ataxingmatter

Business or Hobby Losses? GOP spouse Todd Palin's snowmobile racing; GOP spouse Ann Romney's dressage horse ownership

Remember when Sarah Palin was the GOP vice presidential candidate and we finally got to see two tax returns (2006 and 2007)?  They showed that Todd Palin claimed significant losses from his snowmobile racing activity, which the Palin's claimed as a business.  Since various publicity items made it look more like a hobby, some tax experts expressed an interest in seeing more past returns.  Did he really have a business or was this a hobby, for which losses from the hobby activity in excess of income from the hobby activity are nondeductible under the "basketing"rules of section 183?  The crux of the matter is distinguishing a business activity from a hobby, and one of the most significant factors in doing that under the relevant regulations is whether there is income in a significant number of years (under the regs, 3 out of 5 years of income suggest a business, whereas only rare years of income suggest a hobby).  We didn't see enough of the Palins'  returns to reach a firm conclusion during the campaign, nor is there any way to know whether the IRS audited the returns and reviewed those issues.  There are other factors that suggest a business, including the fact that the activity is undertaken for profitmaking.  Todd Palin's activities seemed more for pleasure and PR purposes, from the coverage and friends' comments at the time, but of course that would require a fact-intensive investigation to be sure.   For  contemporaneous discussion of this issue, see Rangel's Villa; Palin's Home Away from Home (A Taxing Matter, 2008); Sarah Palin's Tax REturns Part II (A Taxing Matter, 2008); Bryan Camp, A Brief Analysis of Governor Palin's Tax Returns for 2006 and 2007, TaxBlog (originally published 2008 but republished on the blog Feb. 12, 2012).

I [Bryan Camp] have no idea what the answer is, but here are some data points that lead me to conclude that snow-machine racing is not Todd Palin’s business but is his hobby. First, I cannot find any websites for “professional“ snow machine racers. Of course, I might have just missed it. But if there is no professional association, that suggests that there is not enough money in the sport for folks to do it as a business. Second, I cannot find any references to Todd Palin being a “professional“ racer that predate Governor Palin’s selection as McCain’s VP running mate. For example, here is a story about his crash in the Iron Dog, but does not suggest that anyone thinks he is a professional racer. http://www.adn.com/news/alaska/story/316352.html Again, I might just be a lousy researcher, however.

Third, and most importantly, what does Todd Palin say and do? The determination of whether the racing is a business is really about Todd Palin’s personal intent. Why does he do it? Love of sport or love of lucre? Some more clues may be found in the following interview he had on FOX News, available here: http://www.foxnews.com/story/0,2933,423102,00.html :

VAN SUSTEREN: I take it that you like where you lie. Look at this spectacular view. How long have you lived here?

PALIN: About six years. And we’re very fortunate to be here. And it is nice for the kids in the summertime. It’s a big playground in the wintertime. About five months out of the year, it’s a big playground, as well, where we snow machine and ice skate on the lake.  Id.

So why raise this old issue again?  Because Candidate Romney has been similarly stingy in the number of returns released. And the 2010 return shows a $77,000 loss from an activity that raises similar questions whether it is a business (for which a loss would be deductible) or a hobby.  See Trip Gabriel, In rarefied sport, a view of the Rommey's world, New York Times (May 26, 2012).

Here's the issue.  Mrs. Romney grew up riding horses and when she was diagnosed with multiple sclerosis, she took up riding dressage (a fancy demonstration of horse techniques with a rider in formal gear).  Dressage is a sport generally engaged in by the wealthy or by people who are "sponsored" by wealthy people.  The Romney's wealth meant that they could provide deep support to their chosen tutor and horse caretaker, Jan Ebeling, a dressage rider who runs a horse farm (the Acres) that is one of the Romney's many vacation spots.  The Romney's have provided loans to their friends/tutors the Ebelings.  Mrs. Romney is also a partner in a partnership with Amy Ebeling and another Romney friend that owns a star mount, Rafalca, used by Ebeling in his dressage competitions and hoped to be used in his try for the Summer Olympics.  These horses cost about $200,000 a year to own and maintain. The Romney's reported a $77,000 loss from the partnership owning Rafalca on their 2010 return.  As the Times reports, "sponsorship arrangements are not unusual in dressage, where riders who want to climb to the top look to wealthy backers." The question is, is the partnership really a business that is out to make a profit, or is it just a part of an expensive hobby for wealthy people like the Romneys that provides them an "in" to an elite sport?

The article describes Romney's activities as traveling with Ebeling to Europe to buy horses for herself and her tutor; boarding her horses at Ebeling's farm; spending time at the farm riding; engaging in amateur competitions; and supporting Ebeling's sporting efforts related to his objective of competing in the Olympics.  It doesn't sound like the partnership would have much hope of profits--Ebeling would have to make more than the cost of maintaining the horse annually in winnings from competitions, and he is apparently primarily engaged in training for the Olympics.  Certainly there is enough here to suggest the same sorts of questions that arose around Palin's tax returns--is this really a business or is it a hobby for which the loss shouldn't be deductible.  If  the Romneys would release more of their earlier tax returns as other presidential candidates have done (most release 10 years of returns), the question would be easily answered.  But without more, this looks like another one of those cases where the rich engage in pursuits unavailable to ordinary folk and then end up claiming a significant tax break for what appears to be a hobby.

The LA Times' earlier article on Romney and her relationship with the Ebelings provides more context but still doesn't answer the specific question about the partnership that owns Rafalca.  See Robin Rabcarian, On a Trail of Her Own, LA Times (May 22, 2012).  It suggests that Mrs. Romney's sponsorship of her dressage tutor is much more extensive than the partnership with Amy Eberling and the Romney friend that owns Jan Ebeling's star mount Rafalca.  According to the LA Times article, Mrs. Romney is a partner in the horse training and boarding farm itself and in another company (a foreign corporation!) that breeds and trains dressage horses.

For nearly 10 years, Romney has trained and ridden with Jan and Amy Ebeling, who own the Acres, an immaculate, Mediterranean-style ranch in Moorpark, about 45 miles northwest of downtown Los Angeles. Romney is a partner with the Ebelings in the Acres, and she and Amy Ebeling own Rob Rom Enterprises LLC, a foreign corporation registered in Delaware that buys and trains dressage horses.

Assuming that the Acres and the breeding company are indeed businesses, that still leaves questions about the partnership that owns Rafalca, questions that would be clarified by seeing more of Romney's earlier tax returns:  has that partnership actually made profits for a majority of the last 5 years?  is the primary objective of that partnership to make profits or to sponsor a friend in, and stay connected to, a beloved activity?  The costly nature of this elite sport suggests that any business profitmaking would be  in providing services (horses, boarding, training) for the wealthy people who can engage in it, not in owning and maintaining a horse used by someone who is training for the Olympics.

Dressage is not for the faint of wallet; it requires healthy outlays of cash for upkeep, training, transportation and veterinary care. It attracts some of the world's richest people -- the daughter of billionaire New York Mayor Michael R. Bloomberg competes. Yahoo co-founder Jerry Yang and his wife own dressage horses.  On a Trail of Her Own, LA Times (May 22, 2012). 

Illinois's Tim Johnson (Rep.) Squirms under Norquist No-Tax-Increase Pledge

Back in 2002, Tim Johnson represented a safely red district in Illinois and the radical right was pressing on his back with its reaganomics-inspired program to cut-taxes-to-shrink-(nonmilitary)-government-and-eliminate-public-infrastructure-and-social-justice-programs; de-regulate-to-free-up-big-business; privatize-wherever-you-can-especially-schools-bridges-and-other-essential-services.  Not to be outdone, Tim Johnson signed the no-tax-increase pledge on the dotted line, with his right-hand aide as witness.

In spite of the decades of extraordinarily well-funded anti-tax/anti-government propaganda spewed by purported think tanks like the "Americans for Prosperity" arm of the Koch Bros, the anti-estate tax "American Family" coalition arm of the Walton heirs, the Big-Business oriented Chamber of Commerce and Club for Growth and similar groups, the American public seems to be finally beginning to learn to read between the lines and recognize self-serving propaganda for what it is.    Even with all the money being spent to misrepresent and distort the truth about taxes, it is worth noting that Rasmussen polls (run by a leaning-right head) are finding Americans more willing to support tax increases than they were a few years ago.  For example, back in December 2011, despite the anti-tax nonsense of the Tea Party and other radical right-wing groups, only 52% thought tax cuts would help the economy--in the low end of the 51% to 63% range answering that question affirmatively since July 2008.  Similarly, a recent poll showed that 47% favor a candidate who wants to raise taxes on the rich over a candidate who wants no tax increases.  Back in September 50% of Americans favored a mix of spending cuts and tax increases (but 64% weren't willing themselves to pay higher taxes, a product of the NIMBY syndrome).  And a March poll found a significant decrease in Americans responding who thought that America is an "over-taxed" nation. 

[N]ew Rasmussen Reports national telephone survey finds that 56% of Likely U.S. Voters believe America is overtaxed. But that’s down from 66% two years ago and 64% last year. One-out-of-three (33%) now believe the country is not overtaxed, while another 12% are not sure. (To see survey question wording, click here.)

[ASIDE:   The problem with the question about whether Americans are overtaxed--especially in this age of 527 groups spending buckets of money to convince them that they are--is that it depends on who you are asking and what facts they actually know about taxes, the economy, and what the difference is between effective tax rates and statutory rates.  Everybody hears the radical right prattle on about how high our (statutory) tax rates are.  Very few hear much about effective tax rates and fewer still understand the difference.  The wealthy are not over-taxed, though they have spent a good bit of their money to convince typical Americans that they are.  Those who escape federal income taxation because they earn amounts covered by the standard deduction and personal exemptions and earned income tax credits--amounts intended to keep lower income taxpayers from having to pay income tax--nonetheless have to pay signficant state and local property and sales (and often also income) taxes and have to pay significant federal payroll taxes.  Not surprisingly, they may well feel overtaxed when their wages are going down and their tax burden is staying the same and they hear the think tank spew of anti-tax stuff on the airwaves day and night.]

And now Tim Johnson's district has changed.  He represents a more Democratic electorate, that is less likely to swallow the Tea Party tax aversion hook, line and sinker.  So he is backtracking.  Which is good. It's a shame he backtracked bit by bit, at first claiming he'd never signed and then suggesting his aide signed for him before he finally admitted he had signed the pledge but just didn't consider it cast in granite.   See Are you Now and Have You Always Been?, New York Times editorial (March 11, 2012). 

But to give him credit, he finally did take a  stand against the idiocy of the tax pledge.   See Pat Garofalo, GOP Rep. Blasts Norquist's Anti-Tax Pledge as "Disingenuous and Irresponsible", Think Progress.org (Mar. 8, 2012).  He ought to do it more straightfowardly--by admitting that it is a mistake to assume that tax cuts are always good or that tax increases are always bad and by acknowledging that there is plenty of room to tax the rich more without harming anybody's economic recovery.  His statement (quoted on ThinkProgress) weasles by making clear that he is leery of tax increases other than fixing tax loopholes or raising the Social Security tax.....

 One hopes that these few quasi- brave Republicans who are beginning to speak out against the idiocy of a "pledge" to cut off a key tax policy tool of democratic institutions for supporting public infrastructure and public needs will cause Norquist's pledge to go to the same ignominious fate that awaited Joe McCarthy's anti-liberal binge (under the name of anti-communism) when a lone lawyer questioned his decency.  As a constitutent told GOP representative Rick Berg in a North Dakota town hall meeting (quoted on Think Progress), these guys are supposed to work for their constituents, not for Norquist.

Rick Santorum's tax policies and more--imposing his moralizing choices on all

Rick Santorum is a man who seems to hold sincerely held religious beliefs.  The problem is that he thinks everybody that matters holds (or should hold) the same beliefs that he does, or at least should be forced to live in a country that operates by the principles that follow from those beliefs.

Santorum has accused Obama of operating from a "phony theology" (one not based on the Bible).  That suggests that Santorum thinks a president is supposed to impose a biblical theology on all presidential work--and that Santorum intends to impose his own "correct" theology if he were to be elected president.  See Santorum Questions Education System and Criticizes Obama, New York Times (Feb. 18, 2012).   That approach fits with Santorum's idiosyncratic views on how religion is supposed to influence public life:  Santorum has made a point of claiming that he does not hold with the founding principle of separation of church and state--a principle enunciated by Thomas Jefferson, ascribed to by Abraham Lincoln, and articulated splendidly by John F. Kennedy.  See Joan Walsh, Santorum's JFK Story Makes Me Want to Throw Up, Salon.com (Feb. 26, 2012). 

This issue is worth pointing out clearly.  Here's what Santorum said

 I don’t believe in an America where the separation of church and state is absolute.  The idea that the church can have no influence or no involvement in the operation of the state is absolutely antithetical to the objectives and vision of our country. (emphasis added)

And here's what the statesman Kennedy said when confronting the concerns of the Southern Baptist Convention that a Catholic in office would implement the laws under the dictate of the Pontiff in Rome rather than the U.S. Constitution.

I believe in an America that is officially neither Catholic, Protestant nor Jewish; where no public official either requests or accepts instructions on public policy from the Pope, the National Council of Churches or any other ecclesiastical source; where no religious body seeks to impose its will directly or indirectly upon the general populace or the public acts of its officials; and where religious liberty is so indivisible that an act against one church is treated as an act against all.

What does Santorum's theology look like and how will it influence public policy under a Santorum presidency?  Santorum apparently thinks public schools are a bad idea (he's likened them to "factories") and that all children should be able to be home schooled (and indoctrinated in a parent's religious preferences) at taxpayer cost.  See Santorum Questions Education System and Criticizes Obama, New York Times (Feb. 18, 2012); Santorum Exposed: why is Santorum spending your tax dollars on his family (noting that Santorum took $100,000 from Pennsylvania for an online program for his home-schooled kids, even though he resided in Virginia at the time). He thinks kids get "weird socialization" in public schools.  Rick Santorum, Kids Get Weird Socialization in Schools, Huffington Post (Feb. 22, 2012).  We already have weakened public schools by permitting taxpayer funds to pay for "nonreligious" items at religious private schools, such as text books and transportation.  Since money is fungible, that payment merely subsidizes more religious expenditure on religious education and deprives children in public schools of much needed resources to deal with the huge lingering infrastructure problems of our public school systems.  We don't need to go even further in that direction by moving religion into public schools wholesale, or moving even more children into ideological indoctrination through taxpayer-funded schooling. 

Santorum's theology is backward on women as well, seeming to think more women should be anchored in the kitchen with numerous progeny pulling on apron strings that signify the most satisfying role for women (in his book).  One worries how that would play out in a Santorum presidency that could cut off funding for disfavored activities through executive orders, and his public statements bode ill for how it would pan out.  Santorum apparently thinks the feminist revolution is bad, because it has made it harder for women to choose to stay at home.  See Santorum faces questions on women in the work force, New York Times (Feb. 12, 2012).  In contradistinction to the importance of individuals' rights under the First Amendment, he seems to think that every religious institution should be able to impose its beliefs on its workers (no matter what their beliefs are):  under Santorum, a woman working in any capacity for the Catholic Church could not be covered in her health care plan provided by her employer for contraception.  See Social Issues Rule Day in Candidates Race, AP (Febl 12, 2012) (noting Santorum's comment that the contraception rule forces churches to do something against their basic (institutional) tenets).   He thinks voters should be aware of his religious faith and should consider that in determining whether to vote for him.  And his religious faith doesn't believe in birth control, so he wants to be sure that the tax code provides a huge tax exemption for each child in multi-child families--but not a refundable tax credit that would be of real use to a poor working mother with one child to care for.  See Santorum letter, Raise the exemption for children, not the child tax credit, Wall St. J (Feb. 25, 2012) (claiming that he wants an $11,100 personal exemption per child for working families but is against a child tax credit that would be refundable, so is "innocent" of "expanding welfare").  

Santorum's theology doesn't seem to find it problematic when a government system systematically redistributes resources upwards to the benefit of the wealthy.  His tax plan would result in zero taxation on unearned income, the primary type of income of the wealthy.  Welfare for the rich is apparently fine and dandy under Rick Santorum's version of morality. 

GOP candidates' policies would raise federal debt by whopping trillions

The GOP likes to pretend to take the high road, proclaiming itself to be against increasing the federal debt, running big deficits, or otherwise not running our government like a person runs their household.  Pundits on the right tend to look at Greece and warn--watch out, America, you're gonna be there next.

Of course, there's a big difference in a family on a limited budget and the federal government.  The government can print money to pay its bills; when people do that, it's called counterfeiting.  The amount of quantitative easing is limited, though where the limits are difficult to establish with any certainty--at some point.   And there's a big difference between the US and Greece.  Unlike Greece, we have a sovereign money supply (Greece is tied to the European Union, unless it decides to break away and suffer the consequences).  And unlike Greece, though our debt is high, it is still only about 70% of GDP.  And lucky for us, the foreign nations who buy our debt need somewhere to put all those dollars that they've acquired through their cheap exports to us.

There's another big difference between the US and Greece.  We have a long history of a stable and workable tax system--in spite of the frequent tinkering that Congress has done over the years.  We have at times had politicians in office who recognize their responsibilities to the system and enact new tax laws, in spite of the intense lobbying by Big Business and wealthy interests to try to derail all tax increases.  We can and should increase taxes now, especially on those most able to pay. 

So is that what the GOP candidates are proposing, after all their whining about how Democrats are fiscally irresponsible and blaming Obama for increasing our debt load?  Nope, not at all.  Except for Ron Paul, who wants to harshly cut every government activity, the rest of the GOP candidates have enormous tax cuts and middling spending cuts (mostly to programs that benefit ordinary Americans) and would add to the deficit by trillions of dollars, according to the Committee for a  Responsible Federal Budget.  See Primary Numbers: The GOP Canddiates and the National Debt (Feb. 24, 2012).  Gingrich would have the biggest increase--about $7 trillion in new debt over a two-term presidency.  Santorum would increase the debt by about $4.5 trillion, and Romney would increase it by about $2.6 trillion (unless he really comes up with some offsets as promised).  All three of them are likely depending on the laughable Laffer Curve idea to help them achieve their promises--the assumption that their tax cuts for the wealthy would result in more growth and therefore more tax revenues.

The Supreme Court's corporate monsters--if money buys them "free speech" rights, can it help them avoid giving others human rights?

The Supreme Court decided in Citizens United that corporations could intevene to influence elections--giving money and aide to their selected candidates.  This was an inordinate broadening of corporate "personhood", claimed to be necessary under the warped First Amendment precedents of the Supreme Court that count "money" as speech and thus consider that  limitations on money spent to influence elections as a limitation on speech.

Yet most economists and tax professors argue against the corporate tax--which has been in place longer than the individual income tax--on the grounds that taxes distort and that the claimed "double taxation" of corporate income distorts the allocation of capital.   See, e.g., Tax Foundation, 2004 paper on integrating corporate and personal income taxes; seminal 1985 integration piece from NBER.  Much of the argument boils down to an a prior assumption that "only people can pay taxes."  

(Of course, we used to think that only people could engage in campaign speech or bribe politicians for quid pro quo policies or otherwise influence the course of society.  We were naive.) 

As a result of this "received wisdom" about economics and corporate taxes--mostly based on the mathematically correct but practically challenged Chicago School approach to understanding economic systems (by assuming away most of the real world, including life, death, and everything in between)-- corporate lobbyists and their allies in Congress have been pushing for decades to eliminate corporate taxation through integration of the corporate and individual tax schemes or at a minimum to drastically reduce the liability of corporations for federal income taxes. 

Every presidential candidate has one scheme or another to reduce corporate taxes, with even Obama falling prey to the continuing influence of the Wall Street facilitators like Timothy Geithner in the Treasury and Larry Summers.  See Citizens for Tax Justice, President's Framework Fails to Raise Revenue (pointing out that there is no reason not to fix the loopholes in corporate tax to help address the deficit without having to lower corporate rates, and noting that although Obama at least called for making his rate reduction framework for so-called corporate tax reform revenue neutral, his plan fails to raise about a trillion dollars to make up for the corporate taxes that it gives up).  As CTJ notes, many organizations have called for the opposite--to raise revenues from corporations that have been paying very little in taxes, especially since the 2003 Bush "reforms" that granted most of the items on corporations' wish list for tax cuts.

Last year, 250 organizations, including organizations from every state in the U.S., joined us in urging Congress to enact a corporate tax reform that raises revenue. These organizations believe that it’s outrageous that Congress is debating cuts in public services like Medicare and Medicaid to address an alleged budget crisis and yet no attempt will be made to raise more revenue from profitable corporations.  Id.

Nonetheless, most candidates call for making the corporate income tax territorial and thus making it even more lucrative for US multinationals to move more of their corporate businesses (and jobs) abroad.  Most call for reducing the rates on corporations to a historically unprecedentedly low level--making it even more likely that the US trade deficit and corresponding budget deficit will continue to grow, even at a time when these self-nominated fiscal "conservatives" are claiming that the current deficit requires monumental sacrifices from ordinary people in the way of reduced medical care and old age security (the effort to cut back drastically on the benefits payable under  Medicare and Social Security).  Most treat the owners of corporate equity as though they were some kind of revered engine of growth, when in fact they are usually merely rich people who are interested in reaping as high a profit as possible from sales of corporate shares but very little interested in entrepreneurship, and as likely to engage in quick trades (the profits of which go into their pockets and not into the working capital of the corproations) as to hold long-term based on analysis of corporate business fundamentals.  Most don't accompany their form of integration with eliminating the category distinction between capital gains and ordinary income. 

Most  "corporate reform" plans call for continuing most of the absurd provisions that have larded the pockets of corporate management over the last few decades, such as

• accelerated depreciation and expensing (including all the depletion allowances for the heavily subsidized oil and gas extractive industry, even while it complains about the petty little incentives put in place in recent years for environmentally sound energy generation--accelerated expensing creates "phantom" deductions that reduce taxable income well below economic profits), and
• the  "research & development" credit, which was first enacted as a stimulus that was to be in place for a very short period of time but has been extended in fits--even retroactively for several years--as corporations demand making every single "stimulus" tax break they get permanent. 

(As readers of this blog know, I see little merit in the R&D credit.  Corporations can already deduct way too much "phantom" expenses--excess interest expense that allows them to operate with too much leverage, facilitating equity firm buyouts by leveraging up the purchased entity to pay off the equity strippers.  Further, as with so many of the GOP's favorite programs of tax subsidies for multinationals and the upper crust, it hasn't bothered to conduct studies to see if the R&D credit indeed results in more research done in this country.  Clearly, a retroactively enacted credit does NOT incentivize research.  Probably the times it's been enacted without being retroactive haven't either--it takes extensive labs and equipment to do research, and such labs and equipment have to be purchased far ahead of when they pay off.  Most of the R&D that the credit supports is likely to be of the "tweak-a-patent" variety that seeks merely to find a way to extend a monopoly profit from a particular profit--something the patent law should frown upon.)

So the drumbeat for lower corporate taxes--at a time when corporations are paying less as a proportion of GDP than they did in the time of our most sustained economic growth--continues unabated from the right joined by only slightly less enthousiastic accompaniment at the White House and think tanks like the Tax Policy Institute.

Meanwhile, the Supreme Court, having anointed corporations with a kind of personhood that lets them intervene in elections even though they have no vote, has taken for consideration a case that challenges the rights of individuals to hold corporations accountable as people are held accountable for human rights violations.  The case is Kiobel v Royal Dutch Petroleum (2d Cir. 2010), in which Nigerian plaintiffs seek to hold Royal Dutch/Shell liable for violating the Alien Tort Statute (“ATS”), 28 U.S.C. § 1350, which upholds international norms of human rights. The Second Circuit held that US courts cannot entertain such suits, holding that jurisdiction under the Alien Tort Statute against corporations requires an international norm approving sanctioning corporations for torts and that requires more than the mere fact that most countries treat corporations under their domestic law as capable of committing torts.   The court in the Second Circuit opinion makes a point much like economists tend to make about taxes--essentially implying that "only people commit heinous acts". 

From the beginning, however, the principle of individual liability for violations of international law has been limited to natural persons—not “juridical” persons such as corporations—because the moral responsibility for a crime so heinous and unbounded as to rise to the level of an “international crime” has rested solely with the individual men and women who have perpetrated it.  Second Circuit in Riobel.

 

 

While people are the "deciders" of corporate decisions, nonetheless the corporate form permits corporations to engage in conduct that individuals alone cannot engage in--from amassing huge resources to carrying out massive enterprises that pollute and steal human dignity.  To ignore that reality of corporate wrongdoing, especially in an age that has anointed corporate personhood with rights that seem furthest from ones that corporate entities should be permitted to enjoy, would be folly. 

For further discussion of the implications of the case, see Peter Weiss, Should corporations have more leeway to kill than people do?, New York Times (Feb. 24, 2012).

Suffice it to say that this case raises the specter of full-blown corporatism overtaking the entire U.S. economic and social system.  If the Supreme Court accompanies its "personhood for free speech/election intervention rights" with "not people so can't be touched for human rights violations", there will be even fewer ways to hold multinationals accountable, and they will forge even stronger relationships with autocratic dictators who treat their citizens like slaves and their environments like garbage pits.   Meanwhile corporations will continue to intervene in our elections at will (usually the will of their ultra-wealthy managerial class), using the extraordinary power of the resources at their command.  

We will all be the worse for any decision that would allow multinationals to expand their quasi-sovereign rights without saddling them with a strong obligation to comply with international norms respecting human rights.  Rights without obligations are invitations to corruption.

Romney's association with corporate tax shelter schemes

Bloomberg's Jesse Drucker has been doing some research into presidential candidate Mitt Romney and come up with some interesting information--at least for those of us who find corporate involvement in aggressive tax shelter phantom loss generating schemes a worrisome problem.  See Drucker, Romney as Audit Chair Saw Marriott Son of Boss Shelter Defy IRS, Bloomberg.com (Feb. 22, 2012).

Mitt Romney has been on the board of Marriott INternational Inc. on and off since 1993, and has served as chair of the audit committee for 6 years.  During that period, the company has used aggressive tax avoidance deals, including (i) the "Son of BOSS" tax shelter structure for generating artificial losses that could be used to offset gains from other sources, thus reducing taxable income and tax liabilities and (ii)  shifting profits to a Luxembourg shell company.  Marriott's effective tax rate has been as low as 6.8%, even though the federal statutory rate for corporations is 35%.

These factoids demonstrate two things.

First, as the Bloomberg.com article points out, Romney claims that his business experience is the primary reason that Americans should want to see him in the White House.  Contrary to his claim, it seems to me that the more we hear about his business experience the less I think he is suited to the White House. 

At Bain Capital, as at most private equity firms, Romney was willing to reap millions from taking a stable, operating company and turning it into a bankrupt by leveraging it up, firing employees, and otherwise destroying the stable business.  Yeah, sometimes the "creative destruction" worked and the company exited making profits.  But often it didn't, and the company wasn't a loser until Bain Capital got hold of it.  Further, Romney doesn't appear to have developed much of a sense of corporate social responsibility through his "earning" of multi-millions taxed at low rate through Bain Capital.  So he didn't see anything amiss in the very aggressive tax planning  engaged in by Marriott when he served as a Marriott director with oversight responsibility--of which he certainly knew, as head of the audit committee.  Even John McCain was aghast at Marriott's wanton use of tax shelters, when he complained about the federal tax credits Marriott claimed in an accidental loophole in the law on synthetic fuels.  As the piece notes, McCain called Marriott's use of this loophole to claim the credits an "expensive hoax" or "scam." 

 Do we want as president a man who thinks it is okay for taxpayers to gin up artificial losses to reduce their tax liability or use provisions of the Code in ways that clearly go against their underlying purpose to get an unintended subsidy from the Federal government?  I don't think so.  Such a person would likely be quite willing to see further cuts to the corporate taxes and taxes on the wealthy, no matter what that does to the federal fisc.  And Romney has certainly demonstrated his willingness to cut taxes even in the face of deficit claims that are being used to demand privatization of Social Security and cuts to Medicare.  (See  his plan for a 25% corporate rate, a zero percent estate tax, a lower top rate on earned income for the wealthy, and other items.) 

I want a president who considers that every taxpayer has an obligation to the integrity of the system, and who would not look kindly on businesses that engage in aggressive tax minimization transactions that don't hold up to the laugh test.

Second, major corporations aren't paying enough--much less too much --in taxes these days.  We have a statutory rate of 35%, but most very profitable corporations end up paying very little in taxes, through a combination of excessive loopholes built into the Code by their accommodating buddies in Congress (quid pro quo for campaign contributions or, after Citizens United, "independent" super-PAC donations?) and outright tax sheltering through aggressive customized transactions intended to generate tax benefits. 

Why in the world would anybody in his/her right mind propose cutting the corporate tax rate in this context of minimal tax payments by corporations?  Makes no sense at all.  Get rid of the loopholes.  Bear down with enforcement clout on the phony tax-loss shelters.  But don't cut the corporate tax rate.  There's absolutely no substance to the constant whine we hear from corporate lobbyists that the corporate tax code is "too complex" (my JD students in corporate tax are quite capable of understanding it, so I am sure Corporate Tax Counsel are, too); or that the corporate tax code is "anticompetitive" (Marriott is making a fine rate of return); or that the corporate tax code is "preventing investments" (corporations have lots of cash floating around--if they want to make expansion investments, they can do so already).

Tax policy should be based on reasonable considerations of efficiency and simplicity, not exorbitant and unfounded claims of how the tax code is wrecking business.  But even more importantly, tax policy should be based on fairness considerations.  And Romney hasn't shown much understanding of what fairness is, or how to make the tax code fairer rather than even more of a government program for redistribution upwards.

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.

"

Campaigns highlight the Sub S payroll tax avoidance problem

Back when John Edwards was trying to get the presidential nod instead of Obama, some attention got focused on the way Edwards was able to avoid certain payroll taxes by having his compensation as a lawyer funneled through his professional service corporation, a Subchapter S corporation for US federal income tax purposes.  Doesn't make sense, when you really think about it, that a lawyer's income for services would magically be transformed when a corporation, the only meaningful services of which are performed by that lawyer, is paid the compensation on his behalf and then pays the lawyer a (smaller) salary plus a purported "dividend".  But that was the gimmick.

Now, another campaign has again brought attention to the issue. Newt Gingrich similarly avoided taxes on his compensation income by using an S Corp format.

And finally maybe Congress will act? 

Pete Stark, D-CA, has introduced a bill to undo the gimmick.  Similar to bills introduced in prior Congresses, the bill would treat dividend payments as payments subject to the Medicare tax for principal shareholders of a small S Corp whose principal assets consist of the skills and reputations of three or fewer shareholders.  See the January 31, 2012 Stark e-Alert, announcing the introduction of H.R. 3840, the Narrowing exceptions for Withholding Taxes (NEWT) Act:

I introduced the Narrowing Exceptions for Withholding Taxes (NEWT) Act (H.R. 3840) yesterday, which would close a tax loophole that allows self-employed individuals -- typically lobbyists, lawyers and investment managers -- to avoid paying Medicare payroll taxes by routing earnings through an S corporation and classifying them as profits or dividends, instead of as wages.

Teachers, firefighters, and nurses can't structure their income to avoid payroll taxes. ...

Former Speaker Newt Gingrich availed himself of this loophole on his 2010 tax returns. He reported [only] $444,327 of his earnings as wages ....  and avoided paying an estimated $69,000 in Medicare taxes.

See also Stark Introduction Statement, which points out in simple language the rationale for the bill.

Medicare payroll taxes are imposed at a rate of 2.9 percent on all wage income. Under present law, certain self-employed individuals try to avoid paying Medicare payroll taxes on a portion of their wage income by routing it through an S corporation. In general, S corporations do not pay income tax. Instead, the income gains and losses of an S corporation “flow through” to shareholders’ individual tax returns. By law, S corporations can have no more than 100 owners; but they are typically far smaller, with the GAO estimating that 94 percent of S corporations have 3 or fewer owners.

A shareholder of an S corporation who performs services as an employee is subject to Social Security and Medicare payroll taxes on his or her wage income, but generally is not subject to payroll taxes on amounts that are not wages (such as dividends and profits). Nevertheless, an S corporation employee-shareholder is subject to payroll taxes on the amount of his or her reasonable compensation, even though the amount may have been characterized as other than wage income. Where an employee-shareholder is entitled to a significant amount of S corporation income, there may be a temptation under present law to understate what portion of the income is compensation for services (and subject to payroll taxes) and correspondingly increase the amount treated as a dividend or profit.

 The provision would produce about $11.2 billion more in taxes annually, according to the JCT estimate. 

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.

Gingrich's 2010 Tax Return: what it does (and doesn't) tell us

In last Thursday's debate, Newt Gingrich released his 2010 Gingrich Foundation tax return  and the Gingrich Joint Tax return.  See Kim Dixon & Marcus Stern, Gingrich tax return out, but much remains unseen, Reuters (Jan. 20, 2012); Paul West, Gingrich tax return details sources of income, alimony payment, L.A. Times (Jan. 19, 2012); Jon Ward, Newt Gingrich Releases His Tax Returns, Huffington Post (Jan. 19, 2012; updated Jan. 20, 2012) (the Gingrich press release, with links to both returns, is also accessible from a link at bottom of this brief article).

The private foundation's return lists Callista Gingrich (presumably in her role as President) as having custody of the books at the Foundation's address in Washington.  It lists Newt Gingrich as the only manager who contributed more than 2% of the contributions received during the year, and another form (Schedule B) lists Gingrich Holdings as the contributor of $152,609.  Callista Gingrich is listed as the president (with zero compensation) and Newt Gingrich as a board member (with no compensation).  A treasurer is listed with $1800 of compensation, a secretary with no compensation, and two other uncompensated board memberes.  The Foundation supported the following organizations with a total of $120,000: Mount Vernon Association, Basilica of the National Shrine, Shiloh Point Elementary in Cumming GA, Amerivan Museum of Natural History in New York, The Washington Opera, The Atlanta Ballet, A Learning Foundation inAtlanta, the Arthritis Foundation, Mount Paran Christian School in Kennesaw GA, the Walker School in Marietta GA, Luther College in Decorah IA, Susan Chambers Dance in Sugar Hill GA, Breast Cancer Research in New York, and Alzheimer's Association in Washington.

The joint tax return shows income in 2010 of more than $3 million, with about $450,000 in  compensation income and about $2.5 million of Schedule E  income through his S corporations Gingrich Holdings inc  and Lubbers Agency Inc. and partnerships Draper Fisher Jurvetson Fund VIII and FLC XXXII Partnership LP.  (He apparently restructured these businesses before entering into the Republican nomination contest, perhaps foreseeing better than Mitt Romney did that voters might react to the very idea of a giant holding company through which one receives one wealth.)   The Salaries and Wages report shows that $450,000 in compensation income arising as follows:  252,500 in wages to Newt from Gingrich Holdings, Inc., and to Callista 5918 from National Shrine and 191,827 from Gingrich Productions, Inc.   According to the Reuters story, Gingrich's earlier disclosure said the Gingrich Holding income was mostly a distributive share (the tax term for a pass-through payment from an entity taxed as a partnership) from Gingrich Productions.  His Schedule SE shows only 847 of self-employment taxes in connection with the various schedule C, K-1 etc. income, while Callista's shows 268.

Also revealed on the tax return are the following: $41,625 in speaking and board of director fees (showed as business income on line 12), $6,853 in rental income, $26,655 in taxable interest, $11,892 in ordinary dividends (not eligible for the 15% net capital gain rate), $5,990 in qualified dividends (eligible for the 15% net capital gain rate), $4,184 in net short-term capital gains and $32,133 net long term capital losses and $33,124 of taxable refunds, credits or offsets for state and local income taxes  The couple claimed a total itemized deduction of $215,095.  They made $81,133 in contributions to various charities and  paid $122,844 in state and local income taxes, $11,656 in real property taxes, and $2,422 in personal property taxes, as well as 8505 in tax preparation fees. They also enjoyed $10,754 of tax-exempt interest (not part of their taxable income).  The Gingrich couple paid almost a million in taxes, giving them an effective tax rate on the 3.1 million of income of around 31%.  

• Re those net short term capital gains:  Gingrich bought and sold shares in Campbell Soup in 2010 (losing 74), bought shares in Celgene Corp in 2009 and sold them in 2010 (making 2591), sold in 2010 shares in American Funds Capital bought at various times, for a 346 gain, and similarly sold shares in Nuveen High Yield fo a 1225 gain.
• Re those net long term capital losses:  Gingrich sold shares bought at various times of Martek Bioscience, American Funds capital, Ishares Trust s&P smallcap 600 and Ishares Trust Russell 1000 Value, which combined with the long-term totals from Schedule D-1 of 1.023 million (from sales of various funds and closing out of $600,000 worth of CDs) yielded an aggregate of 1.257 million with a claimed loss of $35,636.  Using his capital gain distribution from Schedule D-1 of 1018, that left a net LTCL of 32,541.

There are several things worth noting about Gingrich's release of the couple's tax information.

1) this is only a single year's return--2010.  George Romney, Mitt's father, famously began the more transparent information sharing about presidential candidates by releasing 12 years' of his own tax returns.  Gingrich should follow that example, even if Mitt isn't sure he will.  Multi-year returns are necessary for tax experts to even begin to pierce the veil of tax secrecy by seeing trends and patterns in types of income.  One year of returns tells you very little.  Gingrich should release returns back to his volatile period in Congress and his scuffle with the ethics inquiry, and should release returns relating to the period when he earned what he calls "consulting" fees based on his being a "historian" for Freddie Mac (see item 3). 

2) we don't have tax returns for Gingrich Holdings or Gingrich Productions, or even the informative financial statements that publicly traded companies are required to provide.   Those privately held corporations are therefore able to function as "blockers" to maintain a good deal of secrecy about Gingrich's own income even with the release of his return.   Back before Nixon, corporate tax returns were public information and were not kept secret by the Service.  We should go back to that, because corporations, whether publicly traded or held privately, are benefitting from the public trust and the state's willingness to allow them to form.  There seems to be little justification for maintaining any business entity returns as confidential documents, with some redaction allowed to maintain trade secrets.  But until we do, we won't know anything more than what Gingrich tells us (or reporters can get "deep throat" sources to divulge).

3) Gingrich's return labels him a "consultant" but we know very little about his client list or his activities for his clients.  We know he worked for Freddie Mac: he claims he wasn't a lobbyist but that is a hard one to swallow whole. It is difficult to imagine Freddie Mac paying the consummate politician as though he were a mere historian doing historical research but it is very easy to imagine Freddie Mac paying a well-connected lobbyist, shoes that Gingrich's role as House Speaker ensures that he would have fit into easily.  We know that he worked as a "consultant" during the passage of the Medicare Part D prescription drug provision.  Again, that sounds more like lobbying than "consulting".    The problem is that Washington has written weasel rules for lawmakers who "consult" so that they can claim they are not "technically" a lobbyist, as Gingrich is doing.  But voters should want to see what kinds of reports he provided on the Medicare and Freddie Mac issues, as Romney is insisting.  Otherwise, he is just hiding behind the very thin curtain of the fuzzy line between obvious lobbying and "not required to register-wink/wink  lobbying".

4) Congressmen pay themselves nice little pensions even while the GOP is making an ideology out of its desire to cut private pension benefits for unionized workers (in the name of 'saving' business but really in the name of passing along even higher profits to managers and owners) and its intention of "reforming" Social Security (meaning leaving beneficiaries who depend on this system that they've paid into all their lives with less money than they should be able to have).  Gingrich's return reports more than $76,000 in 2010 from his Congressional pension.