ataxingmatter

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.

Maule and Pappas on progressive taxation and the decreasing burden on the rich

Maule and Pappas have been engaging in a debate on progressive taxation and the decreasing burden on the rich.  See Canonizing the Rich, Part 1, Part 2, and Part 3.

As Maule shows in his posts, the rich have an increasing share of the income (an even larger share of the economic income--because they benefit much more than ordinary folk from tax expenditures in the Code, from capital gains preference to charitable contribution deduciton to mortgage interest deduction to life insurance exclusion, and more of adjusted gross income, a tax concept that excludes much of economic income).  But they pay a much smaller proportion of that income in taxes now than they did in the period when our country was the most prosperous shortly after WWII--a decline from about 50% of the income in taxes to less than 20% of it paid in taxes.  Meanwhile, our country has slid into a deficit spiral from the combination of gigantic tax cuts under Bush that were of primary benefit to the ultrarich (the 2001 tax cuts were projected to cost about $1.6 trillion over the first decade and have cost about $700 billion so far) and the huge increase in government under Bush from militarization and his "preemptive war" policy (costs of the Iraq-Afghanistan wars in human lives greater than 5000 and in dollars running to the multiple trillions--especially when long-term health needs of Vets and replacement costs for the expensive equipment is factored in).

So why would anyone think that these disastrous policies of cutting taxes for the rich should continue?  Such a policy has no good outcomes--deficits, inequality that threatens democracy with oligarchy, political instability, poverty and the disease, lack of education, despair and often violence that can come from it.  I wouldn't want to live in a country where the well off live entirely within isolated islands of gated communities, surrounded by deep zones of poverty.  I much prefer a country built on communities based on sustainability, where the wealthiest are merely rich and not "filthy rich."  A salary for a hedge fund manager or a CEO of a million a day (not uncommon in twenty-first century America) is, simply put, obscene when it is 300 or 400 or even 500 times the salary of the average worker.  No one "earns" that kind of salary--it is a corrupt gift from peers who want the same return favor when the manager sits on their salary board.

People who disagree with me on this tend to say that my opposition to such inequality is just jealousy.  No, it is concern for the very heart of this country's democracy.  And I suspect many of those who defend the low taxes for the wealthy put in place under the four decades since Reagan took office do so reflexively--because they are wealthy themselves and don't want to feel guilt for their undeserved fortunes, because they hope to be wealthy themselves and want to get in on the privileges enjoyed by the wealthy few, because they make their incomes by serving the wealthy and perforce take opinions favoring their clients, or because they have been so indoctrinated by freshwater economist thinking that they buy into the myths of the wealthy as the entrepreneurs that make our civilization possible.  Whatever their reasons, it is discouraging to see this defense of the US as tax haven for the wealthy.

Charitable contribution deduction--thought for the day

Here's the way Alan Olsen, the managing partner at Greenstein, Rogoff, Olsen & Co. in San Francisco describes the charitable contribution deduction for stock (received via email titled "Financial and Tax Trends Media Need to KNow About" from Olsen's PR firm Apr. 28, 2010).

  Make charitable contributions.  If you have appreciated stock that you’ve had for more than one year you may want to keep the cash in your pocket and donate the stock.  You’ll avoid paying the tax on the appreciation but will still be able to deduct the full value of the stock.  You win.  Your charity wins.  The only loser is Uncle Sam.

Now, those of you who have been following this blog know that this particular deduction is one of my pet peeves.  It provides a freebie that is per se available only to the 30% of taxpayers to itemize and, within that group, primarily of benefit to the wealthiest set who own most of the financial assets and generally get the bigger rate deduction because of their higher tax bracket.  They can hold greatly appreciated stock without paying tax on the appreciation, and use that as collateral for borrowings at low cost, so already the possession of appreciated stock accrues benefits not available to ordinary Americans who generally hold only small amounts of stock.  But then if these fat cats want to reduce their tax bill, they can donate stock to their favorite charity (maybe it's one that provides a service that they enjoy, such as the opera or symphony, get all kinds of status and name recognition goodies and enjoyable services from the "gift" AND get a tax deduction for the full value as a gift from the federal government. 

 Note the way this works:   Let's assume a banker who has lots of stock that he received as bonuses.  Let's say each share of stock is worth $200 but the banker/contributor has only a $2 cost basis.  The banker contributes to his local opera company (that puts a plaque up in its lobby in his name in recognition) and gets a tax deduction of $200,  $198 of which is an unjustified freebie from Uncle Sam to the banker/contributor, resulting in about $66 lower taxes (assuming a tax rate around 30%).  So 1000 shares and that's $66,000 less in taxes paid on other taxable income.  If the banker had sold the shares and contributed the money instead, he would have paid tax on the appreciation (regretably, only at a reduced preferential rate, but at least that would be fairer).  Since he gives them away instead, he isn't taxed on the appreciation but still gets the deduction.  No income tax on the full value.  Tax deduction for the full value.

Haiti--donate now for a quick tax benefit

As everyone knows by now, the recent earthquake in Haiti left a nation in shambles, without adequate food, water, or shelter for thousands and with the dead literally literring the landscape and polluting the air and water for those lucky enough to survive.   The impact was similar to Aceh Province's tsunami death and damage.  Various organizations have rushed to assist, from the U.S. armed forces to small missionary groups.  Every bit of assistance is needed.

If you haven't contributed to one of the organizations providing much needed medical and food assistance, you can still do so by February 28 and be able to take the deduction on your 2009 tax return.  Don't delay.  We enjoy so much and the harm to Port au Prince makes the World Trade Center calamity look very small indeed. 

Here are a few organizations that are working in Haiti:

Habitat for Humanity

Doctors without Borders (Medicins san Frontieres)

Feed the Children