• Book Overview
• Table of Contents
• Introduction
• Praise

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Wealthfare—the money government gives away to corporations and wealthy individuals—costs us more than $815 billion a year. That’s:

• 47 percent of what it costs to run the US government (which is about $1.73 trillion a year, not counting entitlement trust funds like Social Security and Medicare)
• enough money to eliminate the federal debt in just over eight years (the total is now $6.6 trillion, accumulated over 200-plus years)
• more than four times what we spend on welfare for the poor (currently around $193 billion a year; see Appendix A for a breakdown)

For a summary of what goes into that $815 billion figure, turn back to the Table of Contents, which lists the estimated annual cost of the various subsidies, handouts, tax breaks, loopholes, ripoffs, and scams this book describes.

I’ve calculated these amounts as precisely as possible, but they change every year, and data is often hard to obtain, so they are, of course, estimates. If they seem high to you, cut them all by 50 percent—or 75 percent; welfare for the rich would still cost more than welfare for the poor.

In fact, $815 billion is definitely an underestimate. Limitations of time and space forced me to leave out many major categories of wealthfare. Most of these could be books in themselves: state and local wealthfare (my figure includes just federal giveaways), Medicare waste and fraud, automobile subsidies (much of which are state and local spending), the effects of Federal Reserve policies, the NAFTA and GATT treaties, foreign aid, deregulation of various industries, fraudulent charitable deductions, the easy treatment given white-collar criminals, and on and on.

I discuss some of them in the chapter called “What’s Been Left Out,” which begins on p. 133. (Only the military chapter is longer, which gives you an idea of how much wealthfare isn’t included in the estimate.)

Even within categories I do cite figures for, there are often additional wealthfare expenses I haven’t been able to nail down. So there’s no doubt that $815 billion greatly understates the amount of money American taxpayers lose each year on welfare for the rich.

It’s getting worse

When the first edition of this book was published in 1996, the figure for total wealthfare was $448 billion a year. By 1999, that number had grown to $603 billion. The 2003 estimate of $815 billion shows an 82 percent increase in just seven years (or 69 percent if you adjust for inflation).

In contrast, spending for the poor rose only $63 billion (from the 1996 figure of $130 billion); taking inflation into account, that’s a 41 percent increase. But in fact, spending that exclusively benefits the poor dropped by 10 percent in constant dollars. The only reason there was any increase at all is the vastly higher cost of Medicaid, which also serves some people who aren’t poor.

In the intervening years, there’s been a lot more discussion of wealthfare—and very little reform. In 1997, then-Representative John Kasich (R-OH) brought together a coalition of groups from both the right and the left to oppose a dozen especially dreadful corporate welfare programs. They managed to agree on the need to eliminate $11 billion—spread out over five years (in other words, about $2.2 billion a year, or less than half of one percent of what actually needed to be cut). Six years later, some of the programs they targeted have been cut back considerably, but every one of them still survives.

On the positive side, there have been small victories. Some especially odious nuclear boondoggles were canceled. The McNugget subsidy (an agricultural marketing program exploited by huge firms like McDonald’s) was scaled back by 90 percent. Reformers have occasionally managed to keep things from getting worse. But overall, we’ve lost ground.

At this writing, both houses of Congress have passed a new generation of atrocious nuclear giveaways (though the two bills have yet to be reconciled and sent to the White House). The 2002 farm bill added another $73 billion in new subsidies. Despite then-bipartisan fervor for balancing budgets, the 1998 highway bill contained nearly 1,500 pork-barrel projects, costing over $9 billion. Cutting the tax rate for long-term capital gains to 15 percent has more than doubled the amount of revenue lost to the US Treasury. The income cap on payroll taxes is now costing us 60 percent more than in 1996 (because the rich have gotten so much richer in the meantime).

Even when activists have worked for years to kill off indefensible programs, the funding has often shifted to less-scrutinized parts of the budget. According to Jim Riccio, who works on nuclear issues for Public Citizen, “All those victories we’ve been getting have turned into lessons learned for industry and [federal] agencies, so they can make sure [such] victories never happen again.”

Back when the Democrats controlled the Congress, their districts pulled in about $35 million more a year in goodies from Uncle Sam than GOP districts did. The Republicans complained mightily about that, but then the Dem’s districts did tend to have more poor people in them, who were presumably in need of federal assistance. But by 2001, after seven years of GOP control, the well-heeled Republican districts were taking in, on average, $612 million more than those served by Democrats. That’s a 1748 percent increase.

The rich are stealing from the poor

Before we go on, I’d like to clarify something. I’m not saying there’s anything wrong with being rich, in and of itself. Many wealthy people earned their money by producing a product or a service the public liked and wanted to buy, or by helping a company do that. (The Grateful Dead are one example—their concerts became so popular that they had to run lotteries to decide who got to buy tickets.)

Speaking personally, I don’t think that some people should inherit vast fortunes tax-free while others spend their whole lives scrambling to get by. And I believe that no one should live in luxury while others are starving. (That’s not as hard to fix as you might think. A wealth tax of just 4 percent on the 200 richest people on earth would guarantee everyone enough to eat.)

But this book isn’t about those issues. All it says is that it’s not fair for people to get rich—and stay rich—by defrauding people who are poorer than them. As you’ll soon see, stealing from the poor—actually, from anybody who isn’t rich—has become standard operating procedure in this country. In fact, the US government today functions mostly as a huge Robin-Hood-in-reverse.

But doesn’t it help the economy?

It is sometimes argued that corporate welfare benefits society as a whole by recirculating money back into the economy. Of course, that’s even more true of welfare for the poor, which benefits grocery stores, supermarkets, clothing stores, landlords, doctors, dentists, etc. Furthermore, many welfare programs pay for themselves many times over in future savings on health care, prisons, and welfare payments. (For example, according to conservative estimates, $1 invested in Head Start saves $3 in future costs to society.) Corporate welfare, on the other hand, tends to finance industries that pollute our air, water and soil, so we end up paying for them twice—with our money and with our health.

Subsidizing certain businesses or industries is not only unfair to competitors who aren’t subsidized, but it also stifles the incentive of the subsidized businesses to innovate and develop new products (which might not be eligible for subsidies), ultimately making them less competitive.

Welfare for the rich fosters corruption, both in business and in government. And it’s not uncommon for two wealthfare programs to conflict—as when the Interior Department subsidizes irrigation water for agribusinesses and the Agriculture Department pays those same companies not to grow crops with that water. (What do the companies do? Why, sell the water back to local governments at a profit, of course. What else? See the section called “The Waters of Babylon” on pp. 91–92.)

In any case, it’s not as if the money currently spent on wealthfare would suddenly evaporate if we weren’t handing it over to the rich. It would go into the economy some other way and would almost certainly have a more beneficial effect. (For more on this, see the section “What about the Jobs We’d Lose?” on p. 64, in the chapter on military waste and fraud.)

Wealthfare has one final cost: the creative talents of many bright lawyers, accountants, and financial advisors are spent figuring out how to squeeze the maximum benefit from our labyrinthine tax code. If they weren’t wasting their time on that, they could be doing something genuinely useful, which would make the economy more productive for all of us.

Loopholes are worth more than handouts

Welfare for the rich takes five basic forms. The first two are tax breaks and direct subsidies. The former are more insidious, for a couple of reasons. First, while subsidies typically have to be appropriated by Congress and signed into law by the president each year, tax breaks usually get little scrutiny, and since they don’t have to be renewed annually, they last until they’re repealed by some future tax law.

Second, while subsidies are usually for fixed amounts of money, the amount the government loses on a tax loophole depends on how many taxpayers take advantage of it each year, and to what extent. This means tax breaks are basically open-ended—there’s no way the government can control, or even accurately predict, what they’re going to cost. Furthermore, they’re less controversial for politicians because everybody likes tax cuts; it’s just that the tax cuts I talk about in this book go only to certain groups.

To understand how money is spent in Washington, we have to make a distinction between budgets and bills. When the White House submits a budget to Congress every February, it’s basically a suggestion. Then the Congressmembers pass their own budget, which is basically a set of spending guidelines for them to rely on (more or less loosely) as they pass their appropriations bills over the rest of the year. Theoretically, they’ve passed all those bills by October 1, reconciled between the House and Senate versions, and sent them to the president for signature.

If Congressmembers want to throw money at, say, nuclear power, they could budget for that every year and include it as an item in an appropriations bill. The other method is to write a tax break for nuclear power plant operators and get that passed and signed. Then it stands every year until it’s repealed. Some tax breaks do come with a deadline, as with the “sunset” gimmicks in the latest tax bill that expire in 2006 or 2008 or 2010, unless some future Congress extends them. But something like the Oil Depletion Allowance (see Chapter 18) is more or less immortal.

Over half of the $815 billion wealthfare figure comes from various tax breaks and loopholes. If you think that eliminating them amounts to raising taxes, that’s fine; just be clear that you’re saying the rich deserve to get more than $400 billion a year in tax breaks that aren’t available to poorer people. The Earned Income Tax Credit (EITC) is included in the section on welfare for the poor. Legislators created the EITC out of the recognition that people who are working hard still can’t make ends meet. Okay, so this is a handout necessary for survival. I’ve still included it in the section on welfare for the poor, and most people think of it that way. By the same token, tax breaks for the wealthy are government handouts, and they should be counted as that—welfare for the rich. Handouts are handouts. The only difference is that the rich don’t need them.

Back in 1940, US corporations paid roughly half of the federal government’s general revenues. Over the intervening years, business taxes have been steadily declining (except for a little blip in 1986). In fiscal year 1999, corporate tax payments dropped 2.5 percent and corporate profits rose 8.9 percent. Citizens for Tax Justice reported in 2002 that corporate tax payments were near record lows as a percentage of GDP (gross domestic product). Today, corporations pay just 7.4 percent. So if “fiscally responsible” candidates want to balance the budget and lower individual taxes, it’s easy. All they have to do is tax corporations at the same rate as they did back when what was good for General Motors was good for the country.

The taxes corporations avoid paying have to be raised from individuals. Not all individuals, of course—that would be un-American. Thanks to a series of tax “reforms” that began in 1977, the rate paid by the richest Americans has been cut nearly in half, while Social Security taxes—which are paid overwhelmingly by ordinary wage earners, and not paid at all on income over $87,000—have steadily risen.

Now, I’m certainly no fan of the IRS, and I don’t enjoy paying taxes any more than anybody else. (I’d probably enjoy it a bit more if I knew that more of it was going to fund worthwhile things like teachers and parks and hospitals.) But since corporations and wealthy individuals derive most of the benefit from what the government does, I think they should pay their fair share of taxes. They say they’re in favor of free enterprise—let’s pretend they mean it, and take them off the dole.

Fire sales, overruns, and lazy cops

The other three forms of welfare for the rich are more subtle than handouts or tax breaks. One is when Uncle Sam sells off properties belonging to We the People at a fraction of their true market value. You can find examples of this sort of boondoggle in the chapters on timber and mining subsidies. The magnificent trees in your national forests are being sold off to private interests for pennies on the dollar. But if you think that’s bad, try the chapter on media subsidies and you’ll find out how much Uncle Sam charges radio and TV broadcasters for your public airwaves: nothing.

The flip side of the “fire sale” scam is when Uncle Sam shells out many times more than market value for goods and services from favored contractors. These cost overruns defraud the taxpayer, and seem to continue no matter who is elected (or appointed) to office. There are plenty of examples of this just a few pages away—in the section on waste, fraud, and abuse in military spending. You’ve probably heard about the $640 toilet seat, but believe me, it gets much worse than that.

The fifth and final form of wealthfare might not sound like welfare at all, but it’s a major aspect of how government policies favor the rich: the lax enforcement of white-collar crime. Because this sort of “public assistance” is so difficult to quantify, it’s discussed in the chapter called “What’s Been Left Out” (p. 133).

The rich keep getting richer

Changes in the tax laws have contributed to a widening gap between rich and poor. Between 1983 and 1998, 91 percent of the increase in Americans’ wealth went to the top 20 percent of the US population, and 53 percent of it went to the top 1 percent of the population (those families whose net worth is $3.35 million or more).

Income disparity in the United States is now the widest it’s been since the crash of 1929, and it continues to grow. The top 1 percent of the population now owns more than the bottom 95 percent. In other words, the 2.9 million Americans who are worth $3.35 million or more have as much money and property as the 276,769,922 poorest Americans. (And those are 1998 figures, the last year for which data is available. The disparity is even worse today, given the tax cuts and job losses of the past three years.)

Wherever you look on the economic ladder, the rich are getting richer. The wealthiest 20 percent have gotten wealthier while the other 80 percent of the people have gotten poorer. Within the top 20 percent, the top 5 percent have gotten richer than the other 15 percent. Within the top 5 percent, the top 1 percent have gotten richer than the other 4 percent. Within the top 1 percent, the top quarter have gotten richer than the other three-quarters. And so it goes, right up to the 400 richest Americans. Their average net worth in 2000 was 13 times higher than in 1982.

Inequality increased rapidly in the 1980s and continued to increase—though more slowly—in the 1990s. Median family income did increase slightly in the last decade, but only in 1999 did it catch up to where it was ten years earlier. The poverty rate has also declined to its 1989 figure, but the number of children living in extreme poverty (in families whose income is less than half the official poverty level) has gone up. (The poverty threshold is currently set at an annual income of $14,255 for a family of three, or $17,960 for a family of four.)

This is how the book is organized

There are three main sections. Part One covers a number of tax breaks available to wealthy individuals. Part Two outlines a number of general business loopholes, and Part Three delves into specific cookie jars available to specific industries. In each part, I’ve started with the biggest kinds of wealthfare and worked my way down to the smallest (which aren’t all that small). That way, if you don’t make it all the way through that part, you’ll still have covered the most important ripoffs and scams. (But then you’ll miss some of the most extraordinary ones; for an example, see the section on Taxol, which begins on p. 132.) Let me give you an example from each part.

Horse write-offs

The original idea behind the tax deduction for horse expenses was that horses were essential to the functioning of a farm, like pigs and cattle. Although that’s no longer true for most of the horses in this country, this deduction has been expanded into a major tax shelter. As The Wall Street Journal put it, “Some of the people breeding horses now… can barely tell a horse from a donkey, but [they] recognize a nice tax shelter.” And they aren’t too subtle about it either, as you can see from some of the names given racehorses in recent years: My Deduction, Tax Dodge, Tax Gimmick, Write-Off, My Write-Off, Another Shelter, and Justa Shelter.

If you own a horse, you can deduct the costs of food, housing, vet bills, stud fees, transportation, insurance, interest charges, depreciation, attendance at horse shows, visits to horse farms, and state and local taxes.

Wilhelmina du Pont Ross, a member of one of the wealthiest families in the world, hired her husband to run their stables and wrote off his salary on their joint tax return. Her relative, William du Pont Jr., whose vast estate in Maryland contained a grandstand that could seat 12,500 people, deducted the cost of keeping professional foxhunters on staff.

You can trade an older horse for one that’s younger and more valuable without paying any taxes on the exchange. And when you sell a horse, the profit is taxed at the lower capital gains rate rather than as ordinary income. If you don’t want the bother of actually owning horses, you can even lease them and still cash in on the tax advantages, without any unpleasant odors on the estate.

All of this is kept in place by the vigorous lobbying of the American Horse Council, whose representatives virtually write the laws in this area. There isn’t much opposition to these loopholes, both because most people don’t know about them and because everybody loves horses. (Of course, it isn’t the horses that get the tax breaks.) But like most tax shelters, they divert investment into unproductive uses simply for the purpose of tax evasion. In the nonprofit sector, this would be like securing grant money to provide English-as-a-second-language classes even though your constituency is already completely fluent. Or more ominously, it is like getting debt reduction for your country through an IMF plan in exchange for switching supports for social services to underwriting private enterprise even though your private sector is not starving and your people are. Unfortunately, most business leaders don’t see any of these situations as a paradox. “Free” money obscures clear thinking.

In creating a fiscal response to the 9/11 attacks, Congress allowed horses to be eligible for “bonus depreciation” (see p. 40) if purchased between September 11, 2001, and September 11, 2004. New tax rules in 2003 also quadrupled the limit on the horse deduction from $25,000 to $100,000. Now if that doesn’t stop the terrorists, nothing will.23

Miscellaneous corporate tax breaks

Some economists make the following argument: Since corporations always pass their costs along to their customers, consumers ultimately pay all corporate taxes. Thus, there’s really no such thing as corporate taxation. If this were true, then the lower the corporate tax rate, the higher consumer spending power would be. In the real world, however, the opposite is often the case.

In the 1950s, when the corporate tax rate was 52 percent and corporations paid almost a third of all income taxes, a single wage earner could support a family of four and could afford a new house, a car, and major appliances. In the 2000s, when the corporate tax rate ranges between 15 percent and 35 percent and corporations pay less than 10 percent of all income taxes, more than half of all families have two or more wage earners, and businesses are laying off people left and right. (According to the US Bureau of Labor Statistics, average earnings of nonsupervisory workers peaked in 1973, and they’ve been going down ever since. By 1992, they were 12 percent lower than they were in 1965.)

So it seems that corporations retain some of the savings they get from lower tax rates—which isn’t surprising, since they lobby so ferociously for them. Their investment in certain key legislators can be repaid many times over.

For example, section 543(b) of the US tax code contains a provision that applies only to corporations formed in Nevada on January 27, 1972. It allows Cantor, Fitzgerald, and Co.—the only company incorporated in Nevada on that date—to exempt certain interest income involving securities and money-market funds from taxation.

Handcrafted tax breaks like this are nothing new. Movie mogul Louis B. Mayer had a provision inserted into the Revenue Act of 1951 that classified his retirement package as capital gains rather than ordinary income. As a result, it was taxed at 20 percent instead of 90 percent, and he saved nearly $2 million in federal taxes.

Fly the friendly skies

As I discuss in Chapter 16, “Aviation Subsidies,” if there’s any rationale for governmental subsidies, it would be to help useful fledgling technologies that might not otherwise be developed. The airline industry isn’t exactly a newcomer anymore, and yet we taxpayers still fork out for the air traffic control system, hand out grants for airport construction, and provide reports from the National Weather Service. The industry receives $1 billion annually in federal military research funds, the taxpayer-funded Commerce Department lobbies aggressively for foreign purchases of US-built aircraft, and the airlines are exempted from the 4.3 cents per gallon fuel tax that the rest of us consumers pay.

But even with all these handouts (and there are plenty more cited in that chapter), commercial aviation has never been all that profitable. Even before the 9/11 attacks (which left the country’s entire fleet grounded for a week or so), the industry was in a world of hurt. It was simply a case of over-capacity; compared to the demand, there were too many planes flying. Demand slacked off even more after 9/11, but the airlines ended up with a $15 billion bailout from Uncle Sugar that was triple what they had lost in the shutdown. And as with so many other wealthfare programs described in this book, the lion’s share of the bailout went to the biggest companies; many small firms received quite a bit less than they had lost in the 9/11 crisis.

So how did the big airlines show their gratitude? As you may recall, by laying off thousands of workers (who got absolutely no compensation from Congress) and shelling out huge bonuses for the executives. And did this elicit any outrage on Capitol Hill? Not particularly, though plenty of workers across the country were seething. In fact, Congress saw nothing wrong with setting up another $3 billion bailout for the airlines to get them through any economic turbulence arising from the war on Iraq. Welcome to the wonderful world of corporate welfare.

It’s a system where the timber industry can spend $8 million lobbying to retain a threatened road-building subsidy and come up with $458 million in goodies. It’s a world where Archer Daniels Midland can spread around $3 million in campaign contributions and be rewarded with a $7 billion subsidy. It’s a country where the tobacco companies can buy themselves a $50 billion tax break with a mere $30 million investment in “good government.” And yes, it’s your country; as the saying goes, these are your tax dollars at work.

Here we go…

Even in election years, few politicians pay more than lip service to ending corporate welfare (this isn’t surprising, considering who finances their campaigns). Of the budget cuts passed by the 104th Congress, more than 90 percent came out of programs for the poor. Though some politicians appear to be working sincerely to limit welfare for the rich, it would be foolish to depend on them. Fortunately, there are plenty of ways ordinary citizens can force changes. For some ideas on how to start, see the “Activist’s Toolkits” following each chapter.

If you run across terms you’re not sure of—constant dollars, say, or median—consult the glossary that begins on p. 147. (It can also help you appreciate the full significance of terms you do know the meaning of, like billion and trillion.)

If you think something I’m saying just can’t be true—a reaction I’ve had several times myself—you’ll find backup for it in the endnotes. If a note is in error or you want to check out something that’s not referenced, drop me a line at comicnews@earthlink.net. I can’t promise how quickly I’ll get back to you, but I do value the feedback.

And now—into the mire.

Activist’s Toolkit — general

Following each chapter, you’ll find an “Activist’s Toolkit” geared to that particular topic. But several organizations attack corporate welfare—and other injustices—on more than one front. This section lists some of the best of them. (For groups working mainly on tax policy, see the Toolkit at the end of Chapter 4.) All of the Activist’s Toolkit sections will be archived and occasionally updated at this book’s official website, http://www.markzepezauer.com/wealthfare.

The Cato Institute A libertarian think tank • 1000 Massachusetts Avenue NW, Washington, DC 20001-5403 • phone: (202) 842-0200 • fax: (202) 842-3490 • website on corporate welfare: http://www.catoinstitute.com/fiscal/corporate-welfare.html

The Center for Public Integrity 910 17th Street NW, Seventh Floor, Washington, DC 20006 • phone: (202) 466-1300 • fax: (202) 466-1101 • website: http://www.publicintegrity.org/dtaweb/home.asp

The Center for Responsive Politics 1101 14th Street NW, Suite 1030, Washington, DC 20005-5635 • phone: (202) 857-0044 • fax: (202) 857-7809 • email: info@crp.org • “Your Guide to the Money in U.S. Elections,” website: http://www.opensecrets.org/

Common Cause 2030 M Street NW, Washington, DC 20036 • phone: (202) 833-1200 • fax: (202) 659-3716 • website: http://www.commoncause.org/ • corporate welfare page: http://www.commoncause.org/issue_agenda/corporate_welfare.htm

Corporate Welfare and Foreign Policy A report by Janice Shields for Foreign Policy in Focus • website: http://www.foreignpolicy-infocus.org/papers/cw/

Corporate Welfare: Communism in America website: http://socialconscience.com/articles/welfare/

Corporate Welfare Information Center A project of the ACTION Center • email: catalyst@actionpa.org • website: http://www.corporations.org/welfare/

Corporate Welfare Shame Page A project of the Benjamin Banneker Center • 647 Plymouth Road, Baltimore, MD 21229 • email: banneker@progress.org • website: http://www.progress.org/banneker/cw.html

The Freedom Network Directory for Corporate Welfare website: http://www.free-market.net/directorybytopic/corporatewelfare/

HR 2902, Corporate Subsidy Reform Commission Sponsored by Rep. Adam Smith, (D-WA) • website: http://thomas.loc.gov/cgi-bin/bdquery/z?d108:h.r.02902:

Infact Campaign Headquarters 46 Plympton Street, Boston, MA 02118 • phone: (617) 695-2525 • fax: (617) 695-2626 • email: info@infact.org • website: http://www.infact.org/

OMB Watch 1742 Connecticut Avenue NW, Washington, DC 20009 • phone: (202) 234-8494 • fax: (202) 234-8584 • email: ombwatch@ombwatch.org • website: http://www.ombwatch.org/ • corporate welfare page: http://www.ombwatch.org/article/articleview/428/1/87/

Program on Corporations, Law and Democracy (POCLAD) PO Box 246, South Yarmouth, MA 02664-0246 • phone: (508) 398-1145 • fax: (508) 398-1552 • email: people@poclad.org • website: http://www.poclad.org/

Public Citizen 1600 20th Street NW, Washington, DC 20009 • phone: (202) 588-1000 • fax: (202) 588-7799 • email: pnye@citizen.org • website: http://www.citizen.org/ • corporate welfare page: http://www.citizen.org/congress/welfare/index.cfm

United for a Fair Economy 37 Temple Place, Second Floor, Boston, MA 02111 • phone: (617) 423-2148 • fax: (617) 423-0191 • email: info@faireconomy.org • website: http://www.ufenet.org/

Welfare for the Well-Off: How Business Subsidies Fleece Taxpayers A report by Stephen Moore for the Hoover Institution • website: http://www-hoover.stanford.edu/publications/epp/88/88d.html

What Corporate Welfare Costs You A report for Time magazine by Donald L. Barlett and James B. Steele • November 9, 16, 23, and 30, 1998 • website: http://www.time.com/time/magazine/corpwelfare/

The White Rose Corporate Welfare Page website: http://www.spiritone.com/~gdy52150/cw.htm

Yahoo! Corporate Welfare directory website: http://dir.yahoo.com/Government/u_s__government/budget/corporate_welfare/