Spooked by the specter of the year-end tax cuts' demise? Cheer up, because it was once much worse.
The book "L.A. Noir" by John Buntin offers a true story of mobsters and their tax problems coupled with the explosive growth of California during the '50s and '60s. The epic battle between gangster Mickey Cohen and a newly reformed Los Angeles police force involved hit-men who, in those days, murdered with impunity and rarely spent much time in jail because, as law enforcement saw it, "they were just killing each other."
The mistake that ultimately brought them down, however, was failing to pay their income taxes.
In the '50s and '60s, the tax rate on, say $100,000 (equivalent to about $2 million in today's dollars) was 60 percent plus an additional 5 percent to the state of California. A member of that era's 1 percent was Mickey Cohen, whose estimated annual income from illegal gambling was reputed to be more than $1 million. He would have been lucky to have $350,000 after taxes.
Instead, he declared only $6,000 or about twice the average income at the time. While he claimed that the extravagant lifestyle of expensive homes and new Cadillacs had been a result of "loans from friends," he eventually spent five years in prison for tax evasion -- some of which was spent on Alcatraz.
In spite of these confiscatory tax rates, the American economy, especially in California, was growing by leaps and bounds. The annual growth of
I worked in the summer of 1963 for an aircraft company in Lynwood (next to Watts) with mostly a group of parolees in for grand theft auto. My associates at that time would have been perennially unemployable in today's job market.
What explains the difference between booming 3 percent growth then and today's 1.5 percent restrained growth? For almost 10 years now, we have enjoyed the lowest tax rates in 80 years. Someone making $1 million in regular income here in California would be taking home about $600,000 -- almost twice the after-tax money they would have had to spend or invest in the 1950s through the 1990s.
The answer is simple. Expanding a business and hiring more people is a tax-deductible expense. No business owner has to use their after-tax, take-home pay for expansion. Every dollar paid to me and my growing number of ex-convict associates by Bob Boutelle of Boutelle Aircraft in 1963 was tax-deductible. Reducing taxes may allow business owners to spend more after-tax money on non-deductible expenses like new homes or educating their children, but has no connection with expanding their businesses.
In fact, higher tax rates on regular income may have the perverse effect of prompting business owners to invest more in their businesses so as to create future value that will be taxed at lower capital gains rates when eventually sold. If we reach Dec. 31 and have to end tax cuts and cut government spending across the board, I don't see us peering into some abyss. It just puts us back to where we were in the '90s.
Furthermore, each dollar spent on the IRS results in $7 of otherwise uncollected revenue, according to Douglas Shulman, the IRS commissioner. Mickey Cohen died in 1976 still owing $496,535.23 in uncollected taxes. In the coming era when every dollar will count, the IRS should be given whatever they will need to get to people like Mickey before it's too late.
Steve Butler is CEO of Pension Dynamics. Contact him at email@example.com or 925-956-0505, ext. 228.