Notice to Readers: A Taxing Matter will be online sporadically through the holidays. Regular postings will return on January 10.
One of the provisions of the $858 billion tax cut bill passed in the lame-duck session is another two-year extension for the "active financing" exception to the subpart F rules for taxation of the passive income of foreign controlled corporations. See Eggen, Active Financing Exemption to Cost Taxpayers $9 Billion, Washington Post, Dec. 23, 2010.
The beneficiaries of this provision are big banks with multinational operations and other big businesses who use the creation of their own financing subsidiary as a way to lower even further their already low US taxes. Remember that although the US statutory rate for corporations is somewhat higher than the norm at 35%, the effective tax rate is in fact lower than the norm, with US corporations among the lowest taxed of all the OECD nations. That means that the US is effectively a tax haven for corporations. Part of the reason that is so is that there are so many exceptions and special provisions worked into the corporate tax regime--exceptions like the "active financing" exception.
The active financing exception was supposedly eliminated some time ago. But lobbyists worked hard to get a transitional extension of the provision. And every year since then they've worked hard to get Congress to push through yet another extension and they've increased their efforts to get Congress to make the exception to Subpart F rules permanent.
This is similar to the way the research credit has worked. There is no question that research expenditures need to be taken into account one way or another in figuring a company's tax liability--new products depend on somebody doing the research. But there is a big question about HOW those costs should be taken into account. Under a conceptually rigorous tax system, research expenditures would likely be capitalized. But our system has long permitted a deduction. The credit for R&D is quite a different thing, and not at all justifiable economically and certainly not justifiable as a subsidy that will be worth the price by stimulating growth. INstead, it is a pet project of corporate lobbyists granted an extension each year by Congress that is essentially a pure giveaway--reducing dollar for dollar the corporate tax liability by the amount of money spent on whatever counts as R&D. The problem with that, of course, is that it generally is not growth-stimulating basic research (stuff that is more often done by university or government researchers than by corporate labs) but instead merely profit-enhancing fiddling with a product that allows the company to extend already overly long patent protection (and enjoy monopoly-like profits for even longer) or develop something that differs little from its predecessor product but can be labeled "new" for marketing purposes (and enhance monopoly-like profits for even longer).
Those proponents of lower corporate taxes--who have been lobbying Congress steadily on these issues for decades--have gotten Congress to pass a large number of corporate-friendly provisions with the purported purpose of stimulating economic growth that are really just subsidies for the biggest multinational corporations from Big Banks to Big Oil. So we have seen accelerated depreciation, and first-year partial expensing, and percentage depletion and "bonus" depreciation, and complete expensing--all much more generous than the true economic depreciation and all profferred as a way to stimulate growth.
There is not much empirical evidence to support that this kind of tax treatment results in growth. It correlates instead with increasingly steep increases in compensation levels for top managers (moving from 20-40 times the average worker to 200-400 times the average worker, with some CEOs being paid in a half a day what their average worker makes in a year) and with bigger payouts (either through stock buybacks or dividends) to wealthy shareholders (taxed now at extremely preferential rates compared to the rates of tax paid by ordinary workers on their income and, in the case of wealthy managers and shareholders, likely invested in offshore gambits rather than plowed back into the startup of new enterprises in the US).
The active financing exception fits right in with these others. It is a boon for companies like GE, that use their controlled foreign subsidiary to serve as a financing arm for foreign sales and thus avoid US taxation. But wait, you say. Doesn't that do just the opposite of what is claimed? Wouldn't that make foreign sales easier, cut tax revenues in the US, and do nothing but encourage GE to increase its foreign manufacturing and sales rather than increase its manufacturing in the US and exports from here? Of course. Moreover, by giving companies an exemption for this type of foriegn income AND by having done one almost tax-free repatriation program in 2004 that was supposed to increase domestic investment but instead went to share repurchases (good for wealthy shareholders) and often correlated with huge worker layoffs, the policy is likely to be more associated with domestic corporate decline than with domestic corporation expansion. When one considers in addition the fact that the Great Recession is a direct result of finance-friendly policies gone awry, leading to too much interconnectedness among financial institutions, too much speculation in derivatives like naked credit default swap, and too much of a casino mentality generally among financing entities, the idea of providing a $9 billion bonus to offsore financing bogles the mind.
This Congress (and regretably this President) are too corporate friendly to see the problem. Mark my words: corporatism and all that it implies in terms of increasing social inequality and growth of an influence-heavy, uncaring wealthy elite that can call the shots in its own favor is the single most important topic that every American should be considering in making decisions about how to vote, who to support, what kinds of institutions we should support and how to interpret what people (especially judges) say about justice, fairness and equal opportunity over the next five decades. We should all make a New Year's Resolution to write one letter to Congress every week dealing with some aspect of this issue. If we don't shift this ship of state to at least treat ordinary workers equal to the corporate oligarchs, the democracy we all take for granted will cease to exist. Anti-trust, unions, and democratically egalitarian tax policies are all needed in this effort that should break up the megalithic multinational corporations (especially the "too big to fail" banks), permit workers to form unions more easily rather than being harassed by their employers (a majority of American workers want to unionize but very few are in unions because of the way our national laws have shifted to favor employers' efforts to keep unions out so that the company managers and shareholders can harvest all of the productivity gains for themselves), and eliminate the many tax provisions that continue to redistribute income upwards to the elite (including most of the mortgage interest deduction, the charitable contribution deduction, expensing provisions, and of course the preferential rate for capital gains and the nontaxation of much of the income of the wealthy). Although not the biggest item, the international taxation provisions like the active financing exception that permit large corporations to defer taxation of their income need to be eliminated.
No big surprise here. The House on December 16 passed the Senate-approved TRA by a vote of 277-148, clearing it for the President's signature. The bill extends the Bush tax cuts for two years and reduces the number of estates subject to the estate tax, and the rate of tax when they are taxed, even below the number subject to the tax in 2009. It includes the usual "patch" for the AMT for two years, and various tax breaks for businesses--especially expensing provisions that will likely merely result in more pay to managers and more payouts to mostly wealthy shareholders.
Those most vulnerable get the relief from the lower rates (not many dollars for them, of course), the 2% cut in the payroll taxes, and the extension of unemployment compensation.
Those at the top of the wealth and income heap who have garnered almost all the benefits of productivity gains in the economy over the last few decades get most of the benefit of the bill--tens of thousands of dollars of tax relief for the top 20% of the income distribution, substantial estate tax reductions, and none of the burden-sharing that progressives had advocated (such as the carried interest treatment as ordinary income). The bill even provides what amounts to an interest-free loan to the wealthy who convert regular IRAs to Roth IRAs--the "deal of the century" according to one CPA who services the wealthy. See Leondis, Tax Measure Gives Deal to Wealthy Roth IRA Converters, Bloomberg.com, Dec. 17, 2010. And of course, the bill also lets the wealthy transfer up to $100,000 from regular IRAs to charities without paying the income tax they should have to pay on the appreciation.
All in all, the wealthy made out like bandits in the tax bill. And in many ways, that is the appropriate way to view them--they have stolen the sustainable livelihood of the middle and lower classes for two decades and are rapidly moving into position to become a ruling oligarchy. The bill was a big win for corporatism and the wealthy on the right.
The big banks got into considerable trouble doing derivatives trades--especially the credit default swaps where AIG was the major counterparty and the taxpayers ended up bailing out the Big Banks like Goldman Sachs.
So surely one of the results of "financial reform" in the wake of the casino banking financial crisis would be utter and complete transparency about derivatives, correct? One would think so. But it may not be so.
For a detailed picture of the way the Big Banks have controlled derivatives trading in order to make it a lucrative noncompetitive market for them and a costly market for derivatives endusers, read the article in the Saturday New York times: Louise Story, A Secretive Banking Elite Rules Trading in Derivatives, New York Times, Dec. 11, 2010.
As Story notes, there is an exclusive group of bankers that has a great deal of say about derivatives trading. The theoretical purpose is to "safeguard the integrity" of the derivatives market. The real purposes is to "defend the dominance of the big banks" which the banksters do by thwarting efforts to create transparent markets where end users get real information on prices and fees and comparable trades.
The CFTC chair wants to push for more transparency about the derivatives clearinghouses, which will have more power under the Dodd-Frank bill. But the banks don't want transparency--in fact, the group of nine banksters that is the subject of the article meets monthly with the ICE Trust clearinghouse, and has enormous influence and power over them.
But Republicans in Congress aren't exactly supportive of financial reform, unsurprisingly. They've gotten big contributions and backing from Big Banks, and they plan to push back against banking reform. Apparently they think another crisis like the one that hit us won't be so bad. After all, the banks survived this one just fine (and are making billions off the very low funding costs available to them through the Fed, while charging their depositors and customers huge fees). As did most of the multimillionaires who own substantial financial assets. Apparently, those who want to ease back on banking reform don't care much for ordinary Americans who are paying through the nose for credit and getting nothing for their deposits.
Here's an excerpt from the piece on the way the Big Banks control the derivatives market by keeping the facts about derivatives trades secret.
In the midst of the turmoil, regulators ordered banks to speed up plans — long in the making — to set up a clearinghouse to handle derivatives trading. The intent was to reduce risk and increase stability in the market.
Two established exchanges that trade commodities and futures, the InterContinentalExchange, or ICE, and the Chicago Mercantile Exchange, set up clearinghouses, and, so did Nasdaq.
Each of these new clearinghouses had to persuade big banks to join their efforts, and they doled out membership on their risk committees, which is where trading rules are written, as an incentive.
None of the three clearinghouses would divulge the members of their risk committees when asked by a reporter. But two people with direct knowledge of ICE’s committee said the bank members are: Thomas J. Benison of JPMorgan Chase & Company; James J. Hill of Morgan Stanley; Athanassios Diplas of Deutsche Bank; Paul Hamill of UBS; Paul Mitrokostas of Barclays; Andy Hubbard of Credit Suisse; Oliver Frankel of Goldman Sachs; Ali Balali of Bank of America; and Biswarup Chatterjee of Citigroup.
Through representatives, these bankers declined to discuss the committee or the derivatives market. Some of the spokesmen noted that the bankers have expertise that helps the clearinghouse.
Many of these same people hold influential positions at other clearinghouses, or on committees at the powerful International Swaps and Derivatives Association, which helps govern the market.
Critics have called these banks the “derivatives dealers club,” and they warn that the club is unlikely to give up ground easily.
For many, there is no central exchange, like the New York Stock Exchange or Nasdaq, where the prices of derivatives are listed. Instead, when a company or an investor wants to buy a derivative contract for, say, oil or wheat or securitized mortgages, an order is placed with a trader at a bank. The trader matches that order with someone selling the same type of derivative.
Banks explain that many derivatives trades have to work this way because they are often customized, unlike shares of stock. One share of Google is the same as any other. But the terms of an oil derivatives contract can vary greatly.
And the profits on most derivatives are masked. In most cases, buyers are told only what they have to pay for the derivative contract, say $25 million. That amount is more than the seller gets, but how much more — $5,000, $25,000 or $50,000 more — is unknown. That’s because the seller also is told only the amount he will receive. The difference between the two is the bank’s fee and profit. So, the bigger the difference, the better for the bank — and the worse for the customers.
It would be like a real estate agent selling a house, but the buyer knowing only what he paid and the seller knowing only what he received. The agent would pocket the difference as his fee, rather than disclose it. Moreover, only the real estate agent — and neither buyer nor seller — would have easy access to the prices paid recently for other homes on the same block.
hat job creation part is, I expect, mostly a wish and not a likely expectation. Other than the few provisions that put money into the hands of those who really need it, the bill won't be very stimulative. Those provisions are unemployment insurance extension and the payroll holiday (to the extent it goes to people making at or below the average income). The rest is dross that goes primarily to companies and individuals who are getting along okay. It seems foolish to think expensing, the research credit, the break to big banks from the active financing exception, extending the percentage depletion allowance or tax breaks for millionaires--from rate reductions to estate tax reductions to tax-free distributions from individual retirement accounts for charitable purposes and exclusion of all gain from certain small business stock-- will create jobs.
By the way, I need to correct an earlier misstatement about the payroll holiday before the text was available. (Thanks to Ed Kleinbard for pointing this out). The proposed legislation provides in section 601(e) for transfers to the social security trust fund for the amounts that it will lose due to the payroll tax holiday. So while the payroll holiday will add to the deficit, it shouldn't provide the fodder for Social Security benefit reduction that I had predicted.
Bernie Sanders is standing up in the Senate to filibuster the Obama-GOP tax deal (though it is really still "morning business" and not a filibuster, since the vote isn't scheduled until Monday and Sanders started at about 10:30 this morning 12/9/10). See it live at http://www.c-span.org/Watch/C-SPAN2.aspx (hat tip to Kirk Stark); see selected comments on Washington Post (where Sanders notes that American people work longer hours than any other industrialized country's people, and states that "it's pretty clear in this economy who's winning and losing. The working people, middle-class people, low-income people are losing.")
At this point, he's talking about corporatism, and the way that multinationals outsource their factories in order to pay as little as possible to workers, even if that is not a sustainable wage. He noted that GE is on record as saying that it would like to have its factories on barges so that they could be moved to the cheapest labor place on the spur of the moment. And Cisco's CEO noted that it would like to "become a Chinese Company" because that's where the cheap labor is. They are, says Sanders, "taking us for dummies" by getting one tax break after another in the name of competition. Corporate America believes, Sander says, "that it is totally appropriate to throw American workers out on the street, pay Chinese workers a few cents and then bring the product back into the country." He noted the way that the Chamber of Commerce raised money from rich folks and billionaires and big corporations to elect candidates sympathetic to their point of view. And what is the Chamber of Commerce's point of view? "One job sent overseas, if it happens to be my job, is one job too many. But the benefits of offshoring often outweighs the cost". In other words, Sanders says, multinationals think making more profits by moving jobs offshores is fine--they don't care about the future of the US or US young people.
An AP story--the head of the U.S. Chamber of Commerce (that lobbies heavily and provides campaign contributions) "urged American companies to send jobs overseas" because exporting high-pay, tech jobs to low-cost countries saves companies money". Three million members of C of C champion "tax cuts" and "workers compensation reform" and "more liberal trade policies." It's easy to see what the big corporations support, and then they get implemented into policy through lobbying and campaign contributions.
At the same time that the Republican party supports all kinds of tax breaks for multinationals, there is also talk among members of the GOP of abolishing the minimum wage.
The result, Sanders notes, is that blue collar jobs have been decimated, and the high-technology service jobs promised to substitute for them are now also being transported out of the country to India and elsewhere. Our manufacturing base is going, and our trade policies, pushed by the Chamber and others, are hurting the middle class. The people who built companies into what they are today, Sanders says, are being sold out to give jobs to lower-wage workers elsewhere. Yet when things get tough for US MNEs, they run to American taxpayers to get bailed out.
Sanders asks us to call our Congressman and tell them whether we really believe that the rich need a tax break that drives up the national debt so grandchildren will pay higher taxes. If we don't, we should let the White House, our Senators, and our Congressional representatives know that we don't. If just a handful hear, maybe this deal will stop.
You can call your Congressperson at the Congressional phone number:
[now updated to provide the animation feature--thanks to Steve Cook, at the Cook law firm, available at http://cookazlaw.com]
Well, not exactly an animation, but Estate tax attorney Douglas A. Cook has a chart on the Federal Estate Tax 2001-2011 (linked from the Wills, Trusts & Estates Prof Blog) and also as an animation (see below). Certainly a picture worth a thousand words in terms of showing that ordinary Americans are essentially not taxable under any version of the estate tax. So what the Obama -GOP deal amounts to is a giveway to those few millionaires who had enough assets in the wrong category that they would actually have to pay some amount of tax--only about 5,500 estates under the 2009 version of the bill, about 145,000 in 2011 if the current laws (enacted under GW Bush) remain without any action by today's Congress to change them, but even fewer than 5500 under the Obama deal for a $5 million exemption and a mere 35% top rate.
When Obama signed off on his "deal" with Republicans (from which Democrats in the House and Senate were essentially excluded), he agreed to just about everything on their wish list, giving them the perfect opportunity in the 2012 campaign season to play the same chicken game again but without much credibility behind any White House threat to act differently the next time around.
The estate tax deal provides the "have-mores" (the GOP base according to George W. Bush) with more, while the rest of America suffers stagnant or declining wages. Remember that the wealthiest Americans own most of the financial assets, on which they already enjoy an extraordinarily preferential rate and for which they often can select the timing. Much of their income is tax-exempt--they are the primary purchasers, for example, of municipal bonds, and they have accessible a wide range of tax favored products (life insurance, etc.). If they work, they frequently receive disproportionately high compensation (compared to their own salaried employees) in tax-advantaged ways (stock options, deferred compensation plans, rich pension plans). Every part of the system favors the wealthy over ordinary folk, from the ability to reduce debt on their yachts in bankruptcy when ordinary folk can't get a reduction on their single big asset, their home, to their ability to "monetize" assets to live well while turning over their estates to their heirs in bulk.
It is especially telling to see how the Obama-negotiated deal will leave the estate tax with a token of the coverage it should have, as demonstrable from this chart from the Tax Policy Center (a Clintonian center project of the Urban INstitute and the Brookings Institution).
About 2.5 million Americans die every year. Assuming that current estate tax law remains unchanged in 2011, next year estates would have an exemption of $1 million and be taxed at a maximum rate of 55%. That means that about 45,000 estates should have to pay at least some estate tax, raising almost $35 billion. That's about where the estate tax was in 2001 when the series of GOP changes intended to result in ultimate repeal of the tax began. As a result of the phaseout of the tax under the Bush tax cuts, however, only five thousand five hundred estates had any estate tax liability at all in 2009 (that's only 5500 out of 2,500,000 or only about 0.2% of estates), and that was when the exemption amount was $3.5 million and the tax rate was 45%. That year, the estate tax raised only 13.8 billion, down from a typical $30-32 billion in the pre-Bush years.
The Obama deal with the GOP reduces that even further--providing a $5 million exemption and a 35% rate. It will enable the GOP push to repeal the tax in the next campaign cycle, as they push again their bogus arguments that it hurts economic growth by taking away money that would be invested in the secondary market, or that it hurts family farms, or that it doesn't raise enough money to matter, an argument that may appear stronger the bigger the exemption and the lower the rate. The first argument is bogus--rich people buying and selling stocks and bonds on the secondary market hasn't got anything to do with job creation or with companies having more money to invest in expansion. The second argument is bogus--even the Walton heir effort to herd up sympathetic stories of family farm losses proved unsuccessful since farms are especially protected by an installment payment plan that allows them to pay any estate tax due over a period of 14 years out of the farm revenues. The third is not true, since the pre-Bush revenues of $30 billion were substantial (and could be more so with effective legislation to take away some of the scam planning techniques, like family limited partnerships, valuation discounts, and various trusts). But the third is certainly made to appear more reasonable by the Obama deal to cut the rate down to a pitiable level and raise the exemption amount to far more than the vast majority of Americans will ever have.
Obama's deal thus ensures that in the 2012 campaign season, the GOP "tax cut no matter what" group will have the upper hand. It makes it even more likely that the wasteful and damaging Bush income tax cuts and estate tax cuts will be made permanent or even increased. It ensures that the Bush "have-more" base will continue to reap the rewards of a winner-take-all economy while the rest of us suffer. And it is a significant loss for the future of democracy as an institution that works for all citizens.
Dan Shaviro, a colleague at NYU, ends up being hopeful about the Obama-GOP deal. See "The deal on extending the tax cuts", Start Making Sense, Dec. 6, 2010 and "The tax cut deal: too soon to tell who really won?", Dec. 7, 2010. I think that is because Dan tends to credit Economics 101 with considerably more wisdom than I do (and place "efficiency", as defined by the free marketers, higher on the wish list for tax policy than I), so he thinks Social Security isn't on a sound footing and that benefits will need to be cut; thinks expensing for corporations is a reasonable way to spur growth; thinks there is some possibility that the 2012 replay of "Bush tax cuts, take 2" might play out in favor of Obama if he is "very clear that he planned to veto any extensions and let all the tax cuts expire UNLESS the Republicans made the deal he requires". I'll intersperse my comments with Dan's below.
1) extending all the expiring individual rate cuts for 2 years:
Dan says "we knew this was going to happen" so the only problem is that it comes up again in 2012 when Obama will "might face extra credibility problems".
I think we only knew this was going to happen because Obama didn't fight on this at all. Obama signalled at the beginning that he would cave, and he did not take to the bully pulpit at all. He conferenced with Republicans and cut out the Democratic leadership in reaching his "deal"--which is a Republican policy in everything but name.
2) extending unemployment insurance through 2011:
Dan says it is an important stimulus and "wasn't going to happen otherwise."
I agree on the stimulus. But the Dems should have brought unemployment extension up on a daily basis and forced the Republicans to vote against it. So the "wasn't going to happen otherwise" is part of the give-up before you start negotiating that got us into this mess.
3) reduce the Social Security payroll tax by 2% for one year:
Dan says "good stimulus" though "targeting could have been a lot better" and admits my point (made when payroll holidays were first brought up) that the payroll holiday feeds into the drive to decimate Social Security by hitting the Trust Fund. But Dan thinks the "concern" about long-term fiscal problems is real, and so is comfortable with addressing it "sooner" anyway.
I disagree. The concern about Social Security is being hyped in order to destroy Social Security as we know it. It is in line with the enmity towards unions, towards single payer health care, towards re-regulation of the banks, towards breaking apart big banks, and towards any other policy that would restore a vibrant middle class. By allowing a payroll holiday for everyone, the majority of the benefit goes to people who don't really need it, and too little benefit goes to those who do. Targeting is better than a tax cut purely for the rich, but that isn't saying much. Doing some stimulus in a means that pushes the GOP agenda to eviscerate Social Security forward is like tying one hand behind your back--a rather unwise way to enter a long-term battle for the economic future. Will we have the brutal mix of casino and winner-take-all capitalism that has driven most of this country's policies from Reagan on or will we have a tempered capitalism that ensures a broad-based growth and creates an economic system that works for everyone? The Republican's aims to let states go into bankruptcy and use that mechanism to destroy public employee unions says they are in this battle to destroy the New Deal if they can. We need to fight just as hard on the side of the middle class.
4) Estate tax cut by increasing the exemption from the 2001 level to $5 million (basically 500% of the 2001 amount) and lowering the top rate to a mere 35%.
Dan thinks this might actually be preferable "in efficiency terms" to the current law, which would have restored 2001 rates in 2011, if done in a "distribution and revenue neutral framework". And even though this isn't that, he doesn't think a more progressive estate tax "is long-term feasible anyway." So this is not "a terrible outcome in a realistic overall sense."
Here we part ways 100%. There is no such thing as a distribution and revenue neutral framework--that is a fiction of economics 101 that permits what we have seen, which is four decades of redistribution upwards. Further, distribution neutral is not desirable in an economy where the winners already take all--if we don't reverse the direction of distribution in this economy, we will end up in oligarchy (if we aren't there already). In that context, this was the single most viable opportunity for reinstating an appropriate estate tax, either by letting the Republican-passed law take hold (return to 2001 exemption and rates) or by passing a slightly modified but ideally more progressive version (higher exemption but progressively higher rates beginning at 45%). This is indeed "a terrible outcome in a realistic overall sense."
5) extensions of the EITC, tuition tax credit and expensing (as well as the R&D credit, not mentioned by Dan
Dan says that the EITC and tuition tax credit are okay because they may add progressivity and the expensing provision is okay as a short-term stimulus.
The EITC is okay. Tuition tax credits just subsidize the things colleges spend money on that they don't want students to have to feel they are paying for--like too high administrative salaries (across-the board, at private and public universities). We ought to fund higher education at public institutions, but with conditions, such as limiting the percentage of total budget spent on administration or on the revenue sports, etc. As for expensing, it is unclear how it can be stimulative in this context, when the reason companies aren't expanding is because they don't see a demand for the business. Most companies have the cash on hand and can borrow at a funding cost that is extraordinarily low. That isn't what is holding back investment. Odds are, the savings from expensing will just go to another round of higher manager salaries and big payouts to shareholders (who will also continue to benefit from an extraordinarily low dividend and capital gains rate under the deal).
Dan seems to think that Obama will be able to argue credibly that "this time I mean it" when it comes to the 2012 election and the Bush tax cuts are ready to expire once again. Fat chance. There's nothing so far to convince anyone--Obama caved before fighting on the public option and on taxes for the rich and on the estate tax and on capital gains and on carried interest and on and on. Obama in fact is now pushing his Democratic colleagues to support an agenda that will easily get 100% Republican support and maybe enough reluctant Democratic support to pass, rather than rallying them to fight so that he can veto, if need be, wrong-headed legislation. So he has proven that the Dems lose in the minority and they don't bother to fight when they are in the majority. No way his base will trust him to do it better next time around.
Meanwhile, the GOP is already blaring that there is no way that they'll give an inch on anything. They won't support the Build America Bond program, because they want states to declare bankruptcy as a means to destroy public employee unions. And they don't seem to care that they are destroying the American social contract between the wealthy and the rest of us at the same time--we are what we are because we have recognized the importance of a strong middle class that acts as a check on oligarchy. Yet the Republican party--and now too many Dems--are willing to throw it all away just to get elected one more time (maybe) in the future.
In my view, the American people are the losers here. The AMT patch primarily helps those with high incomes. Most of those who pay the AMT because of bracket creep are in the 250-500,000 income range--certainly not middle class. Only a few are in the 75-100,000 range. The extension of extremely favorable taxation of secondary market capital gains and dividend income is of benefit to the wealthy who own most of the financial assets. The extension of the tax rate cuts even below 250,000 already aids the wealthy--adding the tax rate cut at the top means that most of the rate cut goes to the very well off. This is a very good deal with corporate managers and owners, and rotten for ordinary Americans. It's the upside down world of George W. "the have-mores are my base" Bush.
[edited 12/8/10 to correct typo and awkward wording]
President Obama has agreed with GOP negotiators on a "framework" to extend all of the Bush tax cuts for two years--including a package of cuts for the wealthy and big corporations, getting only extension of unemployment benefits and the more or less useless "making work pay" credits in return. He also agreed to a "temporary reduced estate tax" at 35% rate and $5 million extension, as the trade for a payroll tax holiday of 2%. See Lochhead, Obama Announces Tenative Deal on Tax Cuts, PoliticsBlog, San Francisco Chronicle, Dec. 6, 2010.
How sad. The death of the estate tax this year is the best opportunity the Democrats will have in the next forty years to get the estate tax right--meaning make it progressive, so that no one in the lower quintiles of the income and wealth distribution will have to pay it (not much chance of that no matter what the final shape of the estate tax is) and so that the wealthy pay a share of their estate upon their death (an increasingly larger share as the wealth of the estate increases) to make up for the fact that almost nothing is paid on their incomes during life. As noted frequently here, the wealthy in the top 2% or so who may end up paying some estate tax are the ones that own the vast majority of the financial assets. Much of their income isn't taxed at all--the very wealthy are the primary group that owns tax-exempt municipal bonds and that income isn't subject to taxation. (In his first year in office, Vice President Cheney had some $2 million of tax exempt interest on which he paid no income tax.) Most of the rest of their income ends up being taxed at very preferential capital gains rates. Since the wealthy can control the time of sales of their assets, they generally time them for low rate or for ability to use loses to offset gains, further ensuring that they minimize the taxes paid. Accordingly, the estate tax serves as a backstop to ensure that they contribute something to the government that has facilitated their wealth. It should provide a $2 million exemption and a steeply progressive rate (beginning at 45% and increasing to as high as 65% or more).
Further, extending the Bush tax cuts for the wealthy and giving multinationals (who already are enjoying the cheapest borrowing rate imaginable because of the Fed's policies and other benefits) another huge tax break by permitting 100% expensing (at a $200 billion cost) is more of the "winner-take-all" politics that has caused the decimation of ordinary working Americans by giving all the benefits of the tax system to those at the top. Letting the GOP succeed in extending the cuts on Obama's watch even before the minority becomes the majority in the House in January means Obama now takes credit for the Bush tax cuts and can no longer take the high ground.
What's even worse is that Obama tried to sell his weak compromise as "an essential step on the road to recovery", saying that these tax cuts have a hand in spurring the private sector to create millions of new jobs and add momentum to the economy. That's falling into the Republican trap of claiming that tax cuts do a lot to create jobs. They don't. The rich will invest in businesses overseas or use their money to fund private equity deals that buy out companies so they can lay off workers. Allowing businesses to expense has been tried for years--it was a huge part of the Bush tax cuts, and they failed on creating jobs. Expensing doesn't encourage businesses to invest more--they already have more cash on hand than ever so they have every reason to invest in equipment if they need to without the tax subsidy to them. Infrastructure spending is the best way to create jobs, and while the lower-end tax cuts will help keep spending up, they won't really create any jobs. It's an oversell that will show win it comes time for the 2012 elections and the vast majority of the American workforce is still suffering while the well-off stay well-off.
What a shame that Obama caves so easily. Not voting an extension of unemployment benefits wasn't an option for the GOP, so treating that as something "won" in the negotiation is foolish. Similarly, the payroll holiday--while it will get money in the hands of the working class--is also something that will cause the Social Security fund to run short sooner, giving the GOP even more ammunition to privatize and/or cut benefits, which is their goal. The Democrats just don't seem to be able to play the politics game well at all. Instead of letting GOP leader McConnell have his ear for the last week, Obama should have been helping to twist arms in the Senate to ensure that all Democrats and some Republicans stood with the American people.
Of course, the pundits recognize that the Bush tax cuts were "incredibly expensive" and "deeply flawed conceptiually" but then assume that "Obama can't afford to let all the $3.3 trillion in tax cuts expire as scheduled on December 31." I think that is wrong. I suspect that if Obama and the Dems would force the Republicans to vote (and in the Senate force a real filibuster), they would find that Americans don't get enough dollars in their pockets from the lower-class tax cuts to make that much of a difference. Let them expire. Then pass a new tax cut bill in January through a reconcilation measure.
It will be very hard for progressives to support Obama in the future. If he doesn't have the ability to negotiate with Congress better than he has demonstrated on this issue he comes across as a failure. And it is a failure that reinforces the "winner-take-all" nature of politics and tax policy that has resulted in banksters making millions while millions of ordinary Americans suffer. Too bad that the "change we can believe in" president turned into a "sorry I can't" president.