ataxingmatter

Calculating the Cost of Bailouts

A recent New York Times includes a piece on the Treasury's study of the various bailouts or "rescues" of distressed financial and other institutions.  Gretchen Morgenson, Seeing Bailouts Through Rose-Colored Glasses, New York Times (May 19, 2012).

The Treasury study, The Financial Crisis Response--in charts (April 13, 2012), is  positive about the way that government handled the bailouts. 

Collectively, these programs --carried out by both a Republican and a Democratic administration--were effective in preventing the collapse of the financial system, in restarting economic growth, and in restoring access to credit and capital.  They were well-designed and carefully managed.  Because of this, we were able to limit the broader economic and financial damage.  Although this crisis was caused by a shock larger than that which caused the Great Depression, we were able to put out the financial fires at much lower cost and with much less overall economic damage than occurred during a broad mix of financial crises over the last few decades.

Reading that, one might conclude that everybody now is sitting fairly pretty, and that it was all done in a very upfront, fair and damage-free way.  That ignores the fact that the bank bailouts treated the banksters with kid gloves--letting managers continue to receive their customary overcompensation and allowing banks generally to continue their predatory practices even while the taxpayers were providing them extraordinarily low-cost financing with practically no strings attached.  Meanwhile, ordinary Americans--especially those in the lower half of the income distribution--suffered enormously.  Congress--at the behest of the banksters--refused to enact mortgage clawback provisions in bankruptcy, the one law that would have done wonders at saving families and neighborhoods from unprecedented deteroioration and blight.  

To be fair, the report does include a bevy of charts that attempt to show how the crisis played out for the banks, the economy in general, and ordinary Americans (unemployment, depressed home sales market, etc.).  But then the Treasury goes on to claim the following:

[T]he latest available estimates indicate the financial stability programs are likely to result in an overall positive financial return for taxpayers in terms of direct fiscal cost.  These estimates are based on gains already realized and on a range of different measures of cost and return for the remaining investments outstanding.  These estimates do not include the full impact of the crisis on our fiscal position.  And they do not include the cost of the tax cuts and the emergency spending programs passed by Congress. 

Now, it is good to know that at least the "direct fiscal cost" of the bailouts is likely to be positive.  But note the gaping hole between that amount and the overall true cost of the bailouts--the "impact of the crisis on our fiscal position" and "the cost of the tax cuts" and "the emergency spending programs."  Now, at least the emergency spending programs generated economic activity and made real differences for individual people a good number of whom one can assume weren't in the top 1%.  The tax cuts are a big cost item and one that may well not have had the benefits assumed, except for those that went to the lower and lower-middle income working classes (such as the payroll tax relief).   And the impact on our fiscal position is ongoing and still strongly felt, as we struggle to rebalance an economy that already consumed too much from outside and produced too little here at home.  So how much comfort can we take from the idea that the direct fiscal cost may be significantly less than some had initially expected it to be?

Here's where the Times story comes in. Morgenson notes that "As the battles over financial regulationrage in Washington, it’s crucial that American taxpayers understand the costs associated with rescuing behemoth institutions."  We cannot take wise action for or against reduction in size of banks or other issues unless we are dealing with full information about the crisis and its aftermath.  That won't be easy in the politicized environment in which the Obama administration understandably wants to showcase how its efforts have helped the economy and the GOP seens intent on a "my way or the highway" approach to governance that cares more about winning a race than about doing what's good for the people.

Morgenson reports on an interview with Edward Kane, Boston College finance professor and economist, who thinks that the public needs to see a more thorough cost-benefit analysis of the TARP and other expenditures.  Kane calls the analysis "deficient" (one might even say misleading) for counting as gains the interest income the Fed made from holding Treasuries (this is like money passed from mom to dad to put in the allowance jar for the kids--in other words, Treasury interest is paid by the US fisc to the Fed, and the Fed's profits are paid into the US fisc, so it's all the same pot).  But the bigger deal is a genuine evaluation of the opportunity cost of the subsidy provided to bailout recipients.

The programs provided enormous amounts of money at below-market terms for extended periods, he said. Had those guarantees been priced at their true market value — what a private investor would have charged to lend during those dire days — taxpayers should have received far higher returns. Morgenson, Seeing Bailouts Through Rose-Colored Glasses

Charles Calomaris, a Colombia Business School prof and NBER research associate who worked with Kane on the study, noted the cost-benefit concern.

“We are not saying that the benefits weren’t there,” Mr. Calomiris said. “We’re not saying that it wasn’t worthwhile to create these programs. Maybe it was, maybe it wasn’t. But it requires a fuller analysis of what the benefits were.” Morgenson, Seeing Bailouts Through Rose-Colored Glasses

Nurses Support Financial Transactions Tax

Perhaps the JPMorgan Chase debacle has caught enough attention to alter the debate.  JPMorgan of course claimed to be entering a type of hedge that would be permitted under the Dodd Frank reforms. ( Apparently there were hedges on overall portfolio positions, and then those hedges were themselves hedged writing credit default swaps.) The authors of the legislation beg to differ, noting that the statute was drafted to permit hedges of specific asset but not portfolio-wide heding practices that become almost indiscernible from speculative "bets" on the direction of markets.  Perhaps there will be one good result of the $2 billion plus and growing loss that JPMorgan encountered on its complex trades--regulators may finally quit paying so much attention to the banks' "trust our judgement" lobbies and start making it less possible for banks that get federal support to bet with other people's money in big ways that can cause systemic risk.   This seems to be a no-brainer--we need to more tightly regulate the activities of commercial banks and prevent them from gambling with huge bets that can swing the marketplace  and place the entire system in jeopardy.  That means banks will need to accept more staid profit scenarios--and the compensation for managers and traders should be downsized as well.  They made fortunes out of wrecking the economy.  They should be content with reasonable compensation when they do good jobs, and salary cuts--or being fired--when they don't.

Another action that might help to calm the too-reckless bankers and their desire for super-high profit margins would be to enact a financial transactions tax.  It seems that lots of GOP candidates and economists think sales taxes make sense for ordinary folk--from Herman Cain's 9-9-9 plan (that would eventually convert to a flat national sales tax) to the GOP push to cut income tax rates in states in favor of sales taxes.  But when it comes to a financial transactions tax, all of a sudden the same folks seem to change their minds, suggesting that such a tax on financial transactions would discourage investment in the capital markets and be bad for America. 

There are some singificant factors in favor of a financial transaction tax that would reap a few pennies from each transaction.  First, it would raise much needed money from a group that generally can afford the cost.  Second, it could act to discourage flash trading, where computer-run programs arbitrage the markets in a way that only those with the sophisticated programs can take advantage, leaving ordinary folk out in the cold.   Third, it could be one factor in returning everyone to more prudent approaches to investment--investing for the long term, rather than profiting from arbitraging tiny differences in multiple trades.

The National Nurses United organization has taken out a full page ad in the New York Times in favor of a financial transactions tax.  Here's part of the text:

"I pay a sales tax every time I make a purchase.  We all do--but not the financial services industry, the bankers who sunk [sic] our economy.  A financial transaction tax would cost banks and investment firms just pennies on the dollar for transactions such as stock trades, like a sales tax.  Those pennies would add up to create jobs and fund vital programs and services in this country--education, healthcare and rebuilting our deteriorating infrastructure.  The big banks will never miss this money, while the revenue generated will provide a better life for millions of Americans. "

Maybe the nurses are on to something.  But don't look for Congress to act on this anytime soon.

 

Politicians' wealth and the tax policies they support

[edited to correct typos]

A story in the Boston Globe by Britt Peterson on Feb. 19, 2012 explored "Why it matters that our politicians are rich" (available here on Boston.com).  A key point--the four remaining GOP presidential candidates all are millionaires, with most making more than a million a year and worth multiple millions, while the median net worth of members of Congress is "$913,000, compared with $100,000 for the rest of us."  Id.  That should worry us because, as the article reports, studies have shown that rich people become more focused on their own well-being, less empathetic with the suffering of others, more likely to view their own wealth as due to merit (and others' lack thereof to reflect lack of merit), and ultimately "more callous, self-absorbed, and self-justifying than the people they represent."  Id.

In 2009, Michael Kraus, Paul Piff, and Dacher Keltner, all then of Berkeley (Kraus is now at University of California, San Francisco), published research that divided up sample groups by family income as well as self-reported socioeconomic status. People of higher socioeconomic status were more likely to explain success or failure as a result of individual merit or fault; lower-class people, on the other hand, felt less control in their own lives and were more likely to blame events on circumstance. In other words, higher-status people were more likely to feel that they’d earned their high place in society, and that poorer people hadn’t. 

***

More recently, similar research—involving not just surveys, but heart-rate measurements —has found that higher-status people tend to be less compassionate toward others in a bad situation than people of lower-class backgrounds.

***

The result of these differences, say researchers who work on money and social class, is that people who are confident in their status have a completely different worldview from those who lack that confidence: more self-involved, self-justifying, and even, as the dehumanization study suggests, crueler. And the higher up the spectrum you get, the stronger the effect . . ..

***

Power itself can trigger similar changes. . . . Gaining a sense of power, then, even if it happens through random selection in a lab, alters you on a very basic level, making you “less attentive to others, more free to act, and more free to act in a way that doesn’t take account of other people,” said Adam Galinsky, a psychologist at Northwestern’s Kellogg School of Management who has been studying the effects of power for a decade.  Id.

That sense of personal merit (and lack of responsibility in others) can lead to disastrous policy choices.  The "ownership society/personal responsibility" mantra of the Bush presidency justified heaping tax breaks on large corporations and their owners/investors at the top of the income distribution while preaching deunionization, privatization, and safety net withdrawal.  It permitted a method of bailing out "too big to fail" banks from the financial crisis they caused by profiting immensely from risky speculation (made possible by deregulation) in ways that didn't require a  clawback of the rentier profits received by the "ownership class," resulting in privatization of gains/socialization of losses.  In essence, the "ownership society/personal responsibility" mantra provides justification for class warfare on the middle class and poor who happen not to be as well-off as  the rich.

Similarly, Congress' inability to empathize with ordinary Americans has led to significant numbers of Congresspeople (particularly members of the GOP) who support privatization of Social Security, reduction of benefits under Medicaid and Medicare and unemployment insurance at the same time that they continue to argue for zero taxation on the unearned income of the rich. And each of the GOP presidential candidates reflects that overarching goal of reducing taxes on the ownership class.  See, e.g., Gingrich's "optional 15% flat tax" (zero tax on unearned income); Cain's 999 transitioning to a national retail sales tax proposal (a flat consumption tax that would be heavily regressive and leave rentier profits of the wealthiest essentially untaxed); Santorum's tax proposals (even less protective of the poor than Gingrich's), Romney's tax proposals (including zero taxation of estates, extraordinarily low taxation of corporations, etc.).   Rather than supporting a repeal of the "carried interest" loophole that allows private equity fund managers like Romney pay ridiculously low tax rates on their very high compensation income, these candidates and politicians support continuing the tax policies of redistribution upwards that have led to the decline of the middle class as the "ownership class" gathers for itself all the productivity gains of the economic system.

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Former Sen. Gramm retires from UBS

Let's see.  Gramm pushed through the Commodities modernization act in Dec 2000--the thousand pages that nobody read but that made sure that credit default swaps (CDS) stayed unregulated.   CDC then went on to form one of the pillars of the financialization of the economy--as they mushroom from a few billion in 2000 to about 70 trillion in 2007--all a castle of cards built on a foundation of sand and tangling the world's too-big-to-fail banks in a web of speculative bets and what looked like easy-money guarantees.  Then it all came tumbling down with the realization that the huge mortgage loan securitization industry and the CDOs, CDO-squared, and CDO-cubed transactions were filled mostly with hot air.

When Gramm left the Senate, he went in 2003 to UBS, a bank whose profits built on speculation and gambling with other people's money he had made much cushier with the commodities modernization act .   The proverbial swinging door swung nicely for Gramm.  He was a vice chairman and "senior adviser to investment-banking clients" and "worked with governments around the world on behalf of UBS".  Wall Street Journal, Feb. 11, 2012, at B13.  The "Who's News" note says tht Gramm "helped build the UBS Office of Public Policy in Washington."   In other words, in addition to schmoozing with bank execs and wealthy clients, Gramm was a lobbyist working his old pals in DC on behalf of the bank. 

Guess the bank must have been disappointed when he wasn't able to get them out of the mess their greedy tax evasion business got them into.   Hmmm.  That does make one wonder just how much Gramm knew about UBS's business of pushing secret accounts that the IRS couldn't trace, smuggling diamonds in toothpaste tubes, and generally doing whatever necessary to make loads of money by helping US taxpayers avoid their tax liability under US tax laws? 

PS  In a "serves it right" result, UBS reported a fourth quarter net profit decline of 76%..... 

FATCA regs out on foreign bank withholding requirements

On Feb. 8, 2012, the Treasury and Service issued a notice of proposed regulations (REG 164712-10) implementing new information reporting and withholding provisions under sections 1471-1474, in accordance with changes made in the foreign account tax compliance act (FATCA) enacted in 2010 as part of the Hiring Incentives to Restore Employment Act.  The Treasury release, available here, indicates that these rules lay out a "step-by-step process for U.S. account identification, information reporting, and withholding requirements for foreign financial institutions (FFIs), other foreign entities, and U.S. withholding agents. " 

When I first arrived at Cleary Gottlieb as a fresh-out-of-law-school lawyer in the mid-90s, one of the first "firm memoranda" that I had the pleasure of working on dealt with newly released "qualified intermediary" rules for withholding agents under sections 1441, 1442 and other provisions.  Foreign banks would sign "qualified intermediary" agreements, and be permitted to use their own "know your customer" rules to determine withholding requirements.  Before those regulations were passed, each person or entity in a chain passing along payments was supposed to verify the beneficial owner of the payment and receive the applicable withholding certificate, but that rule was honored in the breach.  Supposedly, the new qualified intermediary rules would work better.  After all, the big banks had commented on the rules and worked with Treasury to develop appropriate "protections" for their businesses.

 But those new rules weren't enough.  Big banks like UBS with longstanding reputations to uphold entered into qualified intermediary agreements but still actively sought out tax avoidance clients in the US and skirted with criminal prosecution in order to make a fast buck from wealthy but nontax-compliant Americans. Smuggling diamonds in toothpaste tubes, no less.  A small swiss bank used its US correspondence account to hide its US clients' transfers into the US from their offshore bank accounts.

The Treasury and Service officials must have felt like they'd been had when the information on the steps some foreign banks took to assist US taxpayers in hiding their assets and income from the IRS began to surface.  

Ultimately this is a fairness issue.  As Emily McMahon comments inthe release: "When taxpayers overseas avoid paying what they owe, other Americans have to bear a disproportionate share of the tax burden."  Or as the preamble to the proposed regulations states:

This information reporting strengthens the integrity of the voluntary compliance system by placing U.S. taxpayers that have access to international investment opportunities on an equal footing with U.S. taxpayers that do not have such access or otherwise choose to invest within the United States.

These new regs on foreign financial institutions expand reporting and withholding to FFIs that have US accounts.  They are long and complicated, but they have had extensive commentary.  FFIs may still use "know your customer" rules and rely on their own customer intake information in certain cases.    Institutions subject to the rules, however, will need to register through an online system that is supposed to be open on Jan. 1, 2013, whereby they will enter into an agreement with the IRS if they want to avoid having withholding apply to payments made to them: under the agreement, they will  identify U.S. accounts, report certain information about those accounts to the IRS, and withhold 30% on payments to noncomplying FFIs or accountholders who are unwilling to provide information.

The regulations provide rules regarding the interaction of the chapter 3 withholding rules relating to qualified intermediaries (QIs) with these new chapter 4 withholding rules for foreign financial institutions (FFIs).

Generally, a participating FFI that is a QI may make an election under section 1471(b)(3) to be withheld upon rather than to withhold only with respect to a payment that is U.S. source FDAP income and only if the participating FFI has not assumed primary withholding responsibility under chapter 3. A participating FFI that is a QI and that does not make the election under section 1473(b)(3) with respect to U.S. source FDAP income must assume primary withholding responsibility under chapter 3.

The proposed regulations have built in ample room for additional comment and time for transitions.  The full rules won't be in effect until several years down the road.  As the release notes,

 The proposed regulations implement FATCA’s obligations in stages to minimize burdens and costs consistent with achieving the statute’s compliance objectives. The rules and implementation schedule are also adjusted to allow time for resolving local law limitations to which some FFIs may be subject.

The IRS's news release, IR-2012- 15(Feb. 8, 2012), calls for written comments by April 20, 2012.  A hearing will be held May 15.

Perhaps the most interesting aspect of this expansion of the withholding and information reporting requirements is the evidence of a move towards international agreement among developed countries that a system of this sort is needed.  At the same time that the regulations were released, the Treasury released a joint statement with Germany, France, U.K., Spain and Italy supporting governmental cooperation in efforts to ensure tax compliance.  The expression of a willingness for reciprocity from the U.S.--"domestic reporting and reciprocal automatic exchange"-- is a good step towards global reporting of accounts to home countries, a necessary move to combat the potential for tax avoidance in the age of electronic finance.

France, Germany, Italy, Spain and the United Kingdom are supportive of the underlying goals of FATCA. FATCA, however, has raised a number of issues, including that FFIs established in these countries may not be able to comply with the reporting, withholding and account closure requirements because of legal restrictions.

An intergovernmental approach to FATCA implementation would address these legal impediments to compliance, simplify practical implementation, and reduce FFI costs.

***

[T]he United States is willing to reciprocate in collecting and exchanging on an automatic basis information on accounts held in US financial institutions by residents of France, Germany, Italy, Spain and the United Kingdom.

 BNA reports that "the European Commission, which hailed the proposals, expressed hope that the agreement would provide an incentive for countries such as Luxembourg and Austria to drop their opposition to revisions to the European Union Savings Tax Directive. Officials from Denmark, which holds the rotating EU presidency, hinted that the FATCA approach could be used in the EU relations with other third countries including Switzerland."  At the same time, commenters expressed concern that various bilateral treaties, rather than an overarching approaching involving multiple jurisdicitons, would lead to confusion, incoherence, and additional costs.  Moreover, financial institutions might have to "implement FATCA twice"--in 2013 under these new rules and again later when a bilateral accord is concluded for their jurisdiction. 27 DTR GG-1.

It will be interesting to see how this develops.

More on Swiss Banks--Romney's Wife's Trust's Swiss Bank Account (until 2010)

Yves Smith over at Naked Capitalism has a thorough accounting (with some good links) of the discussion of the revelation that the Romney's stashed $3 million away in one of those secret bank accounts at UBS.  See Romney's Wife had $3 million in Swiss bank account through 2010: not disclosed in federal financial disclosure forms, Naked Capitalism (Feb. 2, 2012).

Now, there are at least two interesting things about the Romney's stashing $3 million in a very low yield Swiss bank account.

1) There are better things to do with money.  Even if you don't mind a low return, you could hold that money in the US--helps the US economy more than in a Swiss bank, and is easily available without the transaction costs of getting it out of your secret Swiss bank account.  Why would the Romney's have a Swiss bank account with a very low yield?  The Romney spokesperson says "diversification" but that doesn't hold water.  Makes one wonder where this money came from and certainly why it ended up in a Swiss bank.

2) the campaign has stated that the Romney's have paid all the taxes due.  We don't know when, or whether it was a response to the stepped up enforcement of reporting requirements for foreign accounts.  They could have taken reported everything correctly up front or they could have taken part in one of the voluntary disclosure initiatives.  It would be interesting to know whether they had routinely filed FBAR reports and tax returns throughout the period this money was held there.

Perhaps what this reveals more than anything is that we should have an easy-to-find listing of every person who has voluntarily disclosed a foreign bank account for which reports had not been filed until the disclosure, the amount in the account, and the length of time the account had been open.  While there are strong arguments for removing the confidentiality of corporate tax returns imposed back in the 1970s, at the least we should make readily available and easy to find the list of US scofflaws who have held offshore bank accounts and did not report them until the harsh glare of the UBS investigation made people realize they could be subject to criminal prosecution.  There isn't enough shame in naming, these days, but it would be useful to know information, especially if there were political candidates involved.

Swiss Bank Weigelin Indicted

On Feb. 2, 2012, a grand jury in the Southern District of New York indicted Weigelin & Co, a Swiss bank founded in 1741 that provided various asset management and private banking services to U.S. residents without having any branch offices in the US, for helping US taxpayers hide more than a billion in secret offshore accounts.  See United States v. Wegelin, SDNY No.81-12 Cr.02(JSR) (2/2/12) (Download Wegelin indictment).  The Department of Justice has also seized more than $16 million from Wegelin's U.S. accounts under civil forfeiture laws.

 The indictment claims that more than 100 US taxpayers availed themselves of Weigelin's services to hide their assets, starting around 2002 and continuing through 2011.  In particular, it charges that the bank and its officers opened "dozens" of new undeclared accounts in 2008-09 after the investigation of UBS had brought attention to the issue.  The company's executive committee "affirmatively decided" to go after UBS's US clients, telling U.S. taxpayers that the bank's lack of U.S. branch offices would help prevent discovery.  In announcing this new policy of capturing UBS's illegal business, a bank executive noted that Weigelin was smaller and that it would be able to charge high fees for this business since taxpayers were now frightened about the prospect of criminal prosecution in the US if their accounts were discovered.

The bank used a variety of techniques to assist in the tax evasion objectives of its US taxpayer clients.  It helped them repatriate funds by drawing checks on a Stanford account held by the bank, and even extended this to assist clients of other offshore banks in repatriating their funds.   This was often done by conmingling the US taxpayers' funds with other funds, so that the IRS would have more trouble connecting the dots.   It set up their Swiss accounts in names of sham foundations and corporations--using Lichtenstein, Hong Kong and other jurisdictions' facilitative entities for this purpose. It used code names for taxpayers and numbered accounts rather than names whenever possible.  The bankers never mailed information to their clients' US addresses, but they did email and telephone them about their accounts (sometimes using personal email accounts rather than office accounts to further deter discovery).  After the bank started taking on clients that were fleeing UBS, it also changed its contact policies to require travel to the Swiss bank rather than email or phone contacts with US taxpayer clients.  The indictment notes that "various" of the bank's clients filed false 1040s and failed to file the required FBARs related to the accounts.  (We can probably expect to see more of these taxpayers facing criminal tax evasion charges as the months roll by.)

According to the indictment, the bank also solicited new US taxpayers for its asset management business, through Fed Ex and email and through a website (run by another firm, but paid for by the bank) advertising Swiss bank accounts that would not disclose information on tax evasion.  At least 70 US taxpayers moved their accounts from UBS to Weigelin in response to these solicitations.  As it became clear that voluntary disclosures by some US taxpayers was revealing information about other Swiss banks, Weigelin took measures to protect identities of advisers assisting US tax evasion, for example by removing client advisor names from records and listing merely "team international" on those records.

The indictment includes stories of US taxpayers who used the Weigelin bank to hide their assets.  One, a woman who inherited a UBS account in 1987, made a trip  with her husband to Switzerland when the UBS investigation became public and was advised to move her account to Weigelin, which she did.   When the couple wanted funds out of the account, they would call and notify the bank that they were going to Aruba. In Aruba, they would fax information to the bank.  The bank would arrange for checks (in amounts less than $10,000 each) on its Stamford account.  The couple became alarmed, however, when it learned that its account at UBS might be one of the 4500 or so disclosed under the agreement with the IRS.  Weigelin advised them not to worry, and not to voluntarily disclose the account, which held almost $2.5 million. 

Another accountholder mentioned had a larger account of about $30 million.

Of course, it would have been to the taxpayers' benefit to disclose, and the bank was acting to protect itself in persuading them not to disclose.  Surely accountholders should be able to recognize that there would be a conflict?  None of the taxpayers specifically mentioned disclosed voluntarily and, one assumes, all are likely to be under criminal indictment (ought to be at any rate).

 

Why we don't need corporate tax "overhaul": GOP poormouthing on behalf of rich corporate allies(Part I in a series)

These days, one hears a great deal from politicians on the right about how a corporate tax "overhaul" is needed because our taxes are "too complex" and/or "too anti-competitive" or because our tax rates are "too high".  The same GOP politicians who whine and whimper about how huge the deficit is, and accuse President Obama of driving our country to ruin with the deficit are willing to lower the tax burden paid by highly profitable corporations considerably (thus increasing the deficit and adding to regressivity of the tax system)--so long as they are appeasing their multinational constituency, the huge corporations who are the new providers of campaign funds and the new decisionmakers in elections--even though the corporate entities have no vote.  Claims of revenue neutrality are generally little more than PR cover for corporate giveaways.

Just a couple of examples from a recent Bloomberg piece:

• Republican Senator Robert Portman says he will unveil a new proposal soon that will cut taxes for multinational companies' repatriated offshore profits--i.e., a permanent tax holiday for multinationalsm as a first step towards a very MNE favorable move to a territorial tax system--that will remedy "an inefficient and complex maze of tax preferences".   See, e.g., Kathleen Hunter, Portman Corporate Tax Plan to Include Low Repatriation Rate, Bloomberg.com (Feb. 1, 2012).   Portman claims this huge tax cut for the high and mighty MNEs (and their managers/owners) is needed because they "pay[] a very steep tax bill if and when they choose to bring their money home."  Ludicrous.  There is a very generous foreign tax credit provision that allows many MNEs to reduce their taxes to near zero anyway.  Further, the deferral they are allowed on active business income gives them the time value of money benefit.  Most of what foreign corporations want to do is allow their taxes on non-US income to reduce their taxes on US income--which is a kind of subsidy for offshoring that costs US jobs.  And of course, as I've noted in earlier posts on tax holidays and proposals for a territorial system to replace a worldwide system, corporations hold more money overseas when they think there is a good chance that their buddies (or "bought pols"?) will give them the tax break they have been lobbying for--so these proposals encourage corporations to engage in the activity that these proposals say they are addressing, thus giving them more ammunition to get the change they want.  Portman, of course, says he wants to "streamline" the corporate tax and lower the rate to 25%.  We have a statutory rate of 35% now and most corporations that pay taxes (which are not by any means all of the corporations that make significant profits) pay less than 25%.  If we lower the statutory rate to 25%, it is quite likely that most corporations that actually end up paying taxes will be a smaller number than with the 35% rate and at a much lower rate--probably around 10-15% instead of 20-25%.  Of course, what the result will be--as it was in the 1986 tax reform that lowered rates for ordinary income and ended a number of problematic tax preferences such as the capital gains preferential rate--is that the lower rates will stay, and all of the loopy tax preferences (and more) will be reenacted within a couple of years under heavy lobbying for the same by the corporations that benefit from this round.
• Dave Camp, Michigan Republicans and Chair of the House Ways and Means Committee, wants to exempt 95% of overseas profits. 

Is there merit in this drumbeat of (lobbyist-induced) calls for "corporate tax overhaul legislation"?  The simple answer is no.

On Complexity:

Most complexity in the code is there for one of two reasons.

The most likely reason for complexity is the creation of tax preferences heavily lobbied for by corporate lobbyists.  One example is the so-called "domestic production activity deduction" that lowers the tax rate by 9% for most industries (even ones that don't really produce anything) and 6% for natural resource extractive industries.  There are tax breaks on top of tax breaks for the resource industries, of course, that get numerous special benefits throughout the Code, while joining in various coalitions that lobby AGAINST even extraordinarily modest support for green industries (such as reasonably low cost loans for solar power). 

The second main source of complexity is the clear need for specific anti-abuse provisions to undo the harm done when corporations use what can most charitably be called aggressive and inventive interpretations of Code provisions--often ones that are hyper-literal in nature (the kind of analysis that allowed the Bush Treasury to redefine what "exchange" means in the reorganization provisions in order to allow taxpayers to manipulate the allocation of consideration to create a hitherto unrecognizable tax loss in the reorg transaction) or turn the Code's clear textual provision on its head (look at the briefs for the defendant--or for that matter the lousy statutory interpretation in the district court opinions-- in the Black & Decker contingent liability shelter case, where Black & Decker argued for application of a provision in section 357(c) (which says explicitly that it applies only where paragraph one of that provision applies) in a context where paragraph one did not apply).  As a result of the contingent liability shelters, Congress added various Code provisions, including section 358(h) (having to do with the basis for corporate assets in transactions with significant liabilities) and section 357(d) (having to do with calculating the amount of liability assumed).

Complexity, in other words, is not an evil in itself.  Sophisticated taxpayers aren't harmed by complexity, and in fact complexity is needed to provide sufficient detail to prevent sophisticated taxpayers (with the help of their tax advisers) from cheating.  There is generally less complexity in provisions that are relevant for unsophisticated taxpayers, though it is more clearly an obstacle to good tax compliance behavior there.

On Competitiveness:

Competitiveness is used so frequently that it seems doubtful that anybody really knows what they mean by it.  If one company destroys a union and is able to pay their workers lower wages as a result, then a company that produces a similar product will claim that "competitiveness" requires that they be allowed to do the same.  Of course, another approach would be for the company that retains an active union, and continues to provide pension and health care benefits could lobby Congress to enact stronger laws protecting worker rights to pension and health care benefits.  In other words, competitiveness is consistently used as an argunent, when it comes to corporations, for taking away benefits to workers, communities, states and the nation for the benefit of the corporations.  Competitiveness could just as easily be used to argue for maintaining programs, procedures and benefits for workers, communities, states and the nation by considering what would be necessary to buttress the system that supports those benefit levels.  And in fact that view of competition--that we are competing globally to create both profitable companies AND a secure and well-paid workforce that can support a healthy economy that can in turn support a quality of life in all dimensions--would lead to different decisions not only about taxation but also about anti-trust, excise taxes, trade treaties, environmental protection, and many regulatory projects.

Furthermore, competitiveness is often used as an argument in the abstract when the main competitors are both US based companies.  There, the argument for reducing taxes to enhance competitiveness is at its weakest, but few competitiveness arguments reveal just how the competititon is playing out even on a globalized playing field.

On Rate Structures:

The 1986 tax reform act is a frequent reference these days when people talk about amending the Code generally and specifically about amending the corporate tax provisions.  But the context for that act's passage was quite different.  Individuals were taxed at rates that were reasonably progressive--with a top rate at 70% (though the brackets could probably have been better defined to differentiate among top income recipients).  Further, the 1954 Code had built up a plethora of tax preferences (especially useful to the rich) and the Congress had realized that the preferential capital gains rate was wreaking havoc on sensible provisions because of the arbitrage opportunities it created.  Thus, there was room for "base broadening"  (removing ill-advised preferences spread throughout the 1954 Code) as a means of paying for "rate lowering" (lowering the fairly high rates about half, without costing the fisc because of the higher amount of income on which those rates would be charged).

We are not in the same situation today.  We have very high deficits because of an economic crisis caused by two interwoven problems--(i) the lax regulatory oversight of 40 years of Reaganism, which permitted the financialization of the economy and led to excessive incomes for people at the top (managers and owners, hedge fund and equity fund managers, and speculators generally) and excessive debt for banks and especially people not at the top (because of their stagnant or reduced incomes in the face of growing costs, caused in part by the relaxation of regulations and anti-trust activity coupled with the anti-union attitudees and activity); and (ii) the success of a radical right-wing fringe in characterizing government and business as having adverse interests and progressive programs supporting social well being (from Social Security to Medicare to Medicaid to (modest) heatlh care reforms intended to reign in the cost of medical care to unemployment benefits to efforts to reign in contracts of adhesion in the consumer credit markets) as "unmerited" "entitlements or costly and anti-competitive regulation of businesses that counters the "free market" that will ensure "growth and jobs".  The result of the rhetoric is a citizenry that is ignorant of the actual income distribution, tax burdens, and impact of government spending on jobs and the health of the economy.  The result of the 40-year "reaganomics" effort from the right to cut regulations, cut taxes, privatize and militarize is that this is no context for rate reduction but in fact a context in which those who can afford to do so--for sure those individuals and households in the top two quintiles of the income distribution that comprise the upper middle class and the upper class and all profit-making corporations--should be paying taxes at HIGHER rates, not lower rates.

It should be noted that President Obama--who is at best a middle of the roader on tax issues--also is said to plan to propose an "overhaul of the U.S. corporate tax system" in connection with his budget plan for FY 2013 that involves lowering rates and base broadening.  See Steven Sloan, Obama said to propose corporate tax overhaul next month, Businessweek.com (Feb. 2, 2012).   Again--lowering the rate is a bad idea.  Lowering the rate without base broadening is a stupid idea.  But the kind of base broadening that is included, if such a proposal eventually passes, matters an awful lot.  The problem is that if Obama proposes such a reform, the GOP won't support it unless the "base broadening" is essentially inconsequential and can be undone easily later or affects only little guys and not the big-monied lobbyists.  Thus this looks like another of those initiatives from the White House that play into the right's agenda and do little to advance any progressive idea.

Italy now backs a financial transactions tax

Germany and France are already on board in support of a financial transactions tax, and one outcome of the meeting of Italy's new leadership with Chancelor Merkel is that Italy is on board.  See AP, Italy Backs Financial Transactions Tax, New York Times, Jan 11, 2012.

A financial transaction tax has several advantages especially relevant in this post-financial crisis period.  It raises additional revenues in very small increments on financial trades.  That is not likely to have a negative impact on trades, but is likely to raise much needed revenues for starving educational systems, transportation systems and other important government programs. 

Further, to the extent it does act as a disincentive to financial transactions, that, too, accomplishes a public good.  The financial transaction tax is really a variety of the so-called 'sin taxes' that provide revenue when the purchase behavior continues and a social benefit when it ceases.  Finance has become too large a part of the economy, and much of what passes as financial activity, as we saw in the 2007-08 financial crisis, was really 'phantom' activity--trading at several times removed from the productive economy that gives people (other than bankers).

It remains to be seen whether the US can pull its dysfunctional government together enough to make reasonable decisions about such options as a financial transactions tax.  First, we have far too many far too well paid and far too well connected lobbyists roaming the halls of Congress and influencing votes in favor of the big financial institutions' perspectives.  Second, the far right's emphasis on a version of "free markets" that fails to understand nuances of externalities, biases and framing issues leaves no room for recognition of the many negative aspects of unregulated marketplaces.  Third, the Republican party members in Congress have been engaged in obstructionist behavior that leaves little room for any reasonable compromises or even consideration of the justness of a position--they are engaged in election gamesmanship with Supreme Court and other federal court judge nominations at stake, along with an objective of taking broad-stroked deregulatory action across federal agencies, from the EPA to Energy to Education to the IRS.  All of these trends bode ill for the US to get its act together and set in place provisions that will further rein in the finance excesses.

But if Italy can make progress in this regard, surely we can.....

GOP wants to repeal Dodd-Frank: instead they should listen to Nassim Taleb

Nassim Taleb, the author of the book on long-tail events, suggests in a Nov. 6, 2011 op-ed in the New York Times that "it is only a matter of time before private risktaking leads to another giant bailout like the ones the United States was forced to provide in 2008." 

That's pretty strong language, and should be cause for worry among those GOP debaters who have been in a pissing contest over how much legislation they can suggest for repeal, like Dodd-Frank, health care reform, and environmental protection.  Instead of defending big banks, the GOP should start thinking about how to break them up.  Instead of suggesting that we need to repeal Dodd-Frank and end regulation of banks, Taleb says we do need  regulation but can't depend on it alone: "Supervision, regulation, and other forms of monitoring are necessary, but insufficient."

And instead of defending risk-taking bankers as innovators and entrepreneurs, Congress should be considering measures to undo the incentives for risk taking.  Taleb says--End Bonuses for Bankers.

[I]t's time for a fundamental reform:  Any person who works for a company that, regardless of its current financial health, would require a taxpayer-financed bailout if it failed, should not get a bonus, ever.  In fact, all pay at systemically important financial institutions--big banks, but also some insurance companies and even huge hedge funds--should be strictly regulated.

***

Bonuses are particularly dangerous because they invite bankers to game the system by hiding the risks of rare and hard-to-predict but consequential blow-ups, which I have called 'black swan' events. 

Seems like sound advice.  Bonuses encourage risktaking, and risktaking encourages breakdowns of TBTF banks.  Breakdowns lead to taxpayer bailouts.  To break the chain, deny the bonuses.

The asymmetric nature of the bonus (an incentive for success without a corresponding disincentive for failure) causes hidden risks to accmumlate in the financial system and become a catalyst for disaster.  This violates the fundamental rules of capitalism:  Adam Smith himself was wary of the effect of limiting liability, a bedrock principle of the modern corporation.

Here Taleb touches on a factor in the expanding risk of our economy--and the expanding immunity of the manager class from the risk they cause.  Corporations provide limited liability to their owners.  And innovations over the last few decades have expanded limited liability to almost all investors even in pass-through entities that pay no entity-level tax, through the limited liability company and the limited liability partnerships. That is one of the reasons I have argued for Congress to enact legislation to restrain the availability of tax-free mergers and reorganizations.  The combination of easily attained limited liability plus easily attained consolidation of entities has been a factor in the growth of the corporatist state.

Taleb has a good point about the incidence of bonuses in the US market system as well.

We trust military and homeland secrutiy personnel with our lives, yet we don't give them lavish bonuses.  They get promotions and the honor of a job well done if they succeed, and the severe disincentive of shame if they fail.  For bankers, it is the opposite: a bonus if they make short-term profits and a bailout if they go bust.

 Eliminating bonuses would make banking boring again, like it was before the repeal of the Glass-Steagall Act.  Boring, in this case, is good.  Congress should consider what kind of legislation could be designed to make bonuses in banking less likely, through tax disincentives or other means.