The Real Income Gap

The Panama Papers are making waves-- detailing the extensive use of shell corporations and secret offshore accounts as tax havens for the wealthy. We’ve long suspected that the rich made their own rules, but now there is positive proof that hiding money and shirking taxes is widespread. All it takes is a shady lawyer to look the other way when creating a faux corporation in the name of a pet, or some other bogus entity, and a willing financial institution to open an account in the name of Fido.

The left and right look at this story with different eyes. The left sees another example of greedy, wealthy tax evaders manipulating the system to their own advantage. The right sees excessive taxation forcing people to find creative ways to reduce their tax burden. Whether this story is an indictment of the rich or of the tax system itself misses the most important element of the story, an idea that strikes at the heart of a democratic society.

Many of the wealthy hiding their financial assets are political leaders and government officials. These leaders are not just corrupt despots and dictators from the Middle East, Africa, and Eastern Europe. Swept up in the scandal are democratically elected leaders. David Cameron, the Prime Minister of England, and Sigmundur David Gunnlaugsson, the Prime Minister of Iceland, are connected with the scandal, and we can be sure that they are not alone.

These are democratically elected leaders avoiding paying taxes on their amassed wealth, but we need to wonder how they amassed such wealth in the first place? Politicians serve the people; they earn relatively modest salaries of politicians, yet they retired as multimillionaires. In an indirect way this is the question Bernie Sanders asks Hillary Clinton when he questions the enormous speaking fees she garners for talks given to financial institutions.

Virtually all career politicians become multimillionaires over the course of their careers. Yet every political cycle they talk of their humble roots. They mingle with the public, attend fairs, eat at diners, ride subways, and shop at supermarkets. This is a far cry from their actual lives, lives of power and prestige, with endless access to information and connections, which is the foundation for influence and wealth building. Politicians live lives of privilege where rules that govern the rest of the country do not always apply to them.

Several years back “60 Minutes” did a piece on members of congress engaging in insider trading for profit. Insider trading is the buying and selling of stocks by corporate insiders who have non-public information that could affect the price of a stock. It is an illegal practice for which Martha Stewart went to jail. Yet congressman conveniently wrote themselves exemption rules under the guise that they have no corporate responsibilities. As they saw it, it’s perfectly legal for a congressman sitting on a healthcare committee to buy stock in a pharmaceutical company with the knowledge that Medicare was about to approve reimbursement for a drug made by that pharmaceutical company.

The most egregious example covered in the “60 Minutes” piece was that of a Congressman sitting on the House Financial Services Committee. In the days leading up to the financial meltdown in 2008 he was briefed by the Treasury Secretary and The Federal Reserve Chairman about the impending financial crisis. Literally the next day this Congressman bought stock options that would increase in value if stock prices went down. While, presumably, this Congressman was working to avert a financial crisis, he was privately betting on the economy cratering. He profited while ordinary Americans were losing their shirts.

No wonder the elected class is so despised and that this is the year of the outsider in politics. A tipping point has been reached, the middle class is fed up with politicians, immune from the anxieties of ordinary citizens, overlooking the needs of the ordinary citizen except during an election cycle when much is promised and little is delivered.  Bernie Sanders highlights the growing income gap between the rich and the middle class and speaks of a rigged economy that only benefits the wealthy. His target is billionaires and large corporations. Instead his target should be the crony politicians who write legislation for their own benefit and the benefit of large corporations that they have cozy relationships with. The economic system of free market capitalism is not broken. It is our political system that is broken.