Once again, Congress has demonstrated that it notices mostly what affects rich people and can't quite identify with ordinary Americans. And that it will not pass either spending laws or tax laws (which include a wealth of spending laws through the tax expenditure mechanism) that equitably deal with the misallocation of resources between the wealthy few and the rest of us. Tax policies operate for the high and mighty: once again, inequality is the real characteristic that matters.
The sequestration--a response to the GOP-led desire for austerity, shrinking government, and otherwise ensuring that rich people and major businesses don't have to pay much in taxes--was ridiculous from the outset because it cut programs across the board, at a time of significant unemployment, without prioritizing programs that support the safety net or ensure education (like Head Start) or protect critical infrastructure or other needs. The only reasons it made some sense was that (1) it would finally lead to some cuts in our engorged military spending and (2) it should have permitted Congress to develop enough spine to refuse to make the Bush tax cuts permanent for anybody but those ordinary Americans making $100,000 or less.
But we all know that latter wise move didn't happen. Congress made the ridiculous-when-they-were-enacted and more-ridiculous-still-when-they-were-made-permanent Bush tax cuts permanent for the vast majority of Americans, leaving only a smattering of wealthy Americans subject to imperceptibly higher taxes. Businesses got another extension of the equally wasteful Bush tax cuts enacted in the Bush Administration's giveaway mode--the R&D credit (often enacted retroactively like this extension was, whose ostensible purpose is to incentivize US-based research, which a retroactive credit by definition cannot do), the active financing exception for the Banksters that got us into the Great Recession to start with, and all the rest.
So we ended up with across-the-board cuts that could not reasonably be expected to work out well for the economy--especially when Keynesian theory (the only kind of economic theory that hasn't been roundly disproven by actual facts) suggested that we should be continuing to increase government spending to make up for the gaps in the economy from MNE hoarding of their cash offshore and consumers drawing back because of the steady decline of their spending power from job cuts and real salary decreases. IN fact, these damaging cuts were never actually expected to go into effect--Dems hoped (rather naively) that the sequester would force Republicans to support more reasonable tax increases. Repubs hoped (rather reasonably, in retrospect) that they could blame any problems on the Dems and claim credit for protecting ordinary Americans by not increasing taxes, and of course they've been claiming for the last months that any complaints about the problematic impact of the sequestration cuts are "exaggerated," and "they have relished the success of forcing visible spending cuts on a Democratic administration." Alex Pareene, Senate fixes the (part of the) sequesteration (that affects rich people)!, Salon.com (Apr. 26, 2013).
Few in Congress were ever willing to stop the gravy trains for the rich--carried interest for private equity, publicly traded "master limited partnerships" for oil and gas pipeline companies that are excepted from the ordinary treatment of publicly traded partnerships conducting businesses as corporations subject to an entity level tax; so many tax expenditures that favor Big Business that very few companies actually pay any tax on their huge profits; the assignment of income benefit of a stuck in the last century transfer pricing tax system that allows some of today's biggest companies (Google, Microsoft, etc.) to transfer their indispensable intangible properties offshore to avoid US taxation of profits attributable to the support provided by this country, while nonetheless retaining 100% ownership and control; and of course the biggest boondoggle of them all, the preferential rate for capital gains coupled with an absurdly lenient estate tax, that together allow the rich to live richly during their lifetimes and then pass their estates with negligible tax cost and substantial tax benefits (from the "step up in basis at death" that, for example, allows heirs of master limited partnership interests to restart the perpetual tax-free profits machine).
But hark, what is this? The reductions caused by the sequester affected the ease with which rich people can get on a plane and fly to their business and vacation destinations! Such suffering. So incomprehensible how we could allow it. The Senate swiftly moves into action--this was something they hadn't anticipated--that the sequester could actually bother some of their own class. Suddenly, They acted. In just a short time last night, with unanimous consent, the Senate voted to "let the FAA transfer some money from the Transportation Department to pay air traffic controllers." See Alex Pareene, Senate fixes the (part of the) sequesteration (that affects rich people)!, Salon.com (Apr. 26, 2013). The House was expected to act today.
At the beginning of the sequester, most of the Republican politicians who had pressed for even much larger cuts, insisting there was much dross in the federal government, pooh-poohed any complaints that the sequester was leading to real pain for ordinary Americans. That story changes only when the rich feel any squeeze at all. As Pareene implies in his story, the media is too much of the time an unquestioning go-along in this conning of the American people:
the story of Congress hurriedly making sure the well-off minority of Americans who fly regularly don’t get briefly inconvenienced — while ignoring the costs of brutal cuts on programs for low-income Americans facing housing or hunger crises — is treated as a wonderful and encouraging display of bipartisanship.
Max Baucus announced to his fellow Senators today that he will not seek re-election to the Senate in 2014. He has been the top Democrat on the Finance Committee since 2001. See Senate Finance Chairman Max Baucus Won't Run Again in 2014, Bloomberg.net (Apr. 23, 2013).
As someone who thinks that Baucus has been a hindrance to progressive reform of the tax code and financial regulation, I must admit that I do not find his retirement a loss. His chairmanship of the Finance Committee has been marked by a failure to understand the most important issues related to federal income and estate taxation and by adoption of positions that are too favorable to Big Money and Big Business (especially Big Banks). He has been tone-deaf, in other words, to the class warfare waged by the right against the middle class and the resulting growth in inequality in the country that has been worsened by the current tax provisions that support redistribution upwards to the very wealthiest owners of financial assets and businesses. In particular, he has failed to use his position to push for reasonable reform of the capital gains preference and the wealth-favoring versions of the estate tax passed by the Bush administration. He has refused to consider a reasonable financial transactions tax. In fact, Baucus was too willing to go along with the initial passage of the Bush tax agenda in 2001-2004, and he did nothing to ensure that the Bush tax cuts would fade into oblivion on the sunset date. In fact, he worked to make permanent almost all the Bush tax cuts and supported the corporate-friendly "extension" of the broad menu of corporate tax cut provisions (including a retroactive extension of the R&D credit, which cannot possibly serve the purpose it is claimed to serve when enacted retroactively). The tradeoff provided only token items on the progressive menu.
Of course, the Republicans will cast Baucus' choice to retire as a reflection of problems for Democrats. See the Bloomberg News article cited above, in which Rob Collins of the National Republican Senatorial Committee says as much. I suspect that Baucus knew he would be targeted by liberal Democrats for his failure to vote for gun control and for his failure to support progressive tax policies.
That said, he remains as Finance Chair through 2014, and he has said he intends to produce a rewrite of the tax code. He is the wrong person to do that, and so it is important that other Democrats relegate him to a position of less influence in order to come up with more progressive changes than he would support.
Is Ron Wyden (who would become the most senior member of the Finance Committee when Baucus leaves) capable of carrying the banner of progressivism? His emphasis on "tax simplification" is worrisome, because it suggests that he does not understand the relationship between complexity in the tax code and sophistication of taxpayers to whom the complexity applies. The main reasons for complexity are two-fold: (i) existing tax rules are expanded to cover abusive schemes developed by sophisticated tax advisers (attorneys and accountants), and (ii) existing tax rules are riddled with exceptions to provide subsidies (tax expenditures) favoring industries represented by heavy lobbying. To the extent that tax simplification reduces the anti-abuse rules needed to prevent various tax scams and manipulation, simplication is a policy mistake. To the extent that simplication results in changes to the tax expenditures, it can be useful but it is often also mistaken, because the easiest way to "simplify" such rules is to expand them to cover even more of heavily lobbied-for industries. Wyden needs to expand his understanding of the relationship between simplification as a goal and fair allocation of resources to the extent that resource allocation is handled through tax expenditures in the Code, reasonable rules to ensure that the most sophisticated taxpayers pay their fair share, and fair distribution of the tax burden. Baucus did not serve the publci well in regards to these issues. Let's hope that Wyden does better.
Obama's budget isn't even released yet and he's already caving to the "let's make the rich richer and forget the rest" crowd. That crowd that claims that we need a capital gains preference so the rich can gather all that extra money to purportedly create jobs. The crowd, that is, that fails to acknowledge that the rich tend to take all that extra money to Singapore, the Bahamas, or the Cayman Islands or hide it away in some Swiss bank, none of which does any good for our economy compared to what the government investing that money in infrastructure projects would do. See, e.g., David Leigh, Leaks reveal secrets of the rich who hide cash offshore, The Guardian (Apr. 3, 2013); The corporatist crowd that refuses to admit the empirical evidence that says government investment is as important as private investment in creating jobs. It is the government that makes the market go round. And government money--our money--spent for schools, bridges, safer communities provides jobs and improves lives. Without that government investment, there is no market, just barter.
President Obama seems to have forgotten that he was elected. as a Democrat, over the Republican candidate. Obama has no business proposing cuts to Social Security benefits as part of a purported deficit reduction package. Social Security is not a deficit driver: it is a social insurance program earned by those who receive it by payments over lifetimes of hard work. It is the only stable retirement income most have. The average Social Security beneficiary receives just short of $14,000 a year from Social Security--that's just 125% of the poverty line, which of course is defined so low as to guarantee that anyone living at or below that line is indeed in abject poverty and unable to move out of it.
The Republican Party has argued for cuts to Social Security benefits for decades, using whatever crisis of the momen they can engender to argue that we can't afford the system in place. They've invented the perjorative term "entitlement" to imply that those who rely on social insurance because of disabilities or old age are just 'freeloaders' who are mooching off others. Not so, since Social Security is an earned benefit program like insurance: workers pay premiums throughout their working life, and then once they reach retirement age they may draw benefits.
There are a number of reasons for the amount of debt that the US government has--most of them related to the four-decade-long drive by the Republican Party to protect the wealthy and the corporations they own from much of a tax burden and to allow the accumulation of immense wealth by a few at the top of the income distribution. Outsize military expenditures driven by Bush's preemptive wars undertaken at the same time that the Bush Administration pushed through tax cuts that favored the rich are of course a big problem. The Bush tax cuts threw us from surplus to deficit and we haven't gotten beyond them yet. The almost complete capture of the financial regulatory agencies by Wall Street, and the resulting financial crisis driven by casino capitalism spiked with the heady bubbles of derivative inflation is of course another part of the problem, and we haven't gotten beyond that yet, as Big Banks still exercise far too much power over their own regulation, proven by the LIBOR scandal that demonstrated their ability to manipulate the purportedly objective market rate to suit their profit machines.
But Social Security is not one of those drivers of the debt. And the debt is not so outsize that it merits sacrificing the most vulnerable amongst us to mollify the wealthy who merely want to avoid paying their fair share of the revenues needed to get rail service up to snuff, bridges safe, and public schools owned by the public again.
The average Social Security benefit is just under $14,000: the use of chained CPI will result in a loss to the average recipient of "$4,631 in Social Security benefits by age 75, $13,910 by age 85; and $28,004 by age 95" (from release by Social Security Works, based on “Inflation Indexation in Major Federal Benefit Programs: Impact of the Chained CPI,” Alison Shelton, AARP Public Policy Institute, March 2013.).
Obama has no business facilitating the gluttony of the rich. He should drop the proposal to use “chained CPI” that will result in a cut benefits for Social Security recipients.
It seems that billionaires think they are entitled to it all and think they should be able to run their speculative games without paying much of anything at all in taxes to the government they depend on. And none of this is good for the economy or good for the taxpayers not in "the 1%".
Case in point--John Paulson, the notorious hedge fund manager who got a CDO built to his desires with a bunch of iffy subprime mortgages and then took the short side of the bet, making a fortune off the bet against subprimes in the mortgage crashes underlying the 2007-8 Great Recession. See, e.g., Zuckerman, Trader Made Billions on Subprime, Wall St. J. (Jan. 15, 2008).
What has Paulson done? He established a new "reinsurance company" in Bermuda in April, that turned around in June and put the money invested in it back into Paulson's hedge funds in New York, as a portfolio of insurance "reserves" to be held to pay off insurance risks that go bad. The result is tax deferment for Paulson and other executives of his hedge fund along with recharacterization of ordinary compensation income as preferentially taxed capital gains.
For a discussion of the hedge fund reinsurer gambit, see , e.g., any of the following. The story at Bloomberg has reinvigorated media attention to this issue.
Barile notes that these hedge funds are using reinsurance premiums and investing in a very aggressive way, compared to traditional reinsurers". This aggressive position produces a downside if there are low investment returns, especially if there are catastrophes for which they have to pay claims when their investment strategies have produced losses. He says that "it remains to be seen" whether hedge-fund reinsurers are in it for the long haul, since they have a shorter time frame on making greater returns on their money.
Looking at this as a global concern, Baker ultimately suggests that the Basle Capital Accord rules should be extended to hedge fund reinsurer operations, "Another area in which the BIS should take a leadership position," he says, "is the role in which reinsurance firms play in hedge fund operations. The tax implications of hedge funds using reinsurance firms in their funds for tax advantages points to the need for more government regulation of this activity."
He describes the basic problem as follows: "wealthy individuals invest in private placement offerings of offshore reinsurance companies. These companies, many headquartered in Bermuda, buy insurance policies written by name-brand insurers...and "may then invest its stock issue returns in a hedge fund. ...[That reinsurer] pays no taxes on the trading profits until it sells the fund shares and then the reinsurer is taxed at a lower capital gains tax. The tax savings are passed on to the individual investor.
He goes on to say that "The problem ... is that insurers are exempt from registering as investment companies....These reinsurers do not have to make annual distribution of profits as mutual funds do and they are not taxed by the Internal Revenue Service as investment vehicles. ...In short, the activity ... is a method for wealthy investors to reduce their tax burden as a result of a tax loophole. Since these insurance companies are mixing insurance business with investment business, they need more supervision.
This is especially true when hedge funds are involved. "[H]edge funds work with reinsurers to reduce tax liabilities for their wealthy clients. ...U.S. hedge fund managers and investors form a tax-advantaged reinsurance company offshore in...Bermuda, which has no corporate income tax. The Bermuda-based reinsurer sends investment assets to the hedge fund to invest. Investors return to the United States with shares of the reinsurer and pay no taxes until the company goes public. At that time, investors [and managers] sell their shares in the reinsurer company and are taxed at a lower capital gains rate.
These schemes are worrisome from both tax and insurer regulatory perspectives. "Aside from the tax loophole problem, the real issue in these cases is the added underwriting risk incurred in the process. ... [Hedge funds acting as reinsurance companies] have insufficient insurance expertise.... Much of this activity has stemmed from financial engineering and deal making of the 1990s. ... [W]ithout the bailout of LTCM [Long-term Capital Management hedge fund] by national bank regulatory authorities, many banks and reinsurers might have collapsed as well."
So why do it and how does the hedge fund reinsurer gambit work? Remember that these hedge fund execs get a ridiculous amount in compensation in the form of a "fee" (usually 2% of assets under management) and a "carry" (usually 20% of the profits). (The fee and carry are often represented as 2 and 20, but can be much higher for some firms with status, rising to as much as 5 and 50.) Without more, hedge fund managers don't get as much benefit from the claimed treatment of a "profits" partner as private equity fund managers do. Though the managers claim classification as "profits" partners whose taxation is based on their share of the partnership's gains and ordinary income and not as payments of (ordinary) compensation, hedges mainly yield ordinary income so don't act directly as "converter" entities. Private equity fund managers also claim they are "profits" partners whose income should not be classed as compensation but as pass-through shares of the partnership items: in their case, most of the private equity fund's gains will be deferred anyway (for several years at least until the partnership sells the leveraged company) and they claim those deferred gains should be characterized as pass-throughs characterized by the partnership rather than being characterized as ordinary compensation income to them.
So for hedge fund managers, gaining deferment (of what is clearly in substance their compensation as managers) can achieve minimal current tax. If the money is cycled through an offshore corporation that pays no taxes, that's even better because it gets preferential rates as well. The deferrment is achieved by waiting to sell the stock, and the sale of the stock is reported as a capital gain. Thus what is really current compensation income is recharacterized, through the reinsurer "conduit" scam, as a deferred capital gain. So hedge fund and private equity managers ultimately both claim to get the best of all possible worlds--their wages from work are not currently taxed as wages at ordinary income rates, they pay no payroll taxes on their compensation, and their compensation is deferred and taxed at preferential capital gains rates.
This is so obviously unfair to the vast majority of ordinary taxpayers who pay taxes on their compensation income even before the end of the tax year through the withholding mechanism that Congress should step in with legislation. It seems hard to justify a "profits" interest in a partnership at all: it has been created by the "Wall Street Rule" that gains credence because big-money people claim it is correct. As usual, tax administration eventually mostly went along with it (Rev. Proc. 93-27) and a few court cases (Diamond, Hale) mostly treat the notion of a profits partner who pays no taxes on his compensation as reasonable. Congress could easily legislate away the profits interest and define partner in a partnership for tax purposes as someone who has made a genuine at-risk equity contribution of cash or property to the partnership. There really should be no such thing as a services partner with a "profits" interest who hasn't contributed up front for a capital interest. And all compensation shares to what are currently treated as profits partners could be treated as ordinary income --i.e., compensation currently subject to the income tax and to payroll (Social Security/Medicare) taxation.
This use of reinsurers by hedge funds is itself a tax dodge that has been around a decade or so. In 2007, the Senate Finance Committee held a hearing on Offshore Tax Issues: Reinsurance and Hedge Funds (S. Hrg. 110-875, Sept. 26, 2007) (179 pages). In his introduction, Baucus described insurance tax avoidance schemes as follows:
Insurance companies make a living by doing two things: they assess premiums based on the prediction of the likelihood of events against which they insure—that is called underwriting—and they also make money by investing the premiums that they collect until they have to pay out claims. If they are good at those two jobs, they make a profit.
Customers buy insurance from insurance companies to guard against the risk of fire, disaster, or some other calamity. In exchange for paying premiums, the customers shift some of their risk to the insurance companies. Insurance companies also buy insurance. Property and casualty insurance companies pay premiums to reinsurance companies in exchange for shifting some of their risk to the reinsurance company. Sometimes the reinsurance company is also the parent company of the property and casualty insurance company. In that case, the property and casualty insurance company shifts risk to their parent reinsurance company at something less than an arm’s length transaction.
Here is where the tax avoidance comes in. Some parent insurance companies set their headquarters in low-tax jurisdictions, like Bermuda. Subsidiary property and casualty insurance companies shift risk to the Bermuda parent. Because of Bermuda’s low tax burden, the Bermuda parent can get a greater after-tax return on their investment activities. As a result, subsidiary property and casualty insurance companies can charge lower premiums for their insurance. They get a competitive advantage over insurance companies doing business in jurisdictions that tax investments.
The second setting that we will examine today involves hedge funds. Foundations and other nonprofits are some of the largest investors in the world. The law requires a nonprofit investor that invests directly in hedge fund partnerships to pay the unrealized business income tax, otherwise known as UBIT. The policy behind the law is that tax-exempt entities should not be able to have an unfair advantage over taxpaying entities doing the same thing. To avoid UBIT, nonprofit investors sometimes invest in hedge funds through offshore entities incorporated in lowor no-tax jurisdictions, such as the Cayman Islands or Bermuda. These offshore entities are called blockers.
The third setting we will examine today is the compensation of hedge fund managers. Hedge fund managers receive fees from offshore blocker corporations used by nonprofits and foreign investors.Some hedge fund managers elect to defer their income, and deferring income means you pay taxes later, which is the same as a significanttax savings.
The IRS has already noted that offshore arrangements using reinsurers for hedge fund managers may be shams that are subject to challenge on audit. See Notice 2003-34 (indicating that "Treasury and the Internal Revenue Service have become aware of arrangements, described below, that are being used by taxpayers to defer recognition of ordinary income or to characterize ordinary income as a capital gain. The arrangements involve an investment in a purported insurance company that is organized offshore which invests in hedge funds or investments in which hedge funds typically invest.") Although the notice says that these purported insurers may be challenged as not insurers because they are not using their capital and efforts "primarily in earning income from the issuance of insurance", and although it states that such arrangements will be subject to close scrutiny that could result in the application of the PFIC rules (leading to current taxation), it has apparently not bothered to challenge any of the big hedge funds' reinsurer companies.
Again, why would they be subject to challenge? On the basis that they are not real reinsurers, since the low amount of reinsurance that many provide is the less risky part of the business and provides a buffer to the very high reserves that they retain, sometimes invested solely in a single promoter's hedge funds. And if they are not insurers, they are at the least "passive foreign investment companies" (PFICs) on which shareholders are subject to current taxation on profits. (Or perhaps the IRS might go further and recharacterize the arrangement as a sham , causing the hedge fund executive to have current ordinary compensation income.) In other words, there is good cause to think that for many of these, the tax haven corporation is acting as an offshore tax-avoidance pocketbook for the hedge fund executive, and not really as an insurer.
By the way, if you think these hedge fund managers who are making multi-millions and billions from managing other people's assets and hardly paying any U.S. taxes on those huge compensation payments are incredibly smart people who add to the economy's well-being and therefore merit that kind of out-sized pay or because of the returns they bring to people that then invest them in needed projects in the good ole US of A, you need to rethink that. Hedge funds typically pay out very poor returns, when all the expenses and profits to managers are taken into account.
Roughly speaking, if the typical fund manager worked for free, and if the investment firms didn’t charge, these masters of the universe would still have underperformed a balanced index since 2003, by roughly 2.5 per cent per year. Andrew Hallam, Think you're smarter than a hedge fund manager?, The Globe and Mail (Feb. 19, 2013) (emphasis added).
As usual, there was one of those all-knowing snippets in the news last Friday about what the direction in the stock market meant for the economy. Observing high corporate profits and buoyed by the idea that the GOP might not play its "just say no" game on the debt ceiling issue (at least for three months), Wall Street profits rose. See Wall Street at 5-year high, New York Times Business Insider, Jan 18, 2013.
Should we so easily consider Wall Street's well-being as a general sign of the well-being of the economy? Sometimes it seems that it marches to its own tune, while ordinary Americans continue to struggle. Foreclosures, job losses, offshoring, state actions to make union membership harder even when most Americans say union membership should be easier, huge inequalities in incomes and wealth and the social problems that go with those inequalities--there are all kinds of things going on that still don't bode well for ordinary Americans whose income is mostly made up of wages and not preferentially taxed capital gains and who don't own much of the financial assets of this country. Democratic egalitarianism isn't satisfied by such a system that consistently rewards one class of income over another based on what amounts to class distinctions--the kind of income that requires hard work is less rewarded than the kind of income that comes with a silver spoon at birth.
In other words, corporate giants making high profits doesn't provide much reassurance to ordinary guys about the stability of their own personal economies. High profits seem to translate to higher payouts to corporate managers/shareholders, but ordinary workers don't get more than a trickle of a share of those productivity gains.
Trickle down hasn't trickled much down the last few decades, if it ever did. Inequality is growing worse, and with that comes even more influence so that the politically powerful are the same as the economically powerful, yielding a return on lobbying that the Founders couldn't have imagined.
The unequal society that is today's United States has many problems that are at least partially caused by the high level of inequality--from teenage pregnancy to illiteracy rates to lifespan of the underclass to low birth weights to college graduate rates and many other indicators of a less than optimal quality of life. And those problems are exacerbated by the continuing blind faith of so many Washington politicians in the "degenerating discourse of mainstream economics" (the link is to a recent post on Yves Smith's Naked Capitalism by Philip Pilkington). We continue to look to Wall Street, and ignore the blight of wealth and income inequality that besets Main Street, because economists have fabricated a convenient theory of equilibrium that is most successful at hiding what is really going on from us while protecting the "free market" impulses of brute force capitalism.
Perhaps one of the positive results of the buoying of Wall Street is the general consumer attitude, which does result in more spending (still perhaps beyond one's means for much of the underclass)? That spending increases business demand, and could even result ultimately in more job creation, especially if accompanied by more federal spending rather than the counter-stimulus current focus on spending cuts and "balanced" budgets (in at least one sense an oxymoron for a federal government that can print its own money). But those jobs will require a better educated public than the US is likely to have. Again, partly due to the mainstream economic discourse, we are effectively debilitating public education through cuts in funding, exploitation of teachers, and privatization for the profit-making gains of education profiteers, rendering what was our greatest strength our greatest weakness.
But what really happens to most of the wealth created by those increases in corporate profits (and those demands for ever higher returns that the wealthy have come to view as their norm, accompanied by those terribly preferential tax rates that mean the wealthy get to keep more of their unearned wealth while ordinary workers cannot)? One suspects that much of that 'extra' wealth heads out of the country--to offshore tax havens, invested in yet another vacation home abroad, put into emerging markets, following the promise of higher returns without much regard for the impact on the US economy.
As long as we are facing the kind of inordinate reward to the uberwealthy and underreward to ordinary Americans, I find it hard to get excited about a five-year high on Wall Street. It's main effect is to drive home the need for Congress to develop better tax policy to at least use tax as a means to help, on the periphery, cut back on inequality. Eliminate the preferential taxation of capital gains and dividends and estates. Don't listen so much to the deficit scolds who want to decimate earned benefit programs like Medicare and Social Security. Invest more in physical infrastructure, particularly mass transit and environmentally sounder energy policies. Don't listen so much to the militarists (who are often in company with said deficit scolds) who want to continue allowing the military budget to engorge itself.
As most people who follow mergers, acquisitions and other mega transactions are likely aware, Michael Dell wants to take the company he founded private in a leveraged buyout. LBOs, of course, use the company's own assets as collateral for debt to purchase the company--one of the types of financial alchemy that has contributed to the last thirty years of corporate consolidations and elite wealth accumulation, both of which are problematic for sustainable economies and sustainable democracies.
Michael Dell has a particularly interesting "problem". Like most high-technology companies, Dell has avoided a lot of US tax by offshoring and claiming its profits in offshore tax havens rather than in the US. So it has more than $14 billion of highly liquid assets in offshore affiliates and not here. See Zahary Mider and Jesse Drucker, Dell Leveraged Buyout May Hinge on Cash Hoard Outside US, Bloomberg.com (Jan. 18, 2013).
We shouldn't allow that, but fixing it would require real corporate tax reform, not the stuff that commissions and Congress blather on about most of the time, like "lowering tax rates" and "simplifying the tax code", both of which are nonsensical when it comes to corporate multinationals who pay incredibly low effective tax rates already and who will use any "simplification" as just another inviation to exercise their sophisticated tax skills at manipulating the Code for their private tax advantage.
Congress of course hasn't had the gumption to take on Big IT for years. And under the Bush Administration, when Congress and the Treasury seemed to be motivated primarily by seeing how fast they could give away tax breaks to corporate business through the tax code, Congress enacted one of its most foolhardy tax expenditures that especially benefited corporations that had been "bad" tax citizens--the 2004 misnamed "American Jobs Creation Act" that allowed the bad companies that had offshored their profits to avoid tax the indulgence of bringing those untaxed profits home at what amounted to no or negative tax rates--the so-called "repatriation holiday" provision. As usual, the right-wing claimed that these corporate tax breaks would create jobs. They didn't (as shown by Bush's dismal job creation record, even before the onset of the great Recession). Instead, they were used for corporate stock buybacks and similar goodies for those investors who are mostly the wealthy upper-class who own most of the corporate assets. So the repatriation tax holiday exemplified the problems of the corporatist agenda and the way it exacerbates inequality, a kind of class warfare in bits and increments.
So we can expect a new onslaught of lobbying by companies like Dell for another extraordinarily wasteful "repatriation holiday." The lobbyists will claim that such corporate tax cuts are essential if we want big companies to keep creating jobs. But that's bunk. The evidence is in from the last repatriation holidy--it lined the pockets of the rich, as most of these corporate tax breaks have done and did not create jobs.
Obama and the Democrats in Congress should resist. Ordinary Americans should not bear the burden of ordinary income rates when the wealthy are taxed at preferential capital gains rates. And ordinary Americans surely shouldn't be called upon yet again to subsidize profit-making corporation's low-tax regimes through the cuts ordinary Americans will suffer to needed services.
As most readers know, the federal government is currently in what passes for negotiations between the President's Democratic Party Senate and House members and the GOP members that control the House.
The Tea Party and its right-wing rhetoric has of course had a radicalizing impact on the GOP positions, with members not only beholden to Grover Norquist and his anti-tax pledge (all strongly supported by various right-wing propaganda tanks like the Tax Foundation, Heritage, American Enterprise, and other organizations) but also to the anti-social welfare corporatists like David and Charles Koch, the Wal-Mart heirs, and other oligarchic families that constitute the top 1% of US income and wealth. As a result of these two strong influences, the GOP now stands for
tax-cuts-no-matter-what (and for tax cuts that benefit the wealthy most of all, as reflected in the rigid position in favor of the "carried interest" scam used by private equity profits partners and the extraordinarily preferential rate for capital gains and dividends included in the "net capital gain" definition under section 1(h)(11)); and
so-called "entitlement reforms", by which GOPers generally mean reduction in benefits and/or privatization of social welfare programs including Social Security, Medicare and Medicaid. (All of this is argued in terms of caring about "saving" the programs for the future, but the truth lies in the ways that the right proposes changes to the programs--not changes in costs related to profits taken out by Big Pharma and similar interests, but changes in benefits to ordinary Americans (such as raising the working age for eligibility even though those who work at the hardest labor need benefits earlier, not later, or lowering the cost-of-living-allowance adjustment to benefits for Medicare, even though seniors generally have a HIGHER cost of living because of their increased medical needs, including prescription drugs for diabetes, high blood pressure, and similar diseases particularly prevalent in the elderly population.)
The sum of those positions stands for a corporatist philosophy of benefitting the oligarchy and their business enterprises at the expense of everyday Americans who work for a living.
This is even more obvious when one looks at the same groups' position on government subsidies for business. The New York Times recently ran an article on this issue, noting that governments typically pay out a lot of money to support profits of companies and receive very little benefit in terms of tax revenues received and jobs created! Louise Story, As companies seek tax deals, governments pay high price, New York Times (Dec. 1, 2012).
Over at MauledAgain, one of my fellow tax professors Jim Maule has, like me, long criticized the hypocrisy of supporting tax breaks for private enterprise and opposing earned benefits programs for ordinary citizens and has repeatedly pointed out that the economics of the tax breaks for business don't work out for anybody but the owners and managers of the businesses. They certainly don't work for taxpayers of the jurisdiction providing them. As Jim notes:
These tax breaks are nothing more than welfare payments to private enterprise. Opponents of social welfare spending defend these outlays with as much passion as they bring to their attempts to end government assistance for individuals in need of help.James Maule, The Hidden Government Spending Game, MauledAgain (Dec. 5, 2012).
Jim rebuts one of the sham arguments for corporate subsidies--that they are just "keeping what belongs to them." Those special subsidies to one private enterprise sector cause ripple effects throughout the economy--higher taxes to the other taxpayers to make up for the lost revenues, or cuts in important programs that can no longer be sustained without the revenues. Prices and wages may change as well. Id.
What I want to focus on is the hypocrisy of claiming an interest in ending "entitlements" but applying that philosophy only to programs that are intended to help ordinary citizens and not to those intended to beef up the profits of corporations or their managers and owners. This is especially hypocritical for today's right-wing, since they almost universally claim to ascribe to the view that competition is good and that businesses should fail when they cannot successfully compete.
Look at two cases involving WalMart, a multinational enterprise that fights unionization of its employees (and supports right-to-work laws that weaken worker rights) in every way imaginable.
1) In Champlain Illinois (personal experience), WalMart had a huge spralling complex on one side of the road. It had gotten various tax support for the complex. It decided to move across the road and down the block into another jurisdiction. It got new tax subsidies there. It abandonned the old building and left whatever environmental pollution there. Who gained? Mostly WalMart managers and owners. Not the town and counties. Not the employees. Not even the consumers who shopped there, who had to deal with the blight of the abandonned building and the multiplication of vast expanses of ugly parking lots.
2) WalMart in Bangladesh. WalMart delivers cheap goods because it outsources its clothing and other manufacturing needs to impoverished countries where workers can be paid almost nothing and get almost no protections. In Bangladesh last month, a clothing factory burned, killing hundreds of workers. It was a WalMart supplier. See Natasha Leonard, WalMart's Connection to Bangladesh Clothing Factory, Salon.com (Nov. 26, 2012), where a critic noted that:
"Wal-Mart is supporting, is incentivizing, an industry strategy in Bangladesh: extreme low wages, non-existent regulation, brutal suppression of any attempt by workers to act collectively to improve wages and conditions." Id.
This was a modern-day repeat of the Triangle Shirt Factory incident in the early nineteenhundreds in New York City: workers unable to escape burned to death in factory rooms without fire exits and yet dangerously littered with lint and other debris that made their workplace a fire hazard.
These things are all tied together: hostility to workers rights to bargain collectively for some fair share of the productivity gains that their labor brings about, hostility to workers rights to a safe working place; hostitlity to workers rights to decent health care; hostility to ordinary people's rights to a sustainable lifestyle; and hostility to any effort to make the oligarchic uber-rich pay a fair share of the costs of the infrastructure to sustain an economy and a people.
Tax policy, spending policy, policy towards workers, policy towards the wealthy uber-rich--these are all closely intertwined and must be considered of a piece. Tax policy needs to establish reasonable levels of contributions based on a progressive income tax that takes into account the marginal utility of the dollar. Spending policy needs to set priorities based on something other than the lobbying by special corporate and oligarch interests for tax-and-spending provisions that privilege themselves. Policy towards labor rights and workplace safety need to recognize that the worker is disemplowered within the workplace and needs some legal support to provide a reasonable share of productivity gains--minimum wage laws, unionization laws, workers safety laws need to protect workers rights against the all-powerful employer.
If the right succeeds in continuing to pass right-to-work laws (Michigan's lame duck GOP is trying to do that right now), if the oligarchs succeed in capturing all the profits from workers' labor--there will be social unrest on the scale of the Great Depression. Everybody will suffer from that kind of austerity and class warfare policy. Broad based economic growth that comes from workers sharing in the profits of their industry and those at the top not getting an unreasonable share of the productivity gains is better for all.
Some in the GOP have realized what progressives have been saying all along--that by winning the election, President Obama is in a much better negotiating position on taxes and spending than before, and the GOP really doesn't have many hands to play.
The trouble is, the GOP thinks if it "gives" on any tax increases on the wealthiest Americans that it should have the "right" to a "balanced deal" and get the Dems to go along with the decimation of Medicare, Medicaid and Social Security. This is the main battle of the radical right's class warfare against ordinary Americans--their goal is to eliminate, reduce, or privatize Social Security, Medicare, and Medicaid benefits. They created the fiscal cliff with brinkmanship temper-tantrum threats to throw the United States into default unless they got their way, and they are trying to use the December 31 deadline that they themselves set in place to push the Democrats into being the ones to destroy the most effective social welfare programs that the Democrats have created.
See, e.g., Hiedi Przybyla, Republican Defectors Ready to Back U.S. Tax-Rate Compromise, Bloomberg.com (Dec. 5, 2012). Some members of the GOP have "signed a letter calling for exploration of 'all options' on taxes and entitlement programs"; Petition signers like Mike Sampson (R-ID) say this means he would be willing to "accept higher rates for married couples earning more than $500,000 a year, in exchange for an overhaul of spending on entitlements such as Medicare." "We've [the GOP,that is, has] got to have entitlement reform," he says. Id.
Steny Hoyer--the center-right Democratic whip in the House--said that "proposals to raise the eligibility age from 65 to 67 and other entitlement changes 'clearly are on the table'."
Hoyer is writing a suicide note for the Democratic party with that statement, for two reasons.
1) Tax increases cannot be significant enough if they are limited to married couples with $500,000 or $1 million of income, as Simpson suggested, nor if they do not raise the top rate to at least the Clinton era rate of 39.6 percent.
In reality, they should introduce additional brackets above that rate level for the top earners (e.g., 4o% for 750,000 or more, 45% for 2 million or more , 50% for 10 million or more, up to perhaps 65% for those who make hundreds of millions of income per year).
And the capital gains preference should be eliminated. But the GOP is also digging its "line in the sand" against any increases in taxes on investment income--even though this is an income category that creates tax arbitrage opportunities for the wealthiest Americans and high-income Americans (like Mitt Romney) end up paying tax at rates substantially less than ordinary Americans because of the preferential treatment of their capital gains income. See, e.g., James Politi, Republicans in capital gains tax fight, Financial Times.com (Dec. 4, 2012) (noting that Republicans in the House are "fighting tax increases on capital gains and dividends, ruling out investment income as an acceptable source of additional revenues in increasingly urgent talks to avert the fiscal cliff") [hat tip--Yves Smith at Naked Capitalism].
2) Democrats were elected as the party most likely to protect earned benefit programs, not destroy them. There is no way that Democrats should accept ANY "overhaul" of Medicare or the other social program eligibility requirements as a way to cut spending. They are vitally essential to Americans, and the GOP suggestions take the brunt of cuts out on the most vulnerable populations. The GOP's cuts include lowering the COLA for the elderly for Social Security, when the elderly actually have a HIGHERr cost-of-living than ordinary Americans, or raising the eligibility age for Medicare, when those who labor all of their lives often need EARLIER eligibility because they need to retire earlier and have no health care outside of work and can't afford to pay what private insurers will charge.
The savings from these stingy GOP proposals are de minimis, but the impact will be to create a momentum for reducing benefits as a way to save. That is treating a symptom and not the problem.
The problem of increasing health care costs comes from the inordinate profit-taking by parties at every link of the health care chain--consultants who bid out to insurers, insurers, hospitals, doctors, Big Pharm, Big Nursing Home, and shareholders. The only way to address the problem is to do what every other advanced civilization in our era has already done--move to a single payer system that treats health care as a citizen's right and treats the provision of health care as in some sense a public good that the government must provide. Single payer allows the government to bargain on behalf of its citizens, reducing the monopolistic rights of pharaceutical, hospital and other health care intermediaries.
The article notes that about 120 Dems would need to "buy in" to entitlement cuts in the House for the GOP to agree to tax increases. The Dems should say no. The tax increases will come into law on January 1, and then the Dems can propose a bill that will cut taxes for those for whom it makes sense, without decimating the star programs that have supported the middle class since FDR. (Note to Dems--progressives will not vote for anyone who goes along with such entitlement changes.)
The Bloomberg press has looked further at Romney's use of trusts and other arrangements to avoid taxes, using Freedom of INformation Act requests to obtain more information than was released by Romney in his meager tax return release. Romney established a charitable trust in 1996 of a type that Congress cracked down on in 1997 (regrettably, a crackdown that grandfathered existing arrangements, which is the way so many rich people get to keep using abusive shelters). See Jesse Drucker, Romney Avoids Taxeds via Loophole Cutting Mormon Donations, Bloomberg.com (Oct. 29, 2012).
So what did Romney do. He used a "charitable remainder unitrust" (CRUT) in a way that alllowed him to use the tax-exempt status of the Mormon Church (his primary charitable beneficiary) to defer taxes for more than 15 years. The trust benefits Romney considerably, by letting him benefit from the tax-free treatment that the charitable beneficiary has when they sell assets for a profit.and leaves the church less than current law requires for a trust. And it favors Romney over the church, because he gets a guaranteed payout from the trust (which converted most of its assets to cash in 2007) and the church only gets what's left at the end, if anything. Current trends suggest there won't be anything left for the charity at the end.
“The main benefit from a charitable remainder trust is the renting from your favorite charity of its exemption from taxation,” [Jonathan] Blattmachr [, a trusts and estates lawyer] said. Despite the name, giving a gift or getting a charitable deduction “is just a throwaway,” he said. “I used to structure them so the value dedicated to charity was as close to zero as possible without being zero.”
When individuals fund a charitable remainder unitrust, or “CRUT,” they defer capital gains taxes on any profit from the sale of the assets, and receive a small upfront charitable deduction and a stream of yearly cash payments. Like an individual retirement account, the trust allows money to grow tax deferred, while like an annuity it also pays Romney a steady income. After the funder’s death, the trust’s remaining assets go to a designated charity.
Romney’s CRUT, which is only a small part of the $250 million that Romney’s campaign cites as his net worth, has been paying him 8 percent of its assets each year. As the Romneys have received these payments, the money that will potentially be left for charity has declined from at least $750,000 in 2001 to $421,203 at the end of 2011. Id.
Under the 1997 change to the law, Congress required that the present value projected to be left for charity must equal at least 10% of the initial contribution. Romney's CRUT doesn't satisfy this requirement but was grandfathered in. The principal of the CRUT has dwindled to about half what it was. In the meantime, the Romney's have enjoyed considerable tax savings due to the way the CRUT works.
This information is revealing for two reasons. First, it demonstrates yet again that the Romney's are eager to use whatever mechanisms they can to reduce taxes, even though their millions are due in no small part to the way taxpayers make business possible (from courts to roads to police to the military to "rule of law" to relatively low funding costs for borrowing in the United States, etc.). One suspects that the reason Romney has stonewalled the public on his tax returns is that there is lots more of this nature shown therein, including possibly his participation in voluntary disclosure regarding offshore accounts (that otherwise might have resulted in criminal tax evasion charges).
Second, it shows that Congress recognized that CRUTs didn't make sense. So we have to ask why Congress didn't eliminate CRUTs altogether, rather than continuing to allow the gambit, and why, if it were going to continue to allow the gambit, it didn't terminate the favorable treatment of any existing CRUT that didn't satisfy the minimal funding requirement the new law included (10% of the original contribution has to go to charity before the donor can enjoy the immense benefit of the capital gains deferral thereby). Congress should allow the estate tax to lapse back to the pre-Bush levels, and it should then buttress the estate tax by legislating the end to the many different devices used by estate lawyers to get around the tax while still providing most of the benefits of the assets to the estate planners--CRUTs and similar estate-planning trusts are prime targets for action by Congress.
As the election approaches, I find myself asking what concerns me most about the Romney-Ryan ticket. There's a lot.
1. Rommey's disparaging comment about "the 47%".
Romney treated the vulnerable elderly, those still unemployed who were left jobless by Bush's "Great Recession", and the vast majority of the bottom three quintiles of the income distribution for which the standard deduction and personal exemption are INTENDED to ensure they don't have to pay an income tax as though they were all deadbeats who had not sense of personal responsibility and just wanted a government handout. Remember that the income tax is just one piece of the federal tax system--payroll taxes take a significant bite out of low income taxpayers' income, and they usually have state income taxes and sales taxes (which are highly regressive) as well. Romney's disdain for this group--and his assumption that he needn't bother to think about them--augers ill for the future of a Romney-Ryan administration. We would take a significant step closer to rule by oligarchs, if we put oligarchs into the presidency who don't even recognize how their wealth and status has been achieved at the cost of ordinary folk.
2. Romney's refusal to release additional tax returns
Romney has simply stonewalled on information of direct relevance to a Romney presidency. This is bad for two reasons.
First, it suggests that he would serve as president with the same arrogant view of himself as the one who decides what the people need to know and the same arrogant notion that he got where he did on his own "merit" rather than on the foundation of years of wealth, prestige and status with a large helping of government support for his father's industry (roads are built free of charge to auto manufacturers, and what should be their primary competitors--public passenger railroads--are starved by the GOP in Congress to the point that they can't keep schedules because of being shoved aside by the freight owners of the rails they run on).
Second, it suggests that there is likely information in those returns that would reflect poorly on him as president. Even more use of offshore tax havens? More questionable use of trusts to hide who owns what or where it is? Failure to report offshore financial assets (that could be the basis for a criminal charge) until participation in the "voluntary disclosure initiative"?
How can we expect a Romney-Ryan administration to deal appropriately with the obscene "carried interest" provision when he is ashamed of revealing the returns that benefitted him and his donors so magnificently from it? How can we expect a Romney-Ryan administration to take the fair stand taken by President Reagan's administration on capital gains taxes--in the 1986 reform act under Reagan, the preferential rate that has benefitted Romney and Ryan so enormously and given them much of their wealth was eliminated!
This willingness to stonewall around relevant information and the potential that the information that isn't being disclosed would at least reflect poorly on him suggests that as president he would similarly engage. Would Romney be another Bush who pushed for preemptive war in Iraq without adequate planning, without regard to the long-term costs, without regard even for a just rationale because of his willingness to railroad everyone to adopt the neo-con approach of loving warfare? Romney's type of secrecy could easily allow for manipulation of public information to the extent that we are led down another blinder-gate like the Iraq war.
3. Romney and Ryan's various positions on privatization and/or reduction of benefits under social safety net programs like Social Security and Medicare and Medicaid.
Ryan has made no bones about where he stands--he condemns earned-benefit programs, likely because he never expects to need them (and, after all, Congress has had marvelous health care for itself all these years). Romney has waffled as he has with every policy, depending on the audience and the stakes, but his core "market fundamentalism" (as revealed by item 1) makes clear where he really stands--privatization and voucherization and benefit cutbacks and program decimation for programs like Medicaid (under the guise of "federalism") would be the future under a Romney-Ryan administration. Our economy cannot be sustained that way.
4. Attitudes towards inequality, lack of progressivity in the tax system.
One of the most worrisome aspects of a Romney-Ryan presidency would be the lack of concern about the growth of inequality in this country and its disastrous impact on broad-based economic growth and a sustainable democracy. The far-right GOP from which Ryan springs and which supported Romney's candidacy extols market fundamentalism above all else, celebrates wealth no matter how acquired or at what cost to society, and disregards the decline in the middle class that has been a direct result of the dominance of market fundamentalist policies over the last four decades. Deregulation, privatization, militarization, the celebration of greed and tax cuts for the wealthy and big corporations are the cornerstones of the new right-wing consensus.
Those are also the policies that gave us the financialization of the economy, the decimation of U.S.-based manufacturing through our subsidizing of the movement of active businesses offshore, and ultimately the Great Recession and the loss to ordinary Americans of most of their savings represented by the value of their homes. Bush and his Treasury secretary Paulson took measures to save the big banks, but they didn't put the kinds of conditions on those savings measures that would have gone a long way to ameliorating the impact of the Great Recession--such as requiring clawbacks of mortgage loans in bankruptcy and other measures to prevent the foreclosure crisis that has driven honest, hardworking Americans from their homes.
Romney-Ryan and the far-right political machine funded by Sheldon Adelson, Charles and David Koch and their one-percenter peers will simply reinstate the Bush tax-cuts-for-the-rich and damn-the-rest policies. Under Romney-Ryan, we can expect elimination of the estate tax, which will increase the budget deficit while adding to the enormous inequality gap and allowing multibillionaires to pass their wealth to heirs who do nothing to earn it free of any tax ever (most such estates haven't been taxed on their appreciation during the lifetimes of the decedent, and won't be taxed on death, and won't be taxed to the beneficiary either). We can expect elimination of any taxes on income from capital, so that the oligarchs will bear none of the tax burden on their primary source of income. Spending on public infrastructure and safety net programs will cease (as military spending continues to expand to fund the oligarchs who own the military-industrial complex). Progressive tax rates, which have been steadily reduced to a flatter structure, will likely disappear, replaced by a regressive VAT or by a flat structure that puts more of the tax burden on the middle and lower income groups and much much less on the oligarchs. Corporate taxes will continue to decrease, as a way of rewarding the multinationals who fund GOP political power and the oligarchs who manage and own the corporate giants. Wages of workers will accordingly continue to languish. Corporatism and class warfare will win the day, and ordinary Americans will bear the brunt of it.
This is not a pretty picture. It is the reason I find the Romney-Ryan ticket such a worrisome prospect for our future.
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