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Oligarchy and Democracy

Jeffrey A. Winters is professor of political science at Northwestern University and author of Oligarchy, published by Cambridge University Press in 2011.
From the November/December 2011 issue: Oligarchy and Democracy Jeffrey A. Winters


"Oligarchs succeeded in getting their taxes reduced from the 70 percent range to just 25 percent. The top bracket held at this level until 1931, when a series of crises weakened oligarchs and increased the government's need for resources. The 1929 Crash, the Great Depression and World War II combined to increase the top bracket to 63 percent in 1932, 81 percent in 1941 and a peak of 94 percent in 1944. Income taxes on the richest Americans remained above 90 percent until 1964—and that includes the two terms of the Republican Eisenhower Administration—and above 70 percent thereafter until 1981.

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. The industry is wholly funded by oligarchs, and it would simply not exist if oligarchs did not have massive fortunes to defend. There is no parallel (much less countervailing) industry serving the material interests of the mass affluent, the middle class or the poor. The activities of the income defense industry extend far beyond mere "interest group" lobbying over policies. Its salaried specialists assist oligarchs in exerting a form of power that is unique to the ultra-rich: the defensive redeployment of their money and income across a global geography of jurisdictions, banks and offshore havens through the use of tailor-made tax instruments, evasive trusts and shell corporations.

The industry operates almost exclusively by referral and serves only high net-worth individuals who have at least $2 million in investable financial assets, and especially ultra high net-worth individuals with holdings of $30 million or more. The industry is global in its spread and integration. Top-tier players like Whithers, Clifford Chance, Linklaters, White & Case, Milbank Tweed Hadley and McCloy, Weil Gotshal and Manges, and Freeman Freeman and Smiley are known in the trade as "magic circle" firms. They help coordinate relationships with accounting firms and other weapons in the wealth defense arsenal.

The most strategic theater is taxes, with combat conducted on two fronts. The first is the effort to lower the published top tax rate as much as possible and also to set the income threshold for the top bracket low enough that large numbers of relatively modest income earners feel the oligarchs' pain. The second front is making the spread between the published tax rate and actual (or "effective") taxes paid as wide as possible. This is one of the most important and costly fights the income defense industry wages on behalf of its oligarchic patrons. 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. Thus, the industry delivered lower tax rates on which oligarchs paid a lower proportion. The richer the client, the wider the income defense spread achieved.5

The income defense industry's capacities improved throughout the 1970s and 1980s. As it grew stronger, the results the industry achieved for the ultra-rich were spectacular. 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 richest Americans pay fees ranging from $300,000 to $3 million for lawyers to sort through the tax code and produce "tax opinion" letters (an instrument only those who can afford to buy them have ever heard of). Their purpose is to justify enormous non-payments of taxes that straddle the murky (and therefore costly to enforce) line between tax avoidance and tax evasion. These letters are among the most important weapons for pushing down the effective tax rate and increasing the income defense spread.

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.6 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), and it does not include losses from similar schemes employed by corporations.

The income defense industry, attached symbiotically to the nation's richest citizens, has fortified the material power and influence of oligarchs. It has enabled them to fight much more tenaciously even in the face of deep crises that, in earlier decades, delivered serious setbacks to their broader wealth defense agenda. Although oligarchs still operate mostly atomistically, their common deployment of a highly networked and organized industry lends their actions an unprecedented degree of unity. Combined with weakened unions and considerably less political unity among average citizens, America's oligarchs are arguably more powerful today than during the robber baron era at the turn of the 19th century.

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