by taking from the many to benefit the already rich few.

Nationwide state and local subsidies for corporations totaled more than $70 billion in 2010, as calculated by Professor Kenneth Thomasof the University of Missouri-St. Louis

In a country of 311 million, that’s $900 taken on average from each family of four in 2010. There are no official figures, but this one is likely conservative because — as documented by Thomas, this column and Good Jobs First, a nonprofit taxpayer watchdog organization funded by Ford, Surdna and other major foundations — these upward redistributions of wealth keep increasing.

In Irondequoit, just outside Rochester, N.Y., and a few miles from where I live, developer Scott Congel wants $250 million in sales taxes to finance rebuilding the Medley Centre mall while adding condominiums and a hotel. Typically local governments issue bonds, which are paid off using sales tax receipts that are diverted from public purposes to the developer’s benefit.

Subsidies for retail businesses are the worst kind of corporate welfare because, as the end of the economic chain, retailing grows only when population and incomes increase. If population or income falls, then subsidies for new projects like Congel’s damage existing businesses, where people would otherwise be spending their money.

The mall, which struggled from the start, was built in 1990 for $140 million in today’s dollars. A Congel associate, Adam Bersin, bought it in 2005 for less than $6 million in today’s dollars. He then persuaded the Monroe County industrial development agency to issue $5.4 million in bonds and then flipped the real estate to Congel in 2007.

Today the mall is empty, its doors sealed, except for a Sears at one end and a Macy’s at the other, each with a handful of customers during my visits.

Congel promised a $260 million project, but five years on nothing is built and Congel is seeking delays in fulfilling promises for which the mall was granted property tax breaks.

That’s how corporate socialism works – taxpayers contribute when the market rejects.

TAXPAYERS’ EXPENSE

Congel has never spoken publicly about his plans for the mall and neither Congel nor any of his representatives, including a lawyer, returned my calls. But la st month hi s office gave a local TV station a statement promising to invest not $260 million but $750 million

My review of construction costs for hotels and condominiums suggests the $750 million figure is wildly inflated, but it may make the subsidies more politically palatable.

If the larger figure is real, and taxpayers put up $250 million, they would pay for a third of the project, while for a $260 million project the taxpayer share would be 96 percent.

Having taxpayers pay nearly all of a new investment is becoming common. General Electric, for example, is getting Ohio taxpayers to cover 92 percent of a $126 million project

That’s how corporate socialism works — taxpayers donate capital, while the owners keep the profits.

Congel, along with GE and others, should rely on the market to finance projects. If a project is sound, the market will finance it and, if not, why should taxpayers donate?

When the Monroe County industrial development agency gave Congel’s plan initial approval I asked for its due diligence. The county provided a thin report stating that if taxpayers finance the restoration Medley Centre’s sales would grow from $30 million annually to $420 million.

The report cover states that Congel commissioned it. Judy Seil, director of the agency which gives money to companies, confirmed that Congel paid for the report. Still, she insisted, the report is the county’s due diligence.

That’s how corporate socialism works. The poor may have to pass a drug test to get benefits but rich applicants write their own ticket.

My due diligence shows that total inflation-adjusted income in Monroe County fell by $2.5 billion, or 13 percent, from 2000 to 2008, the latest data. With such a steep drop in incomes it seems unlikely that Medley Centre sales could grow 14-fold.

That’s how corporate socialism works — ignore inconvenient facts.

WINNERS AND LOSERS

As for that proposed hotel, my analysis of county hotel tax data shows demand for lodging unchanged for two decades. If taxpayers finance Congel’s hotel it would either fail or almost certainly force an existing hotel or two out of business.

That’s how corporate socialism works — government, not the market, picks winners and losers.

Last November I warnedthat New York State taxpayers would have their pockets picked ever more thoroughly because of a decision by the state’s highest court

The majority acknowledged that the New York State constitution bans gifts to corporations. To get around this, the court ruled, tax dollars can be funneled through a government economic development agency like the one Seil runs.

That’s how corporate socialism works — ignore inconvenient laws.

Because New York had one of the strongest prohibitions among the 50 state constitutions, this ruling shows how easily corporations can plunder state treasuries.

New taxes to pay for stadiums for team owners, billion-dollar-plus gifts for building factories and the pocketing by 2,700 companies of state income taxes paid by their workers have become common

That’s how corporate socialism works — divert money from schools and other public services to company coffers.

The 50 New Yorkers from libertarians to liberal Democrats who brought the case asked for a rehearing, citing serious factual errors in the high court’s decision

The court not only denied the request, it also imposed $100 for court costs. Attorney James Ostrowski of Buffalo, who represented the plaintiffs, called that a gratuitous “slap in the face of people who litigated a matter of vital public interest on a shoestring budget.”

That’s how corporate socialism works — penalize anyone with the temerity to fight being taxed to give to the already rich.

Congel may never get $250 million of taxes, but if he does it will cost taxpayers whether they visit his mall or not, while weakening or destroying existing local businesses.

That’s how corporate socialism works — privatize gains, socialize losses and destroy competitors who do not get subsidies.

Which federal program took in more than it spent last year, added $95 billion to its surplus and lifted 20 million Americans of all ages out of poverty?

Why, Social Security, of course, which ended 2011 with a $2.7 trillion surplus.

That surplus is almost twice the $1.4 trillion collected in personal and corporate income taxes last year. And it is projected to go on growing until 2021, the year the youngest Baby Boomers turn 67 and qualify for full old-age benefits.

So why all the talk about Social Security “going broke?” That theme filled the news after release of the latest annual report of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds, as Social Security is formally called.

The reason is that the people who want to kill Social Security have for years worked hard to persuade the young that the Social Security taxes they pay to support today’s gray hairs will do nothing for them when their own hair turns gray.

That narrative has become the conventional wisdom because it is easily reduced to a headline or sound bite. The facts, which require more nuance and detail, show that, with a few fixes, Social Security can be safe for as long as we want.

SHIFTING TAX BURDENS

Let’s look at how Social Security taxes have grown in the last half century — a little-known tale of tax burdens shifted off the rich and onto workers. From 1961 through 2011, the year covered in the last Social Security report, Social Security taxes exploded from 3.1 percent of Gross Domestic Product to 5.5 percent.

Income taxes went the other way. The personal income tax slipped from 7.8 percent of the economy to 7.3 percent, with most of the decline enjoyed by people in the top 1 percent of incomes. The big drop was in the corporate income tax, which fell from 4 percent of the economy to 1.2 percent. Notice that the corporate income tax fell by 2.8 percentage points, an amount almost entirely offset by a 2.4 percentage point increase in Social Security taxes.

The effect has been to ease the taxes of the wealthy, while burdening the vast majority of workers. Considering how highly ownership of stocks is concentrated, the benefit of those lower corporate taxes went overwhelmingly to the top 1 percent and, especially, the top 1 percent of the top 1 percent. Considering that the Social Security tax is capped, most of the burden of the increased payroll tax went to the bottom 90 percent.

Now let’s look at how that $2.7 trillion Social Security surplus arose. In 1983, President Ronald Reagan sponsored an increase in Social Security taxes, changing the program from pay-as-you-go to collecting much more taxes than it paid in benefits. The idea was to have the Boomers prepay part of their old age benefits. The extra tax was supposed to pay off the federal debt and then be invested in federal bonds. Instead, Reagan ran huge deficits, violating his 1980 promise to balance the federal budget within three years of taking office.

FINANCING TAX CUTS

In my view, building the Social Security surplus has had two major effects.

One effect was to finance tax cuts for those at the top, whose highest tax rate fell during the Reagan years from 70 percent to 28 percent, and for corporations, whose rate fell from 50 percent of profits to 35 percent. Those with less subsidized those with more.

The other effect was a huge increase in consumer debt, as Americans saddled with higher Social Security taxes took out loans to cover other needs. Stagnant wages played a role, but the $2.7 trillion Social Security surplus is also a factor in a $1.5 trillion increase in consumer debt since 1984.

It is no wonder consumers have gone into debt. Paying a tax in advance is expensive. Indeed, the first lesson in tax planning is that a tax deferred for 30 years is effectively a tax avoided, provided the money is invested wisely. The reverse is also true. A dollar of tax paid in 1984 cost $2.20 in today’s dollars, and that’s before counting the interest that could have been earned.

With the coming bulge in retirees, Social Security will start to pay out more than it takes in 2021, according to projections in the latest annual report. Under current law the program would be able to pay only about three-quarters of promised benefits starting in 2033. But that scenario can easily be avoided through a combination of four policy changes that would ensure full benefits continue to be paid, though I fear Congress will continue to do nothing.

One would be restoring the Reagan standard that 90 percent of wages are covered by the Social Security tax, which now applies to only 83 percent of wages. If we went back to the Reagan standard, the Social Security tax would apply to close to $200,000 of wages this year instead of $110,100.

Two would be raising the Social Security tax rate by two percentage points. That tax hike could be smaller or even avoided if, three, we reignited the growth in wages. Median wages have fallen in 2010 back to the level of 1999. And, four, it would help just as much if we created millions more jobs, which since 2000 have grown at only a fifth the rate of population increases.

Under current tax rules, the Social Security shortfall for the next 75 years is $8.6 trillion.

But there is a much bigger problem that needs our attention. If we continue national security spending at current levels, with no future increases, the total cost would be $63 trillion, based on the figures in President Barack Obama’s latest budget. Unlike spending on Social Security, much of the national security spending goes overseas. And that makes us worse off.

Each year the Internal Revenue Service receives tax returns that show more income than was actually earned, in some cases twice the actual earnings.

That seems bizarre at first blush. After all, why would anyone tell the tax man they made more than they did?

The answer is that Congress has created an incentive for the poorest of the working poor to report more than their actual incomes. Doing so can be worth more than $3,000 to impoverished working parents under a form of negative income tax known as the Earned Income Tax Credit that sends government money to the working poor.

But it is not the working poor themselves who make up phony numbers. The problem is with unscrupulous income tax preparers, the IRS Taxpayer Advocate, Nina E. Olson, and others who work with the poor tell me.

Ginning up nonexistent income lets dishonest tax preparers charge larger fees and helps attract new clients as word spreads of their success at getting big refunds.

Just last month the Justice Department sued to shut down what it characterized in court papers as a nationwide chain of tax fraud mills that reported inflated incomes and often did not tell people it was filing tax returns for them.

Asked about the allegations, Instant Tax Service general counsel Todd Bryant said they were baseless, with a handful of problem cases mischaracterized as the norm.

The IRS and the Justice Department identified a problem with tax preparers inflating incomes years ago.

Abusive tax preparers have been found at big firms as well as underground operations. Failing to get tough on the abusers makes it hard for the vast majority of honest preparers to prosper, as clients who know nothing about the complexities of tax naturally gravitate toward whoever has a reputation for getting the biggest refunds.

A PROBLEM THAT’S FIXABLE

Congress could fix the problem of exaggerated incomes and at the same time help end America’s shameful No. 1 ranking among modern nations in child poverty. Sadly, I don’t expect that, given the focus in both parties on tax cuts for corporations and, among Republicans, on more tax cuts for the rich. Indeed, across the country anti-tax Republicans have called for ending the Earned Income Tax Credit.

Milton Friedman, the Chicago School economist and Nobel Prize winner, devised the negative income tax concept decades ago. Friedman demonstrated that people on welfare who go to work could be worse off because of taxes on their earnings. Properly applied, Friedman’s negative income tax idea can ensure that working makes people better off.

President Ronald Reagan hailed the Earned Income Tax Credit as “the best anti-poverty, the best pro-family, the best job creation measure to come out of Congress.” He was right. Last year it lifted 3.3 million children, and an equal number of adults, out of poverty.

Now consider a family with three children that earned $6,000 last year. That may seem extreme, but that was the average wage for a third of American workers in 2010, as I reported in October.

This family will get $2,711.

However, the family’s check more than doubles, to $5,751, when a tax preparer falsely inflates their income to $12,800.

Why does the family making $12,800 get more than twice as much as the $6,000 family? Because Congress set the maximum tax credit for a family with three children at wages of $12,800 to $20,800.

DEVIOUS TAX PREPARERS

The problem of inflated incomes is not with conniving poor people, but with devious tax preparers, everyone I asked about this said.

Nancy Abramowitz, who runs the American University Washington College of Law’s tax clinic for poor people, said she could not recall any individuals who had inflated their own income to increase the tax credit. “It’s always unscrupulous preparers,” she said.

Since employers verify wages, tax preparers usually inflate incomes by creating a phony Schedule C, the tax form used by many small businesses, because it is not verified except in an audit.

Here are four ways Congress and the IRS can fix this:

• Congress should lower the threshold for securing the maximum credit for families with children from $12,800 to the average wage of the bottom third of workers, currently about $6,000.
• Congress should pay for the prosecution of as many corrupt tax return preparers as it takes to stop this fraud, including $3,000 rewards to taxpayers who turn in corrupt preparers. Any action by the IRS, not just convictions, should generate a reward check. The reward I propose equals the maximum fraud loss from a single case, making it cost-efficient provided Congress requires the IRS to be generous, not stingy, in rewarding whistleblowers.
• Congress should delay tax credit refunds for 45 days after a tax return is filed. Olson, the IRS taxpayer advocate, told me that speeding refunds encourages fraud. The United States is unusual in trying to refund money instantly, instead of taking time to make sure payments are proper before cutting checks.
• For the next few years the 40 percent of IRS correspondence audits that now deal with the Earned Income Tax Credit should concentrate on faked Schedule Cs that inflate incomes.

The focus should be on making work rewarding, not on hurting the working poor.

Across the United States more than 2,700 companies are collecting state income taxes from hundreds of thousands of workers – and are keeping the money with the states’ approval, says an eye-opening report published on Thursday.

The report from Good Jobs First, a nonprofit taxpayer watchdog organization funded by Ford, Surdna and other major foundations, identifies 16 states that let companies divert some or all of the state income taxes deducted from workers’ paychecks. None of the states requires notifying the workers, whose withholdings are treated as taxes they paid.

General Electric, Goldman Sachs, Procter & Gamble, Chrysler, Ford, General Motors and AMC Theatres enjoy deals to keep state taxes deducted from their workers’ paychecks, the report shows. Foreign companies also enjoy such arrangements, including Electrolux, Nissan, Toyota and a host of Canadian, Japanese and European banks, Good Jobs First says.

Why do state governments do this? Public records show that large companies often pay little or no state income tax in states where they have large operations, as this column has documented. Some companies get discounts on property, sales and other taxes. So how to provide even more subsidies without writing a check? Simple. Let corporations keep the state income taxes deducted from their workers’ paychecks for up to 25 years.

It was not always this way. Letting companies keep their workers’ state taxes apparently began in Kentucky two decades ago as a way to retain jobs.

Last July when I wrote about six big companies that pocket Illinois state taxes I knew there was more to this. But I had no idea how pervasive these diversions were until I read an advance copy of the 39-page report by Good Jobs First.

CORPORATE SOCIALISM

Deals cut with the states over the past two decades diverted $5.5 billion from public purposes to private gain, the report says. Close to $700 million more was diverted last year, Good Jobs First estimates.

New Jersey approved $73.2 million in new deals in 2011 on top of $178 million diverted that year alone under previous deals. I calculate that at nearly $80 per household in corporate welfare based on New Jersey’s 3.1 million households.

These deals typify corporate socialism, in which business gains are privatized and costs socialized. They also mean government picks winners and losers, interfering with competitive markets. Leaders in both parties embrace these giveaways because they draw campaign donations from corporate interests and votes from people who do not understand that they are subsidizing huge companies.

Michael Press, a Connecticut consultant on tax incentives, says such deals, however troubling, are an inevitable result of the U.S. Constitution setting up competition between the states.

“In an ideal world we would not provide any corporate subsidies,” Press told me. “It looks like corruption. But if you do it right, if you only target those companies whose behavior you change to create jobs or keep jobs in your state then these targeted temporary arrangements are cheaper – much cheaper – and can be more effective than an overall reduction in tax rates.”

The mission of Good Jobs First is making economic development subsidies accountable and effective. In years of working with their data I have always found it sound. While Greg LeRoy, Good Jobs First’s founder, has rooted out all sorts of hidden subsidies over the years, he emphasizes that he is not inherently hostile to them, only to secrecy, waste and what he calls job piracy and job blackmail.

“Job piracy” occurs when one state diverts taxes to lure an employer across state lines. AMC Entertainmentannounced a deal last year to move its corporate headquarters from Kansas City, Mo., to a nearby Kansas suburb. In return, Good Jobs First said, Kansas will let the multiplex chain keep $47 million of state income taxes withheld from its workers’ paychecks, a drain on public finances that did not create any jobs, but does enrich the Wall Street firms that own AMC including arms of J. P. Morgan, Apollo Management, Bain Capital and the Carlyle Group. AMC declined to answer my questions.

“Job blackmail” occurs when a company threatens to close a plant unless it gets tax money.

In Illinois, the law requires companies to threaten to leave before they can keep taxes withheld from paychecks. Motorola Mobility, now being acquired by Google; the truck maker Navistar; the German manufacturer Continental Tire, and three auto makers – Chrysler, Ford and Mitsubishi – get to keep $346.8 in taxes over 10 years because they threatened to leave Illinois. Navistar can pocket $62.1 million even if it fires a quarter of its Illinois workforce, its contract shows. A recent deal gives Sears $150 million, Good Jobs First reported.

PROMISES OF JOBS

Promising to retain jobs can be lucrative. General Electric invested $126 million updating part of its Ohio operations. In return, GE gets a tax credit equal to $115.3 million of its worker taxes, recovering 92 percent of its investment. A sweet deal for GE, but not its competitors.

Gary Sheffer, GE’s top spokesman, said the company told its workers about the deal. In all, he said, GE is investing around $300 million in Ohio and “the resulting taxes the state will receive will far exceed the tax credits provided to GE.”

That response, I think, misses the point – GE should pay its own bills without taking welfare.

Many figures in the Good Jobs First report are from disclosure reports some states make. Others come from news accounts and company announcements.

Total revenue losses are higher than the report states. First, some states hide the costs. Phil Mattera, the research director at Good Jobs First, said he lists the cost as zero for states that hide the numbers.

Good Jobs First wants to end these diversions, but failing that recommends mandatory disclosure to the workers as the first reform. I concur. It’s the first step in ending corporate welfare as we know it.

On March 28, the U.S. Justice Department sought to close a nationwide chain of income tax preparation shops it accuses of fraud. The action underscores the potential for abusive business practices that taxpayers face because Congress has failed to embrace technology that would eliminate most tax returns.

The Justice Department wants a federal judge to shut down Instant Tax Service, whose sole owner is Fesum Ogbazion of Dayton, Ohio, saying he is responsible for “extensive and pervasive tax fraud.” It also sued four of his 276 franchisees. The company has not responded to the lawsuit.

Congress could easily eliminate fraud by abusive tax preparers, as is alleged in the Ogbazion case, and save taxpayers billions of dollars annually, by simply ending mandatory filing of tax returns for most taxpayers.

About 100 million taxpayers — those whose income is entirely from wages and retirement funds, and who do not itemize deductions — should not have to file returns. The government already has the information it needs to calculate the taxes these people owe, once they supply their marital status and number of dependents. It would not take much to automate their income tax payments, as many other modern countries do.

I put the chances of Congress taking such a sensible course at one in 84,000. That’s about the same as the odds of being indicted for a tax crime in 2011, based on an analysis of official data by Syracuse University’s Transactional Records Access Clearinghouse.

Congress will not act because individual income tax returns, which for most people are make-work that creates a drag on the economy, provide tidy revenues for Intuit, the maker of TurboTax software, H&R Block and other legitimate corporations that profit from preparing tax returns. These companies have considerable resources at their disposal to spend on lobbying politicians to keep the tax filing requirement. One sign of their determination: Intuit in 2006 donated $1 million in support of an unsuccessful candidate for California state controller who opposed optional state-prepared returns in California. Intuit has said there are serious problems with the program, which remains in operation, but in my view none of Intuit’s criticisms stands up to scrutiny.

A SIMPLER TAX CODE

Intuit, H&R Block and other tax firms say that they help people pay the least tax and avoid costly mistakes. But these concerns would be easily addressed by simplifying the tax code. In my view, any business that depends on government-induced inefficiency should be swept into the dustbin of history.

Another reason reform is unlikely is that politicians have learned from Republican pollster Frank Luntz over the years that riling up voters against the Internal Revenue Service attracts votes and campaign donations. Actually fixing the problem by ending tax filing for the vast majority would require politicians to come up with other ways to get donors to open their checkbooks. Republican politicians who follow Luntz’s advice seem not to realize they are attacking law enforcement, a strategy that would offend many of their donors if applied to the FBI or street cops.

Short of ending tax filing for most Americans, Congress could license tax preparers — instead of only requiring that they identify themselves with a unique number. We don’t trust amateurs to inspect elevators or audit charities, so why do we let just anyone charge for preparing tax returns? This is especially true given that U.S. Taxpayer Advocate Nina E. Olson has thoroughly documented false and fraudulent reporting by tax preparers who are exempt from IRS professional conduct rules because they are not accountants, enrolled agents or lawyers.

The case of Instant Tax Service appears to be particularly egregious. The Justice Department alleges that the company charges its customers, who are mostly poor and unsophisticated, as much as $1,000 for 15 minutes of tax preparation. It “encourages its franchisees to lie to the IRS about anything,” the department said in court papers.

The government’s complaint quoted Ogbazion, the company’s owner, as saying that “every tax return being done is pretty much fraudulent” at a franchise in Los Angeles. Ogbazion did not revoke the franchise, but did sue it for royalties, the department said. According to the Justice Department, Ogbazion said he did not pay attention to customer complaints because, if he did, he “wouldn’t be able to sleep at night.”

Ogbazion’s business and personal phones are disconnected. At the one listed number that was answered a woman said he was no longer reachable there. Ogbazion also did not respond to messages to his work and home email addresses.

100 MILLION UNNECESSARY RETURNS

The Justice Department brings a high-profile tax case pretty much every year as the mid-April tax deadline approaches. But this misses the much bigger picture: More than 100 million unnecessary tax returns are filed each year, costing billions of dollars in software or preparation.

Meanwhile, the way Congress has written tax laws, and the way courts interpret them, makes it hard to pursue tax cheats. The average time for each criminal tax prosecution the Justice Department completed last year was 740 days, more than double the 345 days in 1992. Last year, the Justice Department completed only 3,656 criminal cases in which tax was the main charge, the analysis by Syracuse University’s Transactional Records Access Clearinghouse shows. No wonder the odds of a criminal tax indictment, while still minute, were 75 percent higher two decades ago.

The Justice Department relies on a law enforcement theory known as general deterrence. The strategy is to bring widely publicized cases to keep people in line. But the IRS criminal division website lists just 79 criminal cases in 2011. Figuring the others requires perusing 90 websites run by local U.S. Attorneys. Many convictions get little or no news coverage, which means zero general deterrence.

Canada, with a ninth of the U.S. population, listed all 204 tax convictions last year at the Canada Revenue Agency’s website. Claude St-Pierre, Canada’s director general for tax enforcement and disclosures, told me that posting all convictions is both a deterrence strategy and an effort to educate Canadians so they do not get lured into tax scams.

Congress should fund more prosecutions, many more, so the Justice Department does not have to reject 40 to 50 percent of criminal referrals by the IRS. Following Ottawa’s lead, the IRS should prominently post every criminal conviction and every request for a civil injunction (a much less expensive law enforcement strategy than prosecution) at its website.

The real solution, though, is to get rid of the archaic, frustrating make-work for 100 million taxpayers whose only benefit is profits for tax preparation firms.