The UK's David Cameron announced that Britain's 10 crown dependencies and overseas territories--Cayman Islands, Bermuda, Jersey, Gilbraltar, Anguilla, Turks and Caicos Islands, Guernsey, Isle of Man, and the British Virgin Islands--would sign on to the OECD's multilateral convention on Mutual Administrative Assistance in Tax Matters. They also agreed to "produce action plans about providing information on who owns which companies and who benefits, the so-called beneficial ownership." Wall St.J., June 17, 2013, at C3.
While many vacationers may know most of these spots because of their location in tropical paradises, most tax practitioners recognize them as key linchpins in tax avoidance plans of many wealthy individuals, banks and corporations. As many as 18,000 corporate offices are located in mailboxes in a three-story building in the Caymans, all with a few Cayman laywers as their principal directors. And of course one of the reasons these tax-haven countries are in demand is that they have both very low taxes and a good deal of secrecy about just who owns what.
Signing the OECD tax convention won't solve all the many problems that revolve around tax haven and banking secrecy jurisdictions. The exchange of information provisions, while an advance over no agreement to exchange information, are still far too difficult to bring into play without having some information about owners and account holders.
But getting these tax haven jurisdictions on board the convention is a first step in the right direction, just as the signing of the convention by other tax haven and banking secrecy jurisdictions like Singapore earlier this year was. One can't help hoping that it is a signal that these tax haven countries realize that tax secrecy ultimately will not be a great way to maintain a stable economy and they will eventually need to produce something useful besides tax avoidance regimes.
I have dedicated this blog to a concept I call "democratic egalitarianism"--the idea that individuals flourish best in a free society that allows them to choose democratically the rules that govern their lives, with the understanding that the institutions must be sustainable and must allow all individuals to flourish, not just a select few. It is that latter idea that supports a view of egalitarianism--not that everyone is always "exactly" an equal of others, but that the society's resource allocation provisions have to counter the tendency for resources to concentrate in the hands of a powerful few. Since there can be no absolute equality, society's institutions must counter the tendency for wealth and power to aggregate in the hands of those with more wealth and power by mandating downward redistribution of wealth and power.
The claim is that every decision in society is in some way redistributionist. Most redistribute upwards to those that already have wealth and power and "connections". Society's institutions have to counter that--at least at the margins--with downward redistribution from those with wealth and power to those without wealth and power. Hence, a progressive income tax system that taxes those at the bottom of the income distribution less than those at the top serves this underlying value. A regressive sales tax system that taxes those at the bottom more severely, in relative terms, than those at the top undermines sustainable democracy.
The US is becoming more and more a society of haves and have-nots, a society that could allow a candidate for president to make claims about merit that suggest that anyone who isn't a successful "have more" is just plain irresponsible (Romney's infamous 47% speech to a private group of wealthy and powerful fundraisers). The Great Recession--engendered in large part by the greed of the have-more class, especially bankers and corporate managers and owners who reap disproportionate rewards for their labor or simple ownership of assets compared to the workers who make those rewards possible--has left the US an even more unequal society than it was before, as the wealthy have mostly recovered and moved ahead, while the middle class and poor have mostly suffered, with jobs that have moved from decent to inadequate and pay scales that continue to reflect the upper class's willingness to exploit the rest of society for their own selfish ends. (And this is true even if that upper class gives "generously" to charities that further their own interests and push their own views about education or transportation or religion onto the recipients of that "charity".)
The Times today has a number of excerpts from commencement speeches given by nationally known figures. I found the excerpt from Ben Bernanke's speech at Princeton worth noting. Here's the excerpt the Times printed:
"A meritocracy is a system in which the people who are the oluckiest in their health and genetic endowment; luckiest in terms of famiy support, encouragement, and, probably, income; luckiest in their educational and career opportunities; and luckiest in so many other ways difficult to enumerate--there are the folks who reap the largest rewards.
The only way for even a putative meritocracy to hope to pass ethical muster, to be considered fair, is if those who are the luckiest in all of those respects also have the greatest responsibility to work hard, to contribute to the betterment of the world and to share their luck with others." Ben Bernanke, excerpted in Commencement Speakers: In Looser Tone, A Call to Take Risks and Be Engaged, New York Times (June 16, 2013), at Y20
This sounds well and good as far as it goes. But it suggests that this kind of society (a "meritocracy") where people who are born into the good life are the ones that can succeed, is okay so long as these meritorious people "contribute to the betterment of the world and share their luck with others", a phrase which sounds like a mere tithing-type responsibility to "give back."
Nah, I don't think so. I don't think that goes nearly far enough. This is not a society I want to live in--where the rich get richer and exercise some royal-like "noblesse oblige" interest in the dregs of society that their very success has created.
If we are to have a society that believes in merit, then it needs to be one that recognizes that the luck of birth has nothing to do with merit but with the concentration of wealth and power in the hands of too few people. Merit, in any useful sense, is only okay so long as the ranks of those who merit success can readily expand to include those not so lucky at the outset. Else the upper class will essentially become a superior caste that enjoys all the rewards, except for the crumbs handed out as charity, and the masses will be essentially peons serving the wealthy few.
How does one maintain a notion that merit is good but avoid the problem of the lucky, powerful few ruling over everyone else? It requires a lot of work, work we haven't been doing very well lately. It requires a decent minimum wage sufficient for people to live on. It requires government systems that actively reallocate resources towards those in need and away from those who already have plenty rather than providing millionarie congressmen millions more in agricultural subsidies for their agribusinesses as we currently do. Through a progressive (i.e., redistributive) tax system, a decent anti-trust system that prevents monopolies and even semi-monopolies, a more innovation-supporting copyright and patent system that does not allow a few well-funded groups to control too much of the new knowledge base for too long, a strong labor law system that does not allow employers to ride roughshod over workers, and a very strong sense of the public good and the need to maintain some systems of primary importance to core democratic values as public rather than private ones--like health care, education, and probably energy. We are failing on so many of these points, as anti-trust has withered to a shrunken ghost of its former self, as global MNEs exercise too much power over workers and communities, as companies are allowed to ignore the externalities of their success (government subsidies and government stability) and of their business models (environmental pollution, worker deprivation).
In particular, the tax system is so frequently under attack from the radical right because it offers an important tool for preventing oligarchy--through the estate tax, which should be strengthened rather than weakened, through the income tax, which should be made more progressive by getting rid of preferential rates for capital gains (among many other important progressive reforms), and through the provisions for standard deductions and personal exemptions and refundable credits, which can provide a part of the social safety net that any wealthy, advanced nation should provide.
These things won't happen until people stop allowing corporate greed--and the wealth and power ambitions of the Koch brothers and their ilk--to decide the fate of the nation. We do still have the power of the ballot box. We as individuals have to work to counter the corporatist creedo that is being preached by Koch-funded think tanks and "social welfare" (really political party) groups. We have to elect people willing to fight for a sustainable democracy and to legislate against the interests of the biggest and most powerful businesses and their owners/managers. The corporatist lobby that commodifies everything is extraordinarily powerful. Fighting it isn't easy. But it must be done.
See the Motherboard article, below, for another analysis of the "meritocracy" idea, and some insight into what the inventor of the term, Michael Young, meant to be doing in his seminal work a half century ago.
I suppose it shouldn't be surprising that the mostly-to-the-right Detroit newspapers would have a center-page opinion piece calling for the elimination of the IRS, that ages-old mantra of the radical right and of those corporate-backed propaganda tanks and radical-liberatarian idea pushers like Cato and Heritage Foundation and Claremont and many of the Tax Party groups, etc. But this one is so bad that it is necessary to call it out for what it is--a bunch of hog-wash. See Nolan FinLey, Let's Get Rid of the IRS, Detroit News (June 10, 2013).
Finley starts out with a presupposition that the scandal-mongering about the IRS is not only completely accurate (which it isn't--liberal and conservative groups were selected for scrutiny, and scrutiny was called for in respect of groups that had "tea party" in their names, since most of them were in fact mainly doing politicking) but that it was also "obvious[ly]" done from at the orders of Obama operatives to aid the President's election chances (which is completely unfounded conspiracy-mongering speculation). He states that "the IRS has been caught red-handed targeting conservative political groups for special scrutiny in what seems obvious was an attempt to aid the reelection bid of President Obama."
An initial scaffolding of distortions and malicious speculation cannot bode well for any opinion piece. So it isn't a surprise that the rest of the piece doesn't hold water, either. He calls the required statutory scrutiny of applicants for 501(c)(4) status a "dragnet"--failing to even acknowledge that the statutory requirement states that such groups must be "exclusively" operated for social welfare purposes and that it is in fact through administrative dispensation via interpretative regulations that the IRS applies instead a "primarily" for social welfare purposes test, thus permitting (too much) politicking as long as it isn't the primary activity.
He goes on to claim that use of the term "patriot" as a screening filter for politicking groups implies that "the United States government finds something sinister in patriotism". Again, that's a ridiculous association of what may possibily have been a perfectly reasonable though politically unwise filter term--i.e., if there are lots of groups with "patriot" in their names that do a lot of politicking, then it is a reasonable term to pick for giving those groups extra scrutiny to see if they do too much politicking, though the expectation that conservatives would rise up in arms if those types of groups receive extra scrutiny should have been a red flag cautioning against use of that term in spite of its usefulness.
Then Finley asserts that this conspiracy-theory thinking provides "more than enough reason to jettison plans to make it [the IRS] the enforcement arm of Obamacare." Now, it is true that the IRS has so many different federal programs that it has to oversee that it is almost impossible for it to do an appropriate task of doing so. Congress has loaded it with tasks (including all the tax expenditure programs embedded in the federal income tax code) and consistently underfunded it so that it is usually understaffed and overstretched. But the answer to that is not to take away a task that it is perhaps best suited for out of all the agencies, but rather to fund the IRS appropriately so that it can do the tasks assigned to it by Congress. Finley completely ignores the underfunding problem, since--as revealed later on--he really wants to decimate or eliminate the IRS entirely.
Finley talks about the IRS as "an institution America no longer trusts" because it is "the most feared agent" and on "that has proven itself willing to manipulate the levers of government to achieve a political end." Again, many problems in this rhetoric.
If the IRS is actually the "most feared" (I personally suspect the CIA and FBI and NSA would come in ahead in that race, but haven't seen any actual empirical study on this issue)--even after the enactment of three laws pulling back on its power to enforce and essentially hamstringing its employees with the "ten sins" provisions included in the 1998 act (see earlier post)-- it is because for decades the right-wing propaganda tanks and media have been pushing distrust of the IRS and of taxes and of government generally. People are influenced by that constant cry of "bad guy" based on blowing up of individual anecdotes into massive (presumed) patterns.
And the claim that the IRS "has proven itself" using its power for political purposes is simply unfounded. There is no "proof" of the assertion made by Finley. He is merely playing the Bill O'Reilly game of asserting speculation--or even worse, falsehoods,-- as fact in order to buttress his own personal vendetta against the IRS and its employees. Most IRS employees are civil servants, not political appointees. I've known quite a few Republican IRS employees in my years as a tax practitioner, and have considered writing about what I consider a related problem -- that too many IRS employees are too willing to court the pleasure of taxpayers such as big multinationals or large law firms or accounting firms that may well become their future employers or clients when they leave the Service.
Now Finley hits his stride with his real objective--arguments for disbanding the IRS, eliminating the income tax, and replacing it with a (regressive and hard to enforce) national sales tax.
The most fitting punishment would be to disband the IRS. And junk the income tax, too. Mike Huckabee, former governor of Arkansas and now a TV talk show host, is urging Congress to replace the income tax with a national sales tax. You’d pay tax on the money you spend instead of the money you earn.That would eliminate the need for an IRS that audits tax returns, hands out non-profit status and enforces a tax code that is egregiously complex and unfair. Id. (paragraphing removed).
Finley reveals his true ignorance here (if he hasn't done for most readers already). Let's just consider first some of the ancillary issues around "disbanding the IRS".
Because the IRS does function as the major enforcement agency for many things besides the income tax, Congress would have to undertake a comprehensive analysis of all of those activities and assign them to some other agency. In all likelihood, that other agency would lack agents with expertise to handle the assigned task, and the result would be essentially a transfer of those currently staffed with the activity to the other agency, requiring considerable time to merge functions and perhaps failing to do it well enough to maintain current operating efficiency, much less improve it (just as huge mergers or consolidations of businesses often go awry).
Further, the time to do the study, legislate the transition, and implement the transition would require continued operation of the current agency and the replacement agency, duplicating costs at a time when conservatives like Finley claim they want to cut wasteful government spending.
The Internal Revenue Code is not really "egregiously complex."
Read earlier posts on the right's tendency to overstate (by tens of thousands of pages) the "size" of the Code and to treat "size" as an appropriate substitution for any analysis of complexity.
Only 30% or so of individual taxpayers itemize, and itemization is the primary complexity faced by individual taxpayers. Most of those who do itemize are in the relatively wealthy part (upper 30% )of the income distribution, and most of those who have difficult and complex decisions to make are the very wealthy who have expensive tax experts to do their work for them.
Most of the complexity in the Code stems from two factors--(a) tax expenditures (subsidies) that benefit (substantially, in most cases) particular types of wealthy and business taxpayers lobbied for by those taxpayers and (b) anti-abuse rules necessitated by the clever tax strategies invented by the wealthy taxpayers' (especially corporate and business taxpayers') expensive tax experts.
It is naive to think that any tax system--whether income or excise or transfer or territorial or worldwide or sales or VAT-- could be "simple" for wealthy individual and corporate taxpayers with a global playing field and incredible sums able to be spent on avoidance and at the same time generate sufficient revenues to provide for the most basic of public goods and services, including a decent safety net for those caught in vulnerable positions by age, illness, or other lack of privilege.
5. Most sales tax systems include incredible arrays of exemptions (for example, for non-profit groups and charities) and exclusions (for "necessities" where the sales tax could make a difference between life and death for those living in poverty) and special provisions (lobbied for by particular industries). A VAT (if that were the form required) would in all likelihood require the same complexities about what is income or not that an income tax requires. A VAT or a national sales tax would require a mechanism for enforcement of collection not unlike the IRS's function and a mechanism for tracking individual's payments not unlike the IRS's current function. It would not permit the elimination of audits of tax returns (just different kinds of returns), handing out nonprofit status (just a different rationale and basis) or enforcing a complex tax code (just a different one).
Finley's ignorance is further revealed by his claim that a "similar outcome" (disbanding or making the IRS much smaller) could be achieved by "vastly lowering current income tax rates in exchange for eliminating all deductions and credits" because there would be "no reason to examine returns."
lowering rates doesn't achieve anything but less revenue--which will have to be made up for in other ways (adding complexity) or by further hardship on the already suffering ordinary people of this country who bore the brunt of the Great Recession, the foreclosure crisis, the unemployment crisis, and the corporatisation of education that has paid administrators twice or more what they are worth while cheating professors, teachers and students;
eliminating all deductions and credits might simplify somewhat the income tax, but at the cost of considerable unfairness in many cases--for just a few obvious examples, removing the foreign tax credit for taxes paid to other countries would result in some instances in "double taxation" of the same revenue by the US and the other country; removing the "standard deduction" and "personal exemption" would undermine a universal view that the income tax shouldn't reach the amount necessary to maintain a barely sustaining level of income for food, shelter and clothing;
even if it were possible to "lower rates and eliminate all deductions and credits", it wouldn't be possible to get rid of the IRS or eliminate audits or curtail enforcement or reduce the tax code to something a kindergartner could understand--a critical question for the Code is "what is income"--and therein lies a huge portion of the complexity and most of the ways that taxpayers have found to abuse the rules by claiming "phantom" losses. (Note that Finley doesn't talk about removing elections, exemptions, and exclusions--was that intentional?) There would still be the same need for returns, audits, and enforcement, and there would still need to be all the procedural provisions for litigation and regulations and penalties and interest on overdue taxes. There would be rules still for all the different types of entities (much of the complexity of the Code lies in the rules for permitting partnerships to have considerable flexibility in their allocation of income and losses among the partners). Certainly Finley wouldn't suggest that the tax code should get to tax gross income and taxpayers be required to forego claiming any losses!
Finley ends with what he thought was a question requiring an obvious answer of "none"--essentially asking that if we can eliminate the IRS and get rid of the health care "entitlement", "what's the downside?"
The answer is not the one he so ignorantly professed to believe. The downside is huge, and there is little upside. Finley disregards the growing inequality in this country and the continuing poverty in what is still the richest country in the world. He doesn't care, apparently, that his "solution" would create even more problems for the poor, as programs that they depend on administered through the IRS-such as the Earned Income Tax Credit and the standard deduction and personal exemptions--would be eliminated with his proposal. Further, without a tax collection and enforcement agency, much of the good done by the federal government would wilt on the vine--from the Centers for Disease Control to the NIH and the Smithsonian, from transportation safety to education funding, and even the right's much beloved military. We simply can't and shouldn't get rid of the IRS--every advanced country in the nation has a bureau that collects and enforces the tax laws. We could get rid of the particular health care reform enacted as Obamacare, but we shouldn't --rather, we should continue to improve it, ultimately instituting Medicare for all and removing the rent-seeking profiteers from the picture except for those who have so much money that they can afford to buy luxury health care.
Finley's proposal amounts to more hot-air from the right about their favorite target--taxes and tax enforcement--that would have regressive results lopsidedly benefiting their favorite beneficiaries--the wealthy and Big Business (owned mostly by the wealthy). Apparently, people like Finley really want a country where brute market forces allow a few to reap all the benefits and the many to suffer, resulting in a classed society with the few living in relative splendor and the rest living off the dregs. That would be the result of most of these proposals for turning to a regressive sales tax and shutting down federal tax enforcement, making such proposals a form of class warfare pure and simple.
(if you don't believe me about "rent-seeking profiteers" in the health care business, read Saturday's New York Times story about the way Questor--a Big Pharma company--has reaped huge profits by essentially building a monopoly power over an immune-disorder drug called Acthar and now intends to purchase a competitor's potential threat (selling for tens of thousands less) because a US startup wanted to make it available cheaply in the United States. Questor bought Acthar in 2001 when it was selling for just a few hundred dollars a vial. By 2007 questor had increased the price to almost $1500 a vial. And in 2007, Questor increased the price in a single jump to $23,000 a vial--yes you read that number correctly. This is the perfect example of the fact that the right's beloved "market" doesn't work if the government doesn't provide the right framework--in this case, enforcement of anti-trust laws much more stringently than has been done in the last few decades as anti-trust has practically dropped from the national vocabulary.)
Today's Times includes an interesting piece by Floyd Norris about the problem of companies that are neither private nor public but have (or claim to have) few enough public investors that the SEC allows them to "go dark"--quit reporting their financial statements, or anything else for that matter, to the public at large or even their few public investors--even though at least some of their shares continue to be publicly traded. See Floyd Norris, Going Dark, and Putting Blindfolds on Investors, New York Times (July 13, 2013), at B1.
Norris is focused on the way that allows companies to take advantage of those (purportedly) few public investors by activities that "smell[] like insider trading." Id. He reports on Equity Inns, a hotel owner acquired by Goldman in 2007, which had (and has) publicly traded preferred shares outstanding, apparently amounting to about 1% of the assets. They'd been issued with par value of $25 and paid a dividend of 8.75% or 9%--now they are trading at less than $10 and Goldman has halted the dividend payments. Norris notes that Goldman was the purchaser and the lender on the deal, so "it could restructure the debt in ways that would essentially give the debt holders--Goldman, that is--the ability to get everything, leaving the preferred shareholdes with nothing." Id. The preferred share price declined, and then started to rise, and then Goldman announced that an affiliate had acquired 35% of the outstanding preferred. Preferred shareholders, perhaps feeling cheated, are trying to get the SEC to require public accounting, since the company has more than 300 shareholders of record. The company is trying to get the SEC to give it an exemption, with its lawyer claiming that "the issuer of the preferred shares ... was simply a real estate investment trust [REIT, in tax parlance] with a small economic interest in 130 hotels and no employees." The SEC asked for public comment. Norris adds that "public filings would make it easier to see what was going on, but Boldman would still have all the cards and might find ways to assure that the preferred holders received little or nothing from their investment." Norris also points out the oddity that the company's Web site seems to discuss its status as a REIT, but Goldman claims that it "gave up its REIT status years ago and disclosed that in financial statements that are not public."
So here's my thought. What reason can there be for not requiring publicly available information on federal income tax classification for all businesses that operate in this country?
I've never found the justifications offered for confidentiality of business tax returns convincing in the first place: they usually claim that "trade secrets" would be revealed, but one suspects that the secrets they don't want revealed and perused over by journalists, tax practitioners (especially academics) and just plain citizens are those showing just how much they are taking advantage of tax expenditures/subsidies to make huge profits for their owners/managers while starving their workers.
Those proffered rationales about trade secrets certainly don't support allowing any company to have one of the tax-privileged classifications such as partnership or S corporation or REIT or RIC status without having that status be public information. Certainly the investors in those preferred shares of the Goldman affiliate at least have a right to know its tax status. Beyond that, the public has a right to know just who is using what tax status (and how they are using it). How can people reasonably participate in public dialogues about tax policy if they are so ill-informed about major players in the system? As it is, in the case of the Goldman-purchased company, there is no way for any lay person to substantiate or disprove Goldman's claim about REIT status. And there are very large privately held companies, like Mars, Inc., that do not reveal their tax status--and won't even if you send them an inquiry asking them about it.
In this post-Citizens United period, when corporations can spend money to directly influence election campaigns under the Supreme Court's absurd "first amendment" holding that corporations are persons, too, there is even less justification for secrecy about tax status than there might have been before. This is one thing that could be easily legislated--a bill that creates a public registry of all businesses by federal income tax classification. It seems to me that sustaining democracy is much more important than sustaining tax-status secrecy.
There's been a good bit in the news lately about the way multinational enterprises like Apple, Google, and many others especially in Big Pharm and Big IP actively reduce their US taxes through offshoring that is offshoring-on-paper-only to a large extent. Apple does it by "selling" rights to its innovative IT developments to affiliated offshore entities (such as those in Ireland), and then claims that the profits from those US-based innovations are not US-income. In Apple's case, the main holding company in Ireland is run by directors in California (except for one woman who actually resides in Ireland but doesn't attend many meetings--and most of those by phone) and isn't even treated as a resident in Ireland for Irish tax purposes. See, e.g., How one Irish woman made $22bn for Apple in one year, The Guardian (May 29, 2013) [hat tip to Stevan].
That's a feat that shouldn't be achievable by any company but is a result of the lack of international harmonization in the way tax laws work and the failure of Congress to keep up with the innovations in tax law achieved by creative tax lawyers taking advantage of every discernible loophole or ambiguity. It may be legal (under our foolhardy current law that fails to treat corporations organized OR MANAGED in the US as US companies) or it may not be, depending on how willing a court would be to apply the "sham" corporation doctrine to the case. Either way, it doesn't sit very well that a company that benefited enormously from the way the US subsidizes the education (especially of the rich who pursue science careers) and research is so willing to show so little social responsibility. Congress should likely act on that, and soon, so that US MNEs do not continue to siphon out US profits to nowhere.
Even much of the ballyhoo about corporations that really "want" to repatriate their overseas profit but are "hindered" by the US taxes they would have to pay is ridiculous--they already keep most of those profits in the US in bank accounts and Treasuries, but don't claim them to be repatriated for their businesses.....
Victor Fleischer, a fellow tax prof, did a DealBook story on this last week that is worth noting. Fleischer, Calculating Apple's True Tax Rate, New York Times, DealBook (June 4, 2013).
As he says at the very beginning, it isn't easy to know what the actual tax amount paid (and hence tax rate) of big MNEs is: "it depends on what the meaning of 'pays' is."
Now, what you have to understand is that this comes in the context of Apple CEO Cook's testimony at congressional hearing as to that very piece of information. “The way I look at this is that Apple pays 30.5 percent of its profits in taxes in the United States.” Id. (emphasis added). One has to wonder about that qualifier--"the way I look at this is", instead of a plain statement about Apple's payments of taxes to the United States Treasury. For example, one wonders "which profits" Apple is using. It all depends, doesn't it, on whether Cook is counting as US income everything that should be counted as US income? In the case of many discussions of MNE tax liabilities, there is also a question of whether they are talking about taxes that the company has booked (as "deferred tax liabilities" that are someday, maybe, due and payable), though the Fleischer story says that was not the case with Cook's statement. Often you have to also ask whether the tax rate calculated as "paid" to the United States is based on tax liabilities that are offset by foreign tax credits (and thus not actually paid to the United States)--which would ordinarily be the case with most MNEs.
As Bloomberg News highlighted recently, Mr. Cook’s calculation is based on a badly distorted measure of United States income. ... Apple shifts substantial amounts of its economic profits from the United States to Ireland, where they are taxed at a rate close to zero. Those profits are then sheltered in Ireland and untaxed unless Apple decides to bring the cash back to the United States.
We can't easily figure out how much an MNE actually pays, because of a rather silly view that corporations merit having their tax returns kept fully confidential. Looking through publicly disclosed information, including financial statements, sometimes is revealing, but only after hard work and not often with certainty about the conclusions, as Fleisher notes. Felix Salmon of Reuters has suggested public companies should file their tax returns with their other information filed with the SEC. Id. Instead, they currently file all kinds of statements prepared assiduously by lawyers to hide their tax avoidance strategies from the IRS and to hide their actual tax situation from everybody. Obviously, they don't want to disclose their tax returns, but it is hard to see why that would be a bad thing to require. We require open disclosure of Form 990 for 501(c)(3) organizations to justify their tax breaks, and MNEs get tax breaks of a much greater magnitude than most 501(c)(3)s.
Fleisher has a more modest proposal--require all public companies to disclose their "true US tax rate", defined as cash payments made to the U.S. Treasury divided by worldwide pre-tax income. If you calculate that rate over three years for Apple, it's a heck of a lot less than Cook says is "the way [he] look[s] at this"--only 8.2% ($5.3 billion paid to the U.S. Treasury from 2009-2011 OVER $65 billion worldwide pre-tax profits). Id.
The point of the disclosure is to allow voters and policy makers an easy way to understand how well the tax system is working and what each corporation contributes to the public coffers. Id.
As the House hearings have continued into the "much ado about nothing" "scandal" of the IRS Cincinnati office using terms like Tea Party and Patriot to filter 501(c)(4) status appications for groups that were likely to be politicking and thus merit extra scrutiny before granting the status, there continue to be statements that lambast the government generally and the Obama White House in particular, accusing it of intervening in IRS affairs and implying that the Obama White House is using the agency to get at its political enemies.
Darryl Issa, the Republican chair of the House Oversight Committee, one of the various politicians avidly pursuing the issue, spoke with CNN's Candy Crowley and claimed that IRS agents were being "directly ordered from Washington". See Joan Walsh, Elijah Cummings Outplays Darryl Issa, Salon.com (June 9, 2013). Issa hinted that interviews with IRS staff had turned up plenty of proof of such shenanigans, but Cummings, the Democratic vice-chair of the Committee, called his bluff, saying that a senior Republican staffer who described himself as a "conservative Republican" had made quite clear that wasn't so and challenging Issa to release the transcripts of interviews. (Cummings ultimately released the transcripts himself.) Cummings suggested that it was time to close the book on this case. id. If only.
The Wall Street Journal reported Saturday on an IRS effort to police the misuse of REITs. See A.D. Pruitt & Amos Sharma, IRS Puts Brakes on Corporate Push to Capture Real-Estate Tax Break, Wall St. J. (June 7-8, 2013), at B1.
A REIT is a "real estate investment trust", a special-status entity created by Congress in sections 856 -859 of the Internal Revenue Code to provide a way for ordinary retail investors to share in a big investment in real estate that would be impossible for them to do individually. REITS avoid the corporate tax so long as they distribute most of their income as dividends to shareholders.
The Journal story notes that private prison operator Corrections Corp of America has already completed conversion to REIT status. Now a flock of corporations operating various businesses that one wouldn't ordinarily think were intended to be covered by the REIT exception to corporate taxation are applying for REIT status--including Iron Mountain Inc. (document storage operator), Lamar Advertising Co. (outdoor billboards), Equinix Inc. (data-center operator), and Penn National Gaming Inc. (casino operator). CBS submitted a letter ruling request for its outdoor advertising division's bid for REIT status and an IPO, a move that would save it $145 million in 2014 taxes (and more in later years), according to Davenport Research, as reported in the Journal.
In addition to the distribution requirement, REITs avoid corporate taxation only if they satisfy a complex set of eligibility requirements, including the following gross income and asset requirements.
The first gross income requirement mandates that at least 95% of a REIT's gross income must come from dividends; interest; real property rents; gains from property sales; income or gain from foreclosure property; abatements and refunds of real property taxes; amounts received as consideration for entering into agreements to make loans secured by mortgages on real property or to purchase or lease real property;gain from disposition of a real estate asset (other than prohibited transactions).
The second gross income requirement mandates that at least 75% of a REIT's gross income be derived from rents from real property; mortgage interest; real property dispositions; dividends or gain from disposition of shares of other REITs; abatement and refund of taxes on real property; income and gain from foreclosure property; consideration for entering into agreements to make mortgage loans or purchase or lease real estate; certain gain from dispositions of real estate; and "qualified temporary investment income". (The latter term is used for other types of investments that are used as temporary parking places for money.)
The first asset test requires that at least 75% of the total assets of a REIT be represented by real estate, cash and cash items (including receivables) and government securities.
The second asset test requires that (i) no more than 25% of the assets represent other securities; (ii) no more than 25% of the total assets be represented by securities of taxable REIT subsidiaries; and (iii) except for those taxable REIT subsidiary securities (I) no more than 5% represent securities of any one issuer; (II) the assets do not include more than 10% of the voting power of any one issuer and (III) the assets do not include more than 10% of the value of any one issuer.
A special rule permits "timber REITs" for logging businesses where more than 50% of the assets are used in a timbering business. And there are many more details to the rules than briefly outlined here.
Already, one can see two things about the REIT rules:
(1) that this is a very complex set of rules for which the discernible intent of Congress was to cover entities that made most of their money from being landlords--holding and leasing real estate;
(2) that the real estate (and logging) businesses undoubtedly lobbied hard to get this kind of break for their property businesses--a break that isn't ordinarily available for corporations that run grocery stores or distribution businesses or manufacturing businesses.
Aside: Real estate developers/owners/leasers are--like Big Oil and other natural resource extractive industries--businesses that exploit natural assets. For reasons likely dating back to the very different circumstances at our founding when people tended to think of America as a vast frontier with almost unlimited resources which required incentives to get people to development them (and of course at the same time overlooking the Native Americans who were already there and using those resources quite differently), Congress has historically lavished largesse in the form of tax expenditure subsidies on businesses that exploit land and minerals and other natural assets.
So why would a prison operator like Corrections Corp of America or a casino operator like Penn National Gaming Inc. that have active business income from operating prisons and casinos be eligible for the REIT break if REIT status is supposed to be for landlords that get rent income? It all depends on whether the business can successfully define its income as "lease" income from real estate (with incidental service income) rather than business income from providing services or running businesses(that take place on physical properties owned or leased by the companies). The IRS has actually been rather flexible in its application of the REIT rules to date, considering cell phone towers "real property" for this purpose, etc. As the journal notes, "some analysts argue that some companies are stretching the definition of landlord." But "stretching definitions" is the key to the tax minimization game, and tax lawyers, accounting firms, and others will keep doing it unless Congress or the IRS narrows the definition (or eliminates the issue entirely).
It seems quite appropriate that the IRS has launched a review "to define what type of companies can qualify as real-estate firms" for this purpose. Even more appropriate is the House Ways and Means Committee's review of the wisdom of providing this preferential tax expenditure for any industry, even if they really are landlords. The SEC has already noted that companies that hold lots of interests in real estate mortgage investment conduits (REMICs) might better be treated as mutual funds rather than REITs, for the safety of the financial system. Id. Rethinking REITs could lead to better securities regulation policy and better tax policy. Elimination of this tax subsidy --which amounts to tax favoritism for these real estate companies, casino and prison operators, and outdoor space advertising businesses--would be the fair thing to do.
Sometimes when you look at the hype on Social Security from the right, you wonder what in the world is going on in the heads of the hypers. Here's the way it tends to go:
1) Social Security is meant to be an insurance program that pays for itself.
2) Down the road in 20 or 30 years it is predicted by Social Security trustees (using prudently conservative estimates based on present valuing for infinity the obligations of the trust fund) that Social Security will be {pick your term: insolvent, bankrupt} and as a result , the program will, at that future date, be able to pay only about 75% of the benefits promised to retirees (which will, nonetheless, exceed the benefits that are currently being paid to retirees).
3) So therefore we should "save" Social Security by "reforming" it now : the way to do that reform is not by lifting the cap (so the rich pay into the program the same way everybody else does) but by cutting benefits so that the program starts paying less benefits today to retirees.
When you write it out in stark terms like that, it becomes strikingly clear how idiotic these "reforms" are and how unprincipled the purported "reformers" are. As Paul Krugman noted in an earlier New York Times opinion piece, Krugman, The Geezers Are All Right, New York Times, Opinion (June 2, 2013), they are proposing preemptively decimating benefits today because the program might reach a situation decades off where benefits would be partially reduced of necessity if nothing at all is done.
[I]t does look as if there will eventually be a shortfall, and the usual suspects insist that we must move right now to reduce scheduled benefits. But I’ve never understood the logic of this demand. The risk is that we might, at some point in the future, have to cut benefits; to avoid this risk of future benefit cuts, we are supposed to act pre-emptively by...cutting future benefits. What problem, exactly, are we solving here? Id.
This is not unlike policies of voluntary war--we'll suffer a great harm now (going to war, with the huge cost now in weaponry and lives and the huge cost in terms of long-term care of injured vets later) because we might have to suffer it in the future. As we found in Afghanistan and Iraq, that speculative concern is a very poor excuse for going to war: the result of overthrowing a dictator may be extraordinary costs to the overthrower and the overthrown people and the result may breed more enemies than it kills them. Preemptive war mostly aides warmongers in the military-industrial complex and the private companies (mercenaries and arms dealers) that make money off of war.
Similarly, preemptive reduction of benefits in a program that does not yet require it to "save" us from having to make reductions in the future (since they've already been made and caused even more suffering in the here and now) is absurd. It smacks of no reason other than:
(i) the real possibility of so fooling so many of the people so much of the time,
(ii) being able to gain "kudos" with the government-and tax-haters, and (likely the real purpose, these earlier just being gravy to the doing of it)
(iii) protecting the real clients who are the corporatist wealthy campaign donors who want to see these social welfare (they like to call them "entitlement") programs ended so that their own true "entitlement" programs --preferential capital gains rates; preferential "carried interest" taxation of compensation for service to private equity funds; preferential retirement programs; and preferential taxation of offshoring and Big Oil, Big Pharma, Big IP and similar industries--can continue unabated.
Remember that Social Security serves real needs. To arrive at a decision to cut benefits, just because it seems to be the politically expedient thing to do given the anti-tax furor stirred up by the likes of the Koch brothers and Grover Norquist and the Tea Party groups, is penny-wise and pound foolish--and smacks of class warfare. Do we really want to return to the pre-Social Security situation of a large population of seniors with too little to eat and nowhere to live? Continuing to reduce benefits when wages have been declining for most ordinary Americans (while the tiny number at the very top of the wage pyramid see their wages mushroom) would be disastrous. Just look at the story in the New York Times today about the near-crisis situation for most retirees, even with Social Security. Jeff Sommer, For Retirees, A Million-Dollar Illusion, New York Times (June 9, 2013), at BU-1.
"We're facing a crisis now, and it's going to get worse," said Alicia Munnell, director of the Center for Retirement Research at Boston College. "Most people haven't saved nearly enough, not even people who have put away $1 million."
***
And if you're not close to being a millionaire--if you're starting, say, with $10,000 in financial assets--you've got very little flexibility indeed. Yet $10,890 is the median financial net worth of an American household today . . ..
***
Social Security is going to be a major, and maybe primary, source of income for people, even for some of those close to the top." [quoting Edward N. Wolff, economics professor at NYU]
The "cut benefits" rhetoric is made even worse when "protecting future generations" is added as to the mix as a "principle" that is claimed to underlie Social Security, as in the following
4) And we should do this in the name of caring about future generations, who should not "on principle" be "paying more" to support their parents' or grandparents' generations.
See, e.g., Robert Shiller's op-ed, Want to Fix Social Security? Use the Right Wrench,n New York Times (June 9, 2013), at BU 4 (claiming to be supporting a fundamental "principle" of Social Security that "one generation shouln't be more burdened than another"). The problem with claiming this principle as an underlying principle of Social Security is that the original legislation provided benefits to a slew of seniors who hadn't paid into it anywhere near what they would be getting out of it (even with the then-likely life expectancies) which was made possible, of course, by demographics that led to increasing numbers in the workplace.
And it isn't clear that there is any reason to consider it essential as an underlying principle now. If we have an economy in which there is sufficient resources to support increased benefits for an aging baby boomer population--even if that means that current workers should be more highly taxed than workers were 20 years ago--why not do so?
We know that we could increase the amount available by simply removing the payment amount cap on wages taxed, while continuing a payout cap based on a reasonable index --ideally, a more generous one than currently used. That just requires the really rich to participate in the insurance system in a way similar to everybody else. We could also make the system more intentionally redistributive, with significantly higher payments in the "bottom bracket" of paid-in amounts (to everybody) and rapidly descreasing payments in additional brackets of paid-in amounts. After all, most insurance is redistributive according to the degree of loss, with higher payments to those that suffer great losses made possible by the more or less consistent premiums paid by everybody, including those who suffer few losses.
n The footnote
I've put a footnote indicator at the Shiller article because there is a lot more about this Shiller op-ed worth pointing out. Shiller is a Yale economist--a profession that too often seems to be at the center of all discussion of tax policies but that tends to spend too much time trying to sound scientific (by reducing everything to equations) and thus missing the mark on truly understanding economies.
Shiller's op-ed starts out talking about the "mere 20 years" when Social Security is predicted to run out of reserves and noting the proposals for addressing that problem.
His second sentence states as near fact that "the public [is] apparently opposed both to tax increases and benefit cuts" to address the problem.
That raises red flags for me. I'm not convinced of the truth of the statement on increasing taxes. I consider it quite plausible that a survey in which the public was asked, in a reasonable framework, about increasing taxes to support Social Security benefits would yield a majority that favor removing the cap on wages to which the Social Security tax applies. If you gave people enough information, it might even be likely that a majority would support removing the preferential rates for capital gains and applying the Social Security tax to all income.
He gets something right: "[t]he purpose of Social security is to help families."
This is something that many on the right tend to ignore when talking about Social Security--it's all treated as a matter of "personal responsibility" (the dislike for so-called "entitlements"--even though these entitlements are earned benefit programs and the push for privatization--as though that would automatically make people able to save enough to take care of themselves no matter their actual financial condition) and fiscal sanity (the tendency to emphasize the potential future shortfalls in benefit payouts as a justification for reducing benefits today, and the implication that otherwise we will face an unimaginably steep deficit, etc.). Very little is about the importance of a social safety net to ensure that our seniors (and children) are not left in dire circumstances, poverty-stricken in a rich country.
He spends the first third of the article seemingly moving towards providing a solution to "the problem"--that if nothing is done, "the Trust Fund runs out in 2033" and the system would only be able to pay about 75% of promised benefits. He discusses the current indexing system, Obama's proposal (which would reduce benefits, stupidly), and then his "alternative" proposal--to index benefits to GDP, leading to increases in growth periods and potentially cutbacks in recessions.
Then he admits that his "alternative" (offered as an alternative to suggestions for changing the index to address the problem of insolvency, since tax raises and benefit cuts are disliked by everyone) doesn't address "the identified problem" of potential future insolvency
But he claims the change should be adopted because it would instead "support the principle that one generation shouldn't be more burdened than another."
This is said as though this "principle" is something everyone recognizes. But let's be clear--there is no per se reason that one generation should be less burdened than another. It depends on need and ability to pay.
As we came out of the Depression and WWII, the younger generation was quite clearly the one burdened with paying for the older generations who had contributed very little for the benefits they were receiving, appropriately so. Even if we end up with fewer workers supporting more baby boomers during the baby boomers retirement years, that's okay--especially if we are wise enough to remove the cap (as suggested above). There is no inherent injustice in that. The injustice would only come into play if the sacrifice asked of a later generation was so great that it outranked the offsetting sacrifice that would be asked of the earlier generation in cutting benefits. That is hard to measure, for sure, and not obviously true merely if later workers pay slightly more in taxes to support earlier workers.
Now, there may be some good reasons for changing the index to a dirrect correlation to GDP, as Shiller suggests. But the op-ed left me wishing he had just addressed that. All his cloaking of his proposal in language that would get the attention of those on the right--talk of insolvency, talk about tax increases not being on the table, talk about the current proposed solutions to the "problem" and his "alternative", which turns out not to be an alternative solution but an alternative indexing proposal that is being proposed for different reasons than the ones that underlie the proposals his is an alternative to--distracts from the meat of his article.
As noted in an earlier post focusing on the way intimidation of the IRS tends to lead to more tax avoidance and even tax evasion through promoted "shelters", Hewlett-Packard official Ray Lane engaged in a phony tax shelter back in 2004. He got caught and has apparently settled the $100 million tax bill. See, e.g., Reuters, H-P Board member Ray Lane Settles long-running tax bill (June 6, 2013); Tax Prof listing of assorted stories.
I can't resist pointing readers to tax professor Jim Maule's excellent post chastising everybody--from those obviously slanted propaganda-tank tax gurus Chris Edwards (you all know him as the purported tax expert from the right-wing pseudo-libertarian Cato Institute, whose other associate, Dan Mitchell, makes similar ridiculous claims in touting the purported "Laffer Theory" about how tax cuts restore tax revenues--I should note that I debated Chris in the run-up to the 2012 elections on Herman Cain's ridiculous tax "plan") and Steve Malanga (you all know him as the purported tax expert from the right-wing Manhattan Institute) to generally reasonable Taxpayer Advocate Nina Olson--about their ridiculous claims of a tax code that runs to the tens of thousands of pages. See James Maule, Code-Size Ignorance Knows No Bounds, MauledAgain (June 5, 2013).
Many of those claims about a giganormous Code that is pressing down on taxpayers from the sheer weight of its pages stem from three facts: (i) that the CCH looseleaf service itself notes that the service (in 20-odd volumes, with extensive and often duplicative annotations to cases, private letter rulings, notices, and various legislative history and rev.proc and rev.rul. items as well as the actual current Code provisions and regulations promulgated thereunder) runs more than 70,000 pages; (ii) that it is very useful to propaganda tanks and others bent on painting a negative picture of IRS tax enforcement and collection and taxes in general to portray the rules as so complex and lengthy that no one in their right mind could think it appropriate; and (iii) people without those bad propaganda intentions frequently serve as shilling boom-boxes for those (false) claims, because they don't stop and think or do their own homework. So the claims are repeated, over and over, and --as psychologists have shown--once something is repeated often enough, it gets to be accepted as fact even by those who should know better.
What people need to know --besides the obvious one fact that Congress, not the IRS as often insinuated in those blogposts condemning the length of the "code", writes the tax laws--is that:
(1) the CCH tax service includes more extra "stuff" that tax practitioners find very useful to help interpret the actual statutory language and the regulations promulgated thereunder than actual Code and Regulations! The tax code itself is relatively short--you can read it quicker than most good novels. (Additionally, the regulations have a lot of specifics applicable to particular types of taxpayers and situations, but even they aren't tens of thousands of pages long. And the page counts also depend greatly on the size of print on the page, folks. Word counts are much more meaningful.)
(2) most of the complexity that actually exists in the Code affects only the 3 in 10 taxpayers who "itemize" their deductions on their tax returns--and then, mostly the ones in the very tip-top of the distribution--the 1 in 10,000 who have lots of complexity in doing that itemization; and
(3) most of that complexity is necessary to prevent abuses by those who can hire very expensive lawyers, accountants and banks to set up schemes to avoid (or even evade) taxes.
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