ataxingmatter

Charitable Contribution Deduction--Camp Hearings Feb 14

Rep. Camp's Ways & Means Committee held hearings today on the charitable contribution deduction. To watch the hearings, you can go to this website. Camp is planning a tax code rewrite, which he says is intended to lower rates, simplify the code, and curb some tax breaks. 

Regarding those Camp objectives--they are not generally the right ones.

• Lowering rates is the wrong objective.  We already have very very low tax rates, especially when you consider that we do not have a VAT alongside the income tax as most European countries do.  The primary motivation for lowering rates appears to be to cut revenues even more, in another ratcheting up cycle of the GOP "starve the beast" game.  Lowering rates allows wealthy taxpayers and corporations to retain more of their profits, when they already garner a higher share of that income than average Americans who toil in their businesses as regular employees.  Lowering rates also results in less revenues and increased borrowing, resulting in higher deficits and higher debt, contributing to the right-wing demand for cutting safety net programs like unemployment insurance, Medicaid, Medicare and Social Security.
• Simplifying the Code is the wrong objective.  About 70% of US individual taxpayers do not itemize, meaning that their tax returns are quite simple.  For the 30% of taxpayers who do itemize, the complexity is necessary to prevent scams, manipulation and unreasonable subsidization of those who don't need it.  A tax system intended to cover the many complex transactions of today's globalized economies cannot be simple without being naive.
• Curbing some tax breaks is a good idea.  But it should be more than "some" and it should be vigorously done to shift the tax burden towards the upper class and business and away from those in the lower and lower-middle income distributions.  The tax breaks that should be curbed are the ones that are most regressive in nature--i.e., the ones that provide the majority benefit to the very rich.

The hearing today included lots of representatives of charities who were arguing their interest--keeping the tax-incentivized flow of money coming.  The typical argument from charities is that the tax deduction is necessary to incentivize the transfer of money to charities.  If it weren't there, the argument goes, rich people might not give at all, or at least not nearly so much money. 

There's not a whole lot of empirical evidence to back this up.  On the one hand, there are studies showing that  non-rich people give much more of their limited assets away, proportionately, than the richest people (though of course it amounts to much less in absolute dollars), and many of them don't get any break at all because they don't itemize. Furthermore, rich people like the names-on-gold-plates-on-opera-house-chairs a heck of a lot, too.  Maybe they give most of the money they give because of the status, the recognition, the remembrance-in-perpetuity, and to get to attend the events they've sponsored, which are usually the kinds of cultural events that they enjoy (opera, ballet, elite art museums, etc.).  Does what a rich person says about why he gives hold a lot of weight in this debate?  I'd argue it should not, since those who give typically want to be thought of as important philanthropists and not as status-greedy opportunists who are just giving the minimum amount to get their name and face plastered all over the New York Times.....

Does the tax incentive come into play in determining how much a person will give?  Indubitably.  But it isn't clear that people who want to give $20 million to their alma matter wouldn't do so even without the charitable contribution deduction!  All that put together suggests that the deduction is highly inefficient.  Most rich people would give money anyway to the things that bring them prestige and status and recognition and that accomplish what they want to accomplish now that they are rich and can afford to spread money around.

In addition to the inefficiency of the charitable contribution deduction--at least in amounts above some reasonable amount to allow to those who are NOT in the top quintile (say, 10%  of  adjusted gross income), there is also the problem that the deduction is primarily beneficial to the very wealthy.  They pay tax at the highest rates (well, except when the system doesn't work well because they have mostly preferentially taxed capital gains) and they get the most bang from the buck for the dollars they contribute.  They invariably itemize, whereas most lower-bracket taxpayers do not.  They give in ways that gives them prestige (there is really a quid pro quo for much of their giving, though it may not be financial).

Another complaint from charities and wealthy donors is that the absence of a charitable contribution deduction will result in the government just taking all that money that would have otherwise gone to the charity, because of higher taxes.  The implication is that such a result is disastrous, putting the recipients of the charity's charitableness at risk.  But the truth is otherwise.  The government may be more likely to support the poor and downtrodden than the wealthy are through charitable donations.  How many wealthy are making contributions to Museums and Opera Houses and Elite Universities, versus a local homeless shelter or similar programs for the needy?  And the decision of what to support, when made by a democratically chosen government, should more accurately reflect the will of the people than the decision of the one (wealthy) donor who gets the tax benefit of a deduction (though of course in these days of partisan gridlock and GOP obstructionism, that is regretably less true).  Shouldn't democracies favor taxation and redistribution via program selection over subsidizing the wealthy's favored charities?

So some new, reasonable limits on the charitable contribution deduction make a lot of sense from the perspective of democratic egalitarianism.   My suggestion would be to limit the deduction to  10% of the adjusted gross income reported on the tax return. (Ideally, such a modification to the deduction would be accompanied by a rethinking of the estate tax, to limit the amount that can be passed on to heirs without tax to an amount that more or less approximates the average estate of a taxpayer in the fourth quintile of the distribution.)

What about other changes that would be easier to pass and make lots of sense? 

• Prime amongst them would be the elimination of the fair-market-value deduction (rather than basis) for contributions of certain properties.  This is a sheer giveaway to the wealthy that cannot be justified.  It allows zero basis stock where there is no remaining unrecovered capital investment to be contributed and yield a deduction for the full value, whereas if the person sold the stock, they would at least have to pay capital gains tax on the value.  This provision should simply be deleted from the Code.  That's one simplification that would actually result in more fairness.
• Another area to tighten is the rules governing private foundations, to prevent the kinds of abuses (where 20 family members receive exorbitant salaries) that give charities a bad name.
• And Congress should eliminate the tax giveaway to large corporations (enacted in the Tax Reform Act of 1976) that permits them an enhanced deduction for donations of excess inventory--a deduction in excess of their cost basis and for more than the value of the inventory.  It's not clear that the deduction incentivizes any additional donations--if a corporation has excess inventory, it will either give it away (which can serve a significant PR function) or sell it at fire-sale prices (which can serve a negative PR function).  IN most cases, it would likely give it away without the enhanced deduction.  Of course, instead of urging Congress to eliminate the large busienss excess inventory special treatment, small businesses (mainly, S corporations with wealthy shareholders) are whining about how tough a time they have and arguing that they should be given a "level playing field" by letting them get the enhanced deduction too.  See NAEIR President Gary Smith's comments, below (in email).

  Congressman Schock and Mr. Smith agree that the bill [H.R. 2592, introduced in the 112th Congres by Schock] would greatly benefit the small business community by establishing parity for S corporations and other small businesses and as such a level playing field with larger regular corporations.  In addition to the principle of fairness inherent in this legislation in the tax benefits it extends to the small business community on par with larger corporations, Mr. Smith notes that “The impact of this legislation must be understood on the grassroots level: promoting greater collaboration between businesses and charities at the local level.”  In brief, several million struggling small businesses and millions of individuals served by our nation’s charities would benefit through previously unavailable access to a wide variety of free donated products.  (NAEIR email release Feb 14, 2013)

Not surprisingly, NAEIR is busy promoting the "enhanced" tax deduction (for up to two times the value of the excess inventory) to businesse--see here.

Related articles

The Inequality Gap

House Holds Hearing Today on Tax Reform and Charitable Contributions

TurboTax - Charitable Contributions You Think You Can Claim but Can't

JFNA joins array of charities testifying in favor of deduction

Congress Starts Examining Changes to Charitable Tax Break

Feeding America Urges Protection Of Charitable Giving Incentives

Romney's CRUT Tax Shelter

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.

 

Tax Policy Center on Cutting Tax Preferences to Lower Tax Rates (aka Romney's "plan")

As the campaign heats up and the Congress continues its inability to set partisanship aside to consider the well-being of the country, we can expect continued emphasis on tax rhetoric without much tax substance. 

On the one hand, Obama appropriately argues for higher taxes on the well-to-do, but doesn't seem to be making much use of the bully pulpit to help Americans understand the importance of that approach.  Obama  ought to be arguing for elimination of the capital gains preference across the board, but he is already losing out on fundraising amongst the banksters, so that argument is not likely to be made. 

On the other hand, Romney says he is going to solve all of our problems by lowering taxes even more on his peers, the wealthy, while paying for it by eliminating unnecessary tax expenditures.  The tricky thing about "lowering rates, by eliminating tax preferences" is that you have to decide (1) who gets lower rates and (2) which tax preferences get cut.  Without that info, you've just got an abstract theory about tax reform, not a real proposal.  And of course, if you cut tax rates at the top, thus favoring the wealthy, while not eliminating the tax preferences that are most beneficial to them, you upend the progressivity of the income tax system at the same time.  So specifics really matter here.

Thankfully, there's a new study that sheds some light on the tax preferences/rate cut scenarios.  The Tax Policy Center issued a new report , prepared by Hang Nguyen, James Nunns Eric Toder and Roberton Williams, on July 10 entitled "How Hard Is It To Cut Tax PreferencesTo Pay For Lower Tax Rates?"   The abstract makes clear that this is not the easy solution so often claimed.

 

Some political leaders have proposed to lower individual income tax rates and make up the lost revenue by eliminating tax preferences. To help inform the discussion of such proposals, we examine illustrative revenue-neutral combinations of lower rates and cuts in tax preferences and their effects on the distribution of tax burdens. We conclude that paying for lower rates would require substantial reductions in broadly-used and popular preferences. In addition, requiring that changes maintain the current progressivity of the federal income tax would make it much harder to find a politically acceptable mix of preferences to curtail.

 

The article starts out with a typical "efficiency" oriented statement about taxes.

 

"High tax rates reduce incentives to work, save and invest, encourage tax evasion and avoidance, and magnify the distortions caused by the myriad tax preferences in the current income tax. An enduring goal of tax reforms has consequently been to broaden the income tax base to pay for lowering tax rates."  Id

 

But guess what.  That statement isn't clearly true.  The idea that taxes "reduce incentives" to work, save, invest" and "magnify distortions" and therefore an appropriate goal is to lower tax rates rests on  economic models about market efficiencies that are, quite simply, unproven.  If taxes are so terrible, we should have terrible economic results in periods of high tax rates and much better economic results in periods of low tax rates.  Of course, we can't ever undertake an experiment to prove or disprove this, since there are many other variables--including how those taxes are spent in furtherance of a more vigorous and sustainable economy-- and those are impossible to control.  But we can look to historic evidence to see if high tax rates have correlated with poor growth and low tax rates with high growth, which would tend to prove the statement.  MIke Kimel's book on Presimetrics examined a wide range of correlations, and showed the statement doesn't hold--high tax rates, in fact, have correlated with good growth.

That doesn't mean that broadening the base by getting rid of wasteful or distributionally unfair tax preferences wouldn't be a good idea.  Many of these preferences are of the most value to the wealthy, and mean very little to ordinary taxpayers--such as carried interest capital gains rate for private equity fund managers.  Many of them are outdated, representing old industrial policy that should have given way to newer ideas long ago--such as the various subsidies in the system for natural resource extraction (favoring Big Oil).  Many of them are examples of the worst of crony capitalism, such as the charitable contribution deduction for the value (not investment) of stocks that only the very rich receive much benefit from (because they own most of the financial assets).  Some of the worst tax preferences are those that favor the wealthy--the capital gains preferential rate, that provides a tax break to the wealthy who can structure their income in ways unavailable to ordinary folk and who own most of the financial assets (and so get the lion's share of the capital gains rate benefit).

The Tax Policy Center study suggests it would be fairly hard to get more than a trillion out of eliminating tax preferences if tax rates are cut at the same time, for the following reasons:

1) if you lower tax rates, the savings from eliminating tax preferences is reduced, since the biggest cost of preferences is to those at the top of the rate scale.

2) even if you know that a tax preference "should" be eliminated, you are likely not going to be able to eliminate it because the interest group benefited by it will protest, loudly (the charitable contribution deduction for stock contributions, for example), or because it is administratively impractical to impose tax on the preference item (home rental value, for example)

3) if you eliminate a tax preference and lower the rate, you may shift more of the tax burden to groups that shouldn't bear it (the lower income classes, for example, in the case of the Earned INcome Tax Credit or the Child Credit)

4) If you repeal existing preferences without transition rules, you change economic outcomes in ways that may be resented, but if you transition in gradually over time and without complete repeal, you will likely not get the revenue gains desired to support cutting rates.

The report looks at three scenarios: 

• "current law" (in which the Bush tax cuts end at 2012 year-end--39.6% on ordinary income and dividends and 20% on capital gains and where the personal exemption phase out and limitation on itemized deductions increase revenues from higher-income taxpayers);
• "current policy" (in which the temporary rates in effect today--35% top rate on ordinary income and 15% preferential rate on capital gains and dividends and the AMT exemption indexed for inflation); and
• "current policy with reduced rates" (in which ordinary rates are cut further to a top rate of only 28%, the capital gains and dividend preferential rate is retained at 15%, and the AMT is repealed--i.e., Romney's tax proposal as to rates, except that he would also repeal the estate tax, reduce the corporate tax rate, make the corporate tax system territorial, and have a zero rate on capital gains and dividends for those with incomes below $250,000--though he has not identified which tax preferences he would eliminate in order to make such a drastically reduced tax intake revenue neutral). 

The report notes that the differences in rates under each of these approaches is significant. 

 

The difference between effective tax rates under Current Law and under Current Policy and Current Policy with Reduced Rates generally increases as income rises (Chart 4). For example, the difference in ETRs for the lowest quintile under Current Law and Current Policy is 2 percentage points, while the difference for the highest quintile is 3.4 percentage points and that for the top 0.1 percent is 4.5 percentage points. That increasing reduction in effective tax rates across income categories indicates that the tax system becomes increasingly less progressive across the three tax laws.

 

 The report considers the 173 tax expenditures in four groups based on prevalance of proposals for repeal and limitation and administrative feasibility:

(a) itemized and above-the-line deductions, non retirement fringes and small credits;

(b) investment and retirement income (items that favor saving by individuals);

(c) child, work-related, and social security benefits ("provisions that primarily help low-income households, families with children, and low-to moderate-income Social Security beneficiaries");

(d)  Other preferences (various exclusions from taxable income such as capital gains at death and on home sales; imputed rent; cash benefits for low-income families; veterans' benefits; inside buildup of life insurance). 

The report doesn't consider business tax expenditures and doesn't consider payroll taxes.

 

They conclude that

Current Policy with Reduced Rates could meet the Current Policy revenue target with a significant curtailment of some of the largest tax expenditures, such as mortgage interest, charitable contributions, and employer-provided health insurance. However, these are widely used and popular provisions, so sharply limiting their value could prove difficult. Further, this combination of lower rates and a broader base would cut taxes substantially for high income taxpayers, resulting in a less progressive tax system than under Current Policy.

 

With sufficient base broadening, tax rates under both Current Policy and Current Policy with Reduced Rates could raise the same amount of individual income tax revenue as Current Law. However, meeting that goal under Current Policy would require a sharp curtailment of mortgage interest, charitable contributions, and employer-provided health insurance. Hitting that revenue target under Current Policy with Reduced Rates would be even harder. It would require curtailment of these same popular tax expenditures as well as substantial reductions of additional tax expenditures, such as the special rates for capital gains and dividends, the exclusions for retirement contributions and earnings, and possibly such items as the earned income tax credit (EITC), the Child Tax Credit, and the exclusion of some or all Social Security benefits for low- to moderate-income beneficiaries. From a political perspective, matching Current Law revenue would be difficult, if not impossible.

 

 

ASIDE:  Meanwhile, Romney continues to clam up about his failure to release more than one tax return and the fact that even tax experts cannot get much of an idea why he has put so much of his fortune in offshore tax havens (Bermuda, Caymans, Swiss banks).   Then there's the question of how an IRA got to be worth $102 million in such a short time--without seeing 10 years of tax returns, it is hard to say how that could be and easy to question whether there some slippery manipulation of asset values at the time of putting them in, so that it looks to have gotten super-extraordinarily splendid returns.   One of the problems of having a presidential candidate with so much wealth is that he (1) is great friends with the banksters and thus able to use all the tricks of the trade --which may or may not be legal but one has to question their advisability for a president; and (2) is so accustomed to getting his own way that he is tone deaf to the justifiable interest that Americans have in how he made so much money and what he chooses to do with it. 

Not to mention, of course, his inability to explain away his signing off on SEC and other federal forms as sole shareholder, CEO and manager of Bain Capital through 2002, while claiming to have exited Bain in 1999 so as to avoid blame for the even worse leveraging carried on by the private equity firm, which resulted in a good deal of outsourcing and US job losses.  His way of dealing with that was to call Obama a liar by raising the issue, but that doesn't fly, since the issue is there and should be dealt with head on by releasing tax returns, among other efforts towards transparency.

 

 

 

 

One in 189 of those with $200,000 or more in AGI paid no federal taxes in 2009

[edited 5/30 to correct "one in four" goof]

 The IRS recently released another "statistics of income" report.  This one has news that should make most ordinary Americans think twice about the GOP agenda of reducing taxes for the rich while cutting back on all kinds of programs that serve ordinary Americans--the fact that a large percentage of the upper crust--one out of every 189 Americans with $200,000 or more in income --pay no federal income taxes whatsoever.  See Rubin, IRS Finds One in 189 High Earners Paid No U.S. Taxes in 2009, Bloomberg.com (May 29, 2012).

  How does someone with $200,000 or more in income pay no taxes, when ordinary folk with jobs who make $50,000 to $75,000 pay 15% to 25% of their income in taxes? 

• As I've often discussed here (see items under charitable contribution deduction), rich folk can easily afford to give away more to charity and they get a tax bonus that is much more than that available to poorer folk when they do so.  They get an especially big break if what they give away is appreciated stock that they bought a while ago--and rich folks own most of these financial assets, so they are the ones that get almost exclusive enjoyment of this lucrative loophole:  they get to deduct the full value of the stock they donate, without having ever paid taxes on the appreciation.  That's one of the boondoggles in the Code that Congress can and should get rid of, no matter what else it does about taxes. 
• Another way rich folk pay less in taxes is by ensuring that the income they earn is of a type that isn't subject to tax.  Big CEOs generally have rich pension plans and other forms of deferred tax compensation that facilitate lowering their tax bills.  Rich folk are the buyers of municipal bonds, which again enjoy a specific tax break in section 103 of the Code that excludes the interest income from the owners' tax returns.  This is supposed to help municipalities, since the tax break gives the wealthy an incentive to buy the bonds even though they pay lower rates, since all the interest is tax free.  But it is a costly break that provides an advantage only for the rich.  Wouldn't it be better to eliminate it and tax wealthy people on all of their interest income at ordinary income rates?  Maybe the tax money could also fund programs for important municipal projects--like intracity rail transportation in Detroit, a much needed idea whose time has come.....
• A third way that rich people avoid taxes is by having so many deductions--high-end medical "equipment" (like swimming pools for arthritic patients), lots of interest on mortgages on high-end homes, and other deductions of special value to those who would otherwise pay tax at a higher rate.

 As the Rubin article notes, the IRS announced that for 2009 there were 10,080 households with "adjusted gross income" of $200,000 or more who paid no US or foreign income taxes. Adjusted gross income is not economic income--AGI does not reflect items that are excluded from the calculation of income for tax purposes and is reduced by certain "above the line" deductions that are especially beneficial to the wealthy. "Using an expanded concept of income that includes some nontaxable items and looking only at U.S. income taxes, there were 35,061 households, or 0.88 percent, that paid nothing."  Id.

The Alternative Minimum Tax was initially enacted to deal with the general unfairness of having extraordinarily well-to-do people be able to avoid tax entirely.  As it was modified over time, it came to function as a way to ensure that those who accumulate lots of different deductions nonetheless pay tax, by treating some of those deductions as unqualified preferences for AMT purposes.  But the AMT has lost a lot of its punch as Congress has eviscerated its provisions, such as the limitation on foreign tax credits.   This is one of the reasons that many progressives have supported two things--elimination of the preferential rate for capital gains (a type of income especially enjoyed by the ultra rich) and adoption of a new type of minimum tax on some high level of gross income (the Buffett Rule).  This new information about the number of rich people who end up paying nothing in federal income taxes should result in more people telling Congress that it's time to pass these two proposals.

Comparisons of charitable giving among presidential candidates

[Hat Tip to Tax Prof]

Len Burman, now a professor at Syracuse but still affiliated with the Tax Policy Center, wrote a blurb for Forbes on Stingy Rich People, Santorum-Gingrich Edition, Forbes (Feb. 20, 2012), which was a followup to Caron's comparison of presidential contender giving based on "Romney and Obama vie for title of most charitable; Santorum gave least to charity," Washington Post (Feb. 16, 2012). 

Romney gave about 13.8% of his income to charity in 2010, and Obama gave about 14.2% of his in 2010.  The Gingrichs (with about $3.1 million in income) gave only about 2.6% of theirs in 2010 and the Santorums (with about $0.9 million in income), only about 1.8% of theirs in 2010.

Burman professes his surprise at Gingrich and Santorum's relative stinginess, given their avowed commitment to religion (and their open claim to religious merit) and the Christian doctrine of tithing 10% of one's income to the church.

But Burman finds that the relative stinginess of the two candidates is about on a par with members of their respective income classes.  The group of people making between half a million and a million give an average 2.6% in 2009 and the group making between $2 and $5 million gave about 3.2% on average.  Conclusion--Santorum and Gingrich are "in the middle of the pack" in terms of generosity for people of their income level.

Personally, I've always thought candidates should keep their religious faith  to themselves.  I don't think we have any business at all taking into consideration whether a presidential candidate is a Mormon, a Baptist, a Muslim or an atheist.  But if they do make a point of their religious faith and present it as a worthy attribute qualifying them for the presidency, then it is rather revealing when those who openly "brag" about their religiosity  don't comply with the most fundamental concept of sharing and  generosity in the bible, the tithing requirement.

Nature Conservancy hijinks, yet again

Most of us who have contributed to the Nature Conservancy were disgruntled, to say the least, when it ws revealed several years ago that trustees of the environmental land protection organization were getting sweetheart deals in terms of possession of some wonderful wilderness lands that were contributed to the Conservancy. 

Now the group is in the news again for related matters.  In Marshall and Judith Cohan, et al., v. Comm'r, T.C. Memo. 2012-8, the court sets out a deal between the Nature Conservancy and parties donating certain properties that was structured as a bargain sale to provide tax benefits for the parties and a less overall consideration to the Nature Conservancy.  At the same time, a Conservancy benefactor stood to gain in terms of being able to develop a piece of the valuable property for himself.

In short, a donor sold property to the Conservancy for what was purported to be a below-market price, entitling the donor to a charitable contribution deduction for the part not paid for.  The IRS contested the deduction, and the court ruled that there was indeed hidden consideration--consideration of which both sides were aware but which was obscured in the deal documents in an effort to 'play the audit lottery' so that the donor could receive a larger deduction than the one to which he would be entitled.  See Cohan v. Comm'r, T.C. Memo 2012-8 (available on BNA).

Briefly, three generations of Cohans owned land through a partnership formed as a limited liability company, refered to as HCAC.  One parcel of land (Herring Creek Farm) included about 175 acres that were owned by the Wallace Family subject to a right of first refusal (at a stated price) of the Cohans (assuming they still owned the adjacent lands) if the Wallace Family were to sell the land, agreed to in 1969 and with an expiration date of Jan. 1, 2010.  The value of the land "so significantly exceeded the set price that the rights of first refusal would be expected to be exercised."  The Wallaces had reciprocal rights on the Cohans' properties.  The agreement also provided personal rights to use of beach property.  When the Wallace families wanted to develop the farm, the Cohans formed HCAC to which they contributed their protect their rights of first refusal under the 1969 agreement.  The Wallaces sued to invalidate the 1969 agreement but lost. 

The Cohans were concerned that the right of first refusal would expire and the development would take place without their being able to stop it, so they wanted to find a buyer that they could approve.  The Nature Conservancy expressed interest.

TNC executes its mission by acquiring land or interests in land that may be used to manage biological diversity. A conservation buyer is someone who acquires property subject to conservation restrictions. At all relevant times, TNC was a section 501(c)(3) organization eligible to receive tax-deductible contributions under section 170.

HCAC agreed to sell the rights of first refusal to the Nature Conservancy (TNC) in 2000, for various consideration including specified lots, reimbursement for legal expernese, leases on the barn, beach rights and certain other reimbursements and indemnifications.  TNC agreed to impose conservation and development restrictions on the land when it was acquired.  IN addtion TNC agreed to convey certain limited devellopment rights to HCAC and other parties (including TNC's benefactor, Roger Bamford, who would receive a right to build a house on a parcel of the farm).

Meanwhile, the Wallaces went ahead with subdivision development on the farm. TNC negotiated with the Wallace family, on condition that a farming institute be allowed to purchase part of the farm for its use.  Eventually the Wallaces and TNC reached and agreement on a sale for about $64 million (allowing more development that the agreement with the Cohans had contemplated),and the HCAC received a fee for the time extension that took.  Bamford and the Farm institute were included in the agreement. 

TNC and HCAC had to renegotiate the agreement to account for the additional development authorized in the Wallace/TNC agreement.  The rights were valued at about $14 million. This was where the idea of having a "bargain sale" treatment that permitted a charitable contribution deduction came in.  Since TNC would have to reimburse HCAC for any tax it paid on the transfer of the rights of first refusal to TNC, it was to TNC's advantage to minimize the amount of taxes that needed to be reimbursed.  The final agreement included reference to a  "bargain sale gift" and noted that tax savings from a charitable contribution deduction for HCAC would benefit TNC by reducing the make-whole payment it would owe HCAC. 

The Tax Court's opinion (at 40) shows the relative amounts for these calculations.  HCAC's tax return claimed consideration paid of about 9.96 million.  The Notices of deficiency claimed consideration paid of about $15.38 million.  Left out of the HCAC return were any values for beach rights, leases of a horse barn and other property, an option on a lot, a right of way relocation, and land bank fees.

In discussing whether HCAC would be allowed a charitable contribution deduction, the court notes that a taxpayer generally can rely on a contemporaneous written acknowledgment from the charity regarding the value of goods provided to the taxpayer by the charity.  But this rule does not apply if the taxpayer knows (or has reason to know) that the estimate is unreasonable (citing Reg. section 1.170A-1(h)(4)(ii)).  TNC's gift letter disclosed some of the items of consideration received, but not all (including those listed in the prior paragraph). 

TNC aspired to structure the 2001 transaction to minimize or to eliminate the portion of petitioners’ tax liabilities that TNC agreed to pay, and TNC (through its officers and attorneys) knew that any decrease in the value of consideration that HCAC received would reduce those liabilities.  In addition, after the transaction was structured, TNC had an incentive to exclude from the gift letter part of the consideration that TNC received because the less consideration disclosed in the gift letter, the more the gift letter would on its face support the reporting of a greater charitable contribution deduction (and thus lesser reimbursement).

 The court concluded that "the parties actively negotiated the details and the contents of the bargain sale gift agreement (and hence the gift letter) with TNC's goal in mind."  Later, the court states:

In fact, the record strongly suggests that representatives of TNC and HCAC made a conscious decision to exclude items of consideration received in the 2001 transaction in calculating the amount of the bargain sale gift and to play the audit lottery with the hope of minimizing the tax indemnification amount. Therefore, the lack of disclosure of those items prevented any charitable contribution deduction because of lack of an adequate written acknowledgment.

The court concluded the letter was not a good faith estimate and that the taxpayers could not reasonably rely on the letter.  Further, the taxpayers could not take the charitable contribution deduction by claiming substantial compliance.

Much of the rest of the opinion deals with valuation methods and experts.  The court then considers whether the taxpayers are liable for underpayment penalties.  It applies the "reasonable cause/good faith" affirmative defense to some of the underpayments, finding that taxpayers reasonably relied on counsel.  But for the remaining portion of underpayments, it found that they did not act on professional advice but in fact knew that they had received additional unreported consideration.

This case, of course, deals with the particular taxpayers that were working out a mutually satisfying deal with TNC for proteciton of the wilderness attributes of land they occupied while allowing TNC to take possession of a large tract of land that needed to be preserved.  The problem came when the parties worked together to come up with a tax reductive scheme that would provide a generous charitable contribution deduction to the donors and hence less of a tax reimbursement payment obligation to the charity.  Playing the audit lottery is not something that respectable charities should be doing.  And acting as an accommodation party to facilitate tax breaks for wealthy donors is not the kind of thing one wants to see happening.  Shame on TNC for its willingness to "tweak" its gift acknowledgment letter here to accomplish those tax savings goals.  And one cannot really savor the idea that a TNC benefactor like Bambord gets a choice development right on the property out of the deal.....

Romney's Wall St. J. Interview with Gigot--Protecting the Rich

[edited to rephrase and correct typos 12/26/11 5 pm]

Joseph Rago and Paul Gigot interviewed Mitt Romney on his 'vision' for America--"On Taxes, 'Modeling', and the Vision Thing", Wall St. J. Dec. 23-24, 2011, at A13.  In it, Romney reveals the way patrician wealth has affected his values, casting President Obama as a "European social democrat" and suggesting that contrasts with his own belief in a "merit-based opportunity society--where people earn their rewards based upon their education, their work, their willingness to take risks and their dreams."  

Now everybody likes the idea of people being able to advance based on merit, rather than on crony capitalism, improper influence or whatever.   The problem with suggesting that America is a 'merit-based opportunity society' is that it isn't much of one anymore: America in this second Gilded Age is primarily a wealth-and-status-based opportunity society. 

• Education:  Even Romney admitted (obviously unintentionally) that wealth makes a real difference, since he noted that rewards depend in part on education.  People with wealth receive the finest educations from pre-K through post-graduate, getting preferences at the best children's academies in Manhattan and at the highest ranked universities like Harvard and Yale.  People without wealth lose out from the very beginning, with inferior schools that are no longer fully supported by the public, as charter and for-profit schools take over offering inferior educations that no patrician family would ever accept.  The poor and middle class take on enormous loans and work loads to finance even their public university educations, since state support has slipped down to a mere 20-30% of the cost of that education.  That makes study and grades and success much more difficult for them. 
• Working hard (with Contacts/Influence/lobbyists):  The wealthy are introduced early to the most important people of influence in society, like the Vanderbilts and the Astors of old, the private equity fund managers and the Wall Street bankers that can smooth their way through all the trials and tribulations of their 'work' careers--i.e., becoming owners of major league baseball team when you have no relevant experience (George W. Bush, with the aid of his papa and his papa's influential and rich partners) or setting up a venture capital fund (like Romney's Bain Capital). These connections ultimately permit the wealthy to mingle in a monied society that offers the right contact for every venture to succeed--including lobbyists to help a wealthy entrepreneur get his business going and ability to 'invest' in politicians who are willing to risk alienating the middle class to support preferential taxation of the rich. 
  • By the way, lots of the not-rich work quite hard, often at thankless jobs that provide no cushion to deal with life's difficult blows or at a job that, at minimum wage, still leaves their family below the poverty line.  Without the contacts and influence that smooth the way of the rich, there chances of moving up are much more limited.  If they persevere, have an entrepreneurial idea, and catch a break, they may be able to move beyond where they are, but they have to do a lot more than just 'work hard.'  
• Taking Risks (and Getting Subsidies and Preferential Tax Provisions):  The poor take a risk every time they get up in the morning--will their health hold out so they can keep working? will they be able to make it to their job in that car that needs a new starter? can they manage to arrange for someone to take care of their kids while they work or will they have to be "latch-key kids" yet another day?  But they don't usually have the kind of capital nest-egg to take a risk with in the way that Romney means it--the excitement of opening a new business demands from the poor and near-poor Herculean efforts to pull together family, friends, and workers to support their business ideas.  Those with money, on the other hand, have a head start on all of this.  Bill Gates' parents offered him an educated life of relative ease; he could 'play' in the garage on that dream of his rather than running heavy machinery or working behind a counter at a McDonalds.  And those with contacts and money are able (and willing) to hire the best lobbyists to ensure that they get all the tax-advantaged benefits and subsidies that they can finnangle (or buy) from local, state and federal legislators for their activities.  That includes favorable tax provisions that allow them to keep a significant percentage of their wealth (and to fight for even more favorable provisions), such as the carried interest provision that gave Romney a preferential rate on almost all of his compensation income, the preferential capital gains rate that gives all the wealthy a low tax rate on their income from trading stocks and bonds with each other, and the various ways that the tax code subsidizes the kinds of personal deductions that provide the most benefit to those with money--from the charitable contribution deduction (including the ability to give away stock and claim a deduction for its value rather than for your actual basis) and the mortgage interest deduction (for interest on home loans up to a million plus $100,000) to all of those provisions that allow the wealthy to retire well--pension plans, exclusion of life insurance benefits, etc.  Then there are the many subsidies they get various governments to provide for their businesses, presumably by using those long-term family/status connections to wine, dine and influence.  They include low-cost loans such as those enjoyed by Romney's Bain Capital for various businesses that Bain Capital was 'turning around'.  (Handily, they can make low-taxed profits for themselves even when their turnarounds fail, with all those subsidies, so that the taxpayer sometimes ends up paying  for their losses along with the fired workers.)  See the links provided in the posting yesterday on Romney's reluctance to release his tax returns, which discuss some of the subsidies and other benefits to Romney's business. 

That's not a merit-based opportunity society:  it's an influence-based society, where the poor and even most of the middle class are working against long odds to make headway. 

And there's not much evidence that Romney recognizes this fundamental difference in existence of the well-off and the not-so-well-off here in America.  Take the Gigot story's discussion of tax policy and what kinds of "reforms" Romney supports.  The Journal apparently thinks Romney is too timid on 'risk-taking' because he didn't espouse the kind of tax agenda that the Journal supports--moving to a consumption tax--like the national sales tax-- that shifts most of the tax burden to ordinary folks (since they will pay tax on most or all of their  income since they spend most of it on food, shelter, clothing and other necessities) and leaves a zero percent tax rate on the capital gains, dividends, and other income from capital that makes up most of the income of the wealthy and little of the income of everybody else.  Why, the Journal notes, Romney's plan merely calls for extending the Bush tax cuts, cutting the statutory corporate tax rate from 35% to 25%, and eliminating capital gains and dividends taxes only for those who make $200,000 or less.  Romney won't even say he supports a consumption tax til he's studied it more, though he likes the purported "simplicity" of a flat tax.    Romney also says he likes "removing the distortion in our tax code for certain classes of investment".  This means that Romney does not understand the real economics of the consumption tax and the so-called 'flat tax', both of which result in taxation of 100% of the income of the poor and near poor and most of the middle class while leaving the rich with a minimal tax burden.  Any system for alleviating that burden (such as a low-level exemption at the bottom of the income scale) would thrust a truly burdensome recordkeeping requirement on those least able to cope with it.  Especially for versions that merely zero out the tax rate on income from capital, distortions would be magnified: the categorization of income into different types is one of the primary distortions in our system, and any plan to eliminate taxes on one type of income while retaining them on another increases distortions rather than removing them!

What about Romney's saying he won't propose cuts in individual tax rates for those making more than $200,000?  The Journal seems to think that is rather cowardly, since such a proposal accepts President Obama's linedrawing on where rate cuts might be reasonable.  Now, aside from the failure to consider dropping the entire bunch of Bush tax cuts and letting all the rates go back to the level that they were when Bush took office (which might well be the best tax reform the Congress could do at this point), Romney should be commended for at least recognizing that the wealthy have gotten a fistful of tax gifts from the Bush individual tax cuts (and, indirectly, from the various corporate tax provisions that have allowed companies to pay less and less into the federal fisc) and for not wanting to proffer even more. 

But here's the rub.  Romney doesn't recognize the damage from the wealthier among us continuing to get even wealthier while the vast majority suffers stagnation and decline:  as the concentration of income increases at the top and inequality becomes the defining characteristic of this society, opportunity for all is threatened as is democracy itself.  Tax policies that could serve as a deterrent to that wealth buildup at the top--e.g., a stiffer, progressive estate tax, a financial transactions tax to discourage trading and capture a tiny amount in connection with those secondary market trades amongst the wealthy, and bracket expansions that would create a more progressive set of tax rates for the highest income that would distinguish between those who have $400,000 a year and those who have $2 million a year--aren't even on Romney's radar screen.  He's content with the current system's distribution, one that is highly favorable to the wealthy.  As a recent FED Finance and Economics Discussion Series article made clear, inequality has made permanent inroads and tax policies haven't done much to dampen them.  See Jason DeBacker et al, Rising Inequality, Transitory or Permanent? New Evidence from a U.S. Panel of Household Income 1987-2006.

Romeny's made it clear that he isn't about to challenge the status quo of an easy tax life for the wealthy.  Here's what he said to the Journal on the question of making sure that the wealthy never see any kind of a tax increase.

"My intent is to simplify our tax code and create growth, and so I will also look to see whether the top one-half of 1% or one-thousandth of 1% or top 1% are still paying roughly the same share of the total tax burden that they have today.  I'm not looking to lower the share paid for by the top."  Wall St. J., Dec. 24-25, 2011, at A13 (quoting Romney).

So after a decade of cutting taxes on the wealthy and passing more and more provisions that benefit the wealthy in particular either directly or indirectly, Romney declares today's status quo as the perfect state for things to be in--the current low taxes on the wealthy, in perpetuity, are his goal.  And while we may applaud him for not intending to lower taxeds further on the wealthy, it is hard to see how continuing current tax policy towards the wealthy makes sense for the fisc or for democracy.   Carried interest--won't be taxed under Romney as the ordinary compensation that it is.  Mortgage interest deduction on million-dollar loans--won't be pulled back to a more reasonable amount such as the interest on a loan that is 80% of the value of the median-priced US home.  Charitable contribution deduction for value rather than basis in stocks contributed--won't get rid of that one.  Establishment of new brackets to recognize the drastic expansion of incomes at the top so that those with progressively more income are paying progressively more in taxes--won't happen under Romney.  Why?  Because he is going to make sure that the top 1%, the top 1/2%, the top 1/1000% don't pay less, but also don't pay a bit more in taxes than they are paying now, this perfect state where the GOP wants to cut people off Medicaid to save money, turn Medicare into a 'premium support' system that will shift more and more of the burden of health care in one's old age to the vulnerable elderly with a pension they can't count on and a Social Security system that the GOP is trying to ensure that they can't count on.

Most tax "simplification" promoted by lobbyists won't create growth--it is much more likely to result in tax loopholes that the wealthy can drive a truck through.  Refusing ever to increase taxes, even on the ultra-rich who can clearly afford to pay more (without really noticing the difference in spending power) won't create growth--it most likely will result in a stagnant economy where the burdened middle class gradually falls into the ranks of the New Poor. 

Presimetrics

Over at Angry Bear, my colleague Mike Kimel wrote a book called "Presimetrics".  It measures the economy in various ways related to the terms of presidents (and their parties).  Kimel concluded that Democratic presidents show the best broad-based economic growth and the best job creation.

Now, that fits because Democrats--albeit usually in weak form and often co-opted by the financial wealth holders of the country--generally adopt policies that do have something to do with furthering broad based growth that benefits ordinary American, rather than just feathering the nests of the already rich.  What kinds of policies?  Well, anti-trust, pro-unionization, financial regulation, regulation of industrial pollution, environmental protection, "green" industries, unemployment compensation, progressive taxation, estate taxation, and the AMT (which undoes some of the accumulated preferences mostly enjoyed by the rich, from charitable deductions for value they never paid taxes on and so comprising a pure windfall, to huge mortgage interest deductions on their million dollar homes, though it still leaves them their preferential taxation on capital gains).

Others are beginning to catch on to Kimel's conclusions.  See, e.g., this graph at The Far Left Side (constrasting the last 11 Presidents by party and their impact on the economy for bad or good--Republicans are almost uniformly bad, with their corporatist policies intended to benefit the rich at the cost of productivity sharing with the workers who make it possible).  You might want to read the site, as well as Kimel's book (available through Angry Bear).

Tax Bill's "Active Financing" Giveaway to Multinationals

Notice to Readers:  A Taxing Matter will be online sporadically through the holidays.  Regular postings will return on January 10.

One of the provisions of the $858 billion tax cut bill passed in the lame-duck session is another two-year extension for the "active financing" exception to the subpart F rules for taxation of the passive income of foreign controlled corporations.  See Eggen, Active Financing Exemption to Cost Taxpayers $9 Billion, Washington Post, Dec. 23, 2010.

The beneficiaries of this provision are big banks with multinational operations and  other big businesses who use the creation of their own financing subsidiary as a way to lower even further their already low US taxes.  Remember that although the US statutory rate for corporations is somewhat higher than the norm at 35%, the effective tax rate is in fact lower than the norm, with US corporations among the lowest taxed of all the OECD nations.  That means that the US is effectively a tax haven for corporations.  Part of the reason that is so is that there are so many exceptions and special provisions worked into the corporate tax regime--exceptions like the "active financing" exception.

The active financing exception was supposedly eliminated some time ago.  But lobbyists worked hard to get a transitional extension of the provision.  And every year since then they've worked hard to get Congress to push through yet another extension and they've increased their efforts to get Congress to make the exception to Subpart F rules permanent.

This is similar to the way the research credit has worked.  There is no question that research expenditures need to be taken into account one way or another in figuring a company's tax liability--new products depend on somebody doing the research.  But there is a big question about HOW those costs should be taken into account.  Under a conceptually rigorous tax system, research expenditures would likely be capitalized.  But our system has long permitted a deduction.   The credit for R&D is quite a different thing, and not at all justifiable economically and certainly not justifiable as a subsidy that will be worth the price by stimulating growth.  INstead, it is a pet project of corporate lobbyists granted an extension each year by Congress that is essentially a pure giveaway--reducing dollar for dollar the corporate tax liability by the amount of money spent on whatever counts as R&D.  The problem with that, of course, is that it generally is not growth-stimulating basic research (stuff that is more often done by university or government researchers than by corporate labs) but instead merely profit-enhancing fiddling with a product that allows the company to extend already overly long patent protection (and enjoy monopoly-like profits for even longer) or develop something that differs little from its predecessor product but can be labeled "new" for marketing purposes (and enhance monopoly-like profits for even longer).

Those proponents of lower corporate taxes--who have been lobbying Congress steadily on these issues for decades--have gotten Congress to pass a large number of corporate-friendly provisions with the purported purpose of stimulating economic growth that are really just subsidies for the biggest multinational corporations from Big Banks to Big Oil.  So we have seen accelerated depreciation, and first-year partial expensing, and percentage depletion and "bonus" depreciation, and complete expensing--all much more generous than the true economic depreciation and all profferred as a way to stimulate growth. 

There is not much empirical evidence to support that this kind of tax treatment results in growth.  It correlates instead with increasingly steep increases in compensation levels for top managers (moving from 20-40 times the average worker to 200-400 times the average worker, with some CEOs being paid in a half a day what their average worker makes in a year) and with bigger payouts (either through stock buybacks or dividends) to wealthy shareholders (taxed now at extremely preferential rates compared to the rates of tax paid by ordinary workers on their income and, in the case of wealthy managers and shareholders, likely invested in offshore gambits rather than plowed back into the startup of new enterprises in the US).

The active financing exception fits right in with these others.  It is a boon for companies like GE, that use their controlled foreign subsidiary to serve as a financing arm for foreign sales and thus avoid US taxation.  But wait, you say.  Doesn't that do just the opposite of what is claimed?  Wouldn't that make foreign sales easier, cut tax revenues in the US, and do nothing but encourage GE to increase its foreign manufacturing and sales rather than increase its manufacturing in the US and exports from here?  Of course.  Moreover, by giving companies an exemption for this type of foriegn income AND by having done one almost tax-free repatriation program in 2004 that was supposed to increase domestic investment but instead went to share repurchases (good for wealthy shareholders) and often correlated with huge worker layoffs, the policy is likely to be more associated with domestic corporate decline than with domestic corporation expansion.  When one considers in addition the fact that the Great Recession is a direct result of finance-friendly policies gone awry, leading to too much interconnectedness among financial institutions, too much speculation in derivatives like naked credit default swap, and too much of a casino mentality generally among financing entities, the idea of providing a $9 billion bonus to offsore financing bogles the mind.

This Congress (and regretably this President) are too corporate friendly to see the problem.  Mark my words:  corporatism and all that it implies in terms of increasing social inequality and growth of an influence-heavy, uncaring wealthy elite that can call the shots in its own favor is the single most important topic that every American should be considering in making decisions about how to vote, who to support, what kinds of institutions we should support and how to interpret what people (especially judges) say about justice, fairness and equal opportunity over the next five decades.  We should all make a New Year's Resolution to write one letter to Congress every week dealing with some aspect of this issue.  If we don't shift this ship of state to at least treat ordinary workers equal to the corporate oligarchs, the democracy we all take for granted will cease to exist.  Anti-trust, unions, and democratically egalitarian tax policies are all needed in this effort that should break up the megalithic multinational corporations (especially the "too big to fail" banks), permit workers to form unions more easily rather than being harassed by their employers (a majority of American workers want to unionize but very few are in unions because of the way our national laws have shifted to favor employers' efforts to keep unions out so that the company managers and shareholders can harvest all of the productivity gains for themselves), and eliminate the many tax provisions that continue to redistribute income upwards to the elite (including most of the mortgage interest deduction, the charitable contribution deduction, expensing provisions, and of course the preferential rate for capital gains and the nontaxation of much of the income of the wealthy).  Although not the biggest item, the international taxation provisions like the active financing exception that permit large corporations to defer taxation of their income need to be eliminated.

Dealing with the Sunset of the Bush Tax Cuts (Part V in a series)--dividends at capital gains rate

IN this series, i've been discussing the merits of enacting a new series of tax cuts that mimic, at least in part, the Bush temporary tax cut legislation that expires at the end of this year. 

The primary arguments for the original Bush temporary tax cuts were either bogus to start with or proven weak over the period of the tax cuts. 

1. The Republicans who pushed the cuts claimed first that they were intended to return to taxpayers the surplus.  Of course, that argument was laughable from the beginning: Bush deficits started in the first year of the Bush regime and got worse for the long term as the costs of a military budget pumped up by preemptive war and other augmenting of government spending at the same time that tax revenues were cut again and again throughout the regime. 
2. Various Republicans also admitted that their goal was to cut the size of government--though they didn't mean the military and they did mean any programs that protect average Americans (such as Social Security, unemployment compensation, environmental programs, OSHA, etc.).   But the size of government grew in spite of the reductions in revenue, resulting in expanding deficits.
3. The various  expensing provisions; repatriation with almost no taxation (in the 2004 "American Jobs Creation Act"); tax breaks for oil and other natural resource companies; international tax breaks; and other corporate-favorable provisions were supposed to stimulate entrepreneurial activity and job creation.  Instead, businesses used the low-tax repatriated income to pay managers more and workers less, and laid off workers at the same time.  The expensing provisions allowed corporations tax breaks for equipment they would have bought anyway, but didn't create new jobs--the Bush regime's jobs record was terrible, barely keeping up with inflation and certainly not spurring new job growth.  The tax breaks for natural resource companies fed their complacency about everything from jobs to safety to environmental protection--giving companies more for less doesn't create better citizens and doesn't get us cheaper energy either.  The record from the tax cuts as far as entrepreneurialism and job creation was dismal--the mainstream neoconservative and neoliberal theories of market fundamentalism didn't work out as claimed.
4. The lowering of capital gains taxation and the taxation of dividend as a net capital gain at the lower rate were also heralded as ways to spur investment in new businesses (entrepreneurialism) and job creation.  Bullshit.  Most of the result was just more money in the pocket of the richest Americans who own most of the financial assets, and that money in the pocket was as likely to be invested in offshore bank accounts as put to work supporting a new business here in the US.  The dividend tax cut didn't even lead to much in the way of dividend payouts--except perhaps for firms whose managers and directors saw a chance to benefit themselves.  Even if those expiring tax cuts are not renewed with new tax legislation, it is not likely to have much of an effect on companies' dividend policies.  See Higher Taxes May Not Push Firms to Cut Dividends, Wall St. J., Aug. 30, 2010.
5. The cuts in individual rates were supposed to provide more money as an economic stimulus.  But the Republicans who passed those rate cuts knew that the AMT would act as a clawback to the cuts over time, except for those at the very top who were always subject to the AMT and those in the bottom who are hardly ever subject to the AMT.  And they knew that amending the AMT to conform to the temporary tax cuts would be tremendously expensive--at least a trillion in revenue lost for the decade of the tax cuts, where the "temporary" nature of the bill had been necessary to claim that the cost was "just" 1.3 trillion over a decade.  In other words, the tax cut bills passed during the Bush regime with the 2010 sunsetting gimmick were a sham from the beginning--they cost much more than those who passed them wanted to admit, and they carried with them a clawback mechanism that would undo the cuts in rates for many individuals.  The various annual "patches" to the AMT are extraordinarily costly in terms of lost tax revenues since they are essentially an extension of the tax cuts to an even broader base, and the corporate changes to the AMT have reduced its effectiveness in cutting back on corporate preferences while costing the fisc billions.
6. The estate tax scaleback and one-year repeal was the most gimmicking of all.  Cutting the budget by $30 billion a year in order to fund a giveaway to the wealthiest and most privileged Americans is hard to justify in any budgetary climate.  So Republicans pushing estate tax repeal and the various "coalitions" funded by wealthy families like the Walton heirs have painted a facade of "helping little guy farmers and businesses" on their efforts--a facade that many Americans may have bought hook, line, and sinker since they do not tell the truth, much less the whole story.  Very few family farms and very few small businesses are threatened at all by the estate tax. 

So what should this list of bogus and failed reasoning tell us about what the Congress should do on taxes for 2011 and thereafter? 

1. I say let the Bush cuts expire according to the way they were written.  But enact a new set of tax cuts that are better targeted to jumpstart the economy and to put money where it is needed.  
2. Let the corporate giveaways  expire as slated.  
3. Let the estate tax mess expire as slated.  Enact a new estate tax law that (i) increases the exemption amount to a reasonable level (say, $2 million) and indexes it for inflation and  (ii) enacts a progressive rate structure (ranging from 55% on the estate that exceeds the exemption amount, up to some higher rate of 65% or 70% on multi-billion-dollar estates. 
4. Let the capital gains changes die as slated, and do not enact any further capital gains preferences (so dividends would go back to being treated as ordinary income). 
5. Let the individual rate changes die as slated, and enact a new tax cut for individuals making $100,000 or less, with a temporary tax cut for individuals making up to $200,000 for a three year period to aid us in getting out of this recession.
6. Enact genuine AMT reform--in which capital gains are treated as a preference and which provides a significant exemption amount based on gross income.  See the earlier articles (2005-2006) in ataxingmatter on AMT reform for more specifics about the kinds of reforms to the AMT that make sense.
7. In conntection with the rate cut and AMT legislation, enact measures to pay for the tax cut, including

(i) a carried interest provision taxing all profits interests as ordinary incom

(ii) a corporate tax provision limiting the benefits of tax-free reorganizations and consolidations, and

(iii) a charitable contribution provision eliminating the deduction of value in excess of basis.