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Kevin Brady's misleading Wall St. Journal op-ed

Today's Wall Street Journal features an op-ed by Kevin Brady, right-wing Texas Republican who chairs the notorious "Joint Economic Committee" that has been a notorious producer of anti-tax propaganda-driven studies over the years of Republican hegemony in the House.  See "Tax Reform Needs Accurate Tax Tables", Wall Street Journal (May 6, 2013), at A15.

The op-ed spends a lot of time denouncing information about tax rates.  It suggests that the entire US tax system is far too progressive in nature, because "one of the most salient characteristics of the U.S. tax code [is] the decreasing share of taxes paid by the bottom 50% of taxapyers and the increasing share of taxes paid by the upper 1%."  Of course, Brady mentions nothing about the accelerated growth of inequality of income in that same period, resulting in the upper 1% controlling so much more of the U.S.'s wealth and income compared to that bottom 50%.  In fact, the upper group pays less than it should given the enormously increased bite of wealth and income, a fact that Brady conveniently overlooks.

The op-ed also talks only about the income tax rates, thus appearing to suggest that the income tax is the only relevant portion of the U.S. tax system and that rates, rather than base, are the most significant factor.  In fact, there are a range of taxes--income, estate, payroll, excise/sales taxes.  Regrettably, the income, estate and payroll taxes are much too lenient on the highest paid groups.  

The shrinking of the income tax rate structure (from many different rate levels in the 1970s to our minimal group of rate brackets today) is highly favorable to the highest income group.  The rate levels off at less than half a million, while the highest paid CEOs are making 20-30 or 40 million a year.  As a result, those in the top 1%--and especially those in the top part of that 1%--are taxed at the same rates as people who make a "mere" $400,000 a year.  Further, the base on which that rate is applied to determine tax liability is notoriously laden with tax expenditures that primarily benefit that same group at the top, beginning with the charitable deduction for non-taxed appreciation and continuing through Roth IRAs/ IRAs /generous pension plans to too-high mortgage interest deductions and others.  Only those in the top 30% even bother with itemizing deductions.  And among those, it is those at the top who garner the enormous benefits of deductions from those tax expenditure provisions.

The estate tax is similarly designed to provide special benefits to the wealthy--from the lack of a progressive rate structure that ensures that the wealthiest tycoons who've amassed fortunes from loopholes like the carried interest provision will pay peanuts on an estate hardly taxed during their lifetimes,  to the various gimmicks for evading and deferring estate taxes-- including various kinds of trusts,"family" partnerships  and irrational "discounts. 

On the other hand, the sales tax is a mere gnat for the wealthy while its expansion cuts into essential living expenses for the growing legions of the poor and nearly poor.  The payroll taxes for the working poor and the middle class take a significant bite out of their labor's rewards, while the wealthy CEOs and directors pay Social Security only on a miniscule portion of their wage income. 

But Brady's most misleading statements are those that repeat the tax-cutting mantra that the GOP has pushed for well-nigh four decades now, beginnning before Reagan but put into overdrive during the George W. Bush administration--the idea that tax cuts stimulate economic growth, and especially that tax cuts on the capital income of the wealthy will stimulate growth, create jobs, and increase wages for the majority of Americans who are not wealthy.  Here's what Brady says (notice how the statement presupposes the truth of his claim):

The most important defect of tax-distribution tables is that they cannot help one to assess how proposed tax changes will affect economic growth.

Suppose Congress eliminated the double taxation of capital income by doing away with taxes on capital gains and dividends at the individual level.  Current tax distribution tables would depict this change as a reduction in progressivity due to the large share of capital gains and dividends attributable to the top income quintile.

But doing away with taxes on capital gains and dividends would significantly lower the after-tax cost of capital for new business investment in buildings equipment and software.  New business investment increases the demand for and productivity of labor, driving real wages higher. 

For households in the bottom 50% of the income distribution, the benefits are significant but indirect--more jobs at higher real wages.  Id.

The fact is, we have been following this agenda of reducing taxes on capital income for decades.  The result has been an unprecedented growth in inequality and the continuing decline of wages for the vast majority of Americans who work for their income.  The right's "philosophy" of low taxes on capital and high taxes on labor doesn't work and never will.  Brady doesn't appear to much care --his arguments seem designed to justify the right's continuing push for policies that create an oligarchic elite served by an increasingly indebted worker class with few employment rights as the courts favor Big Business over the people this country was founded to protect.  Brady's op-ed, in other words, is just another volley in the right's class warfare against American workers.

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Fixing Sequestration (for the rich only)

Once again, Congress has demonstrated that it notices mostly what affects rich people and can't quite identify with ordinary Americans.  And that it will not pass either spending laws or tax laws (which include a wealth of spending laws through the tax expenditure mechanism) that equitably deal with the misallocation of resources between the wealthy few and the rest of us.  Tax policies operate for the high and mighty:  once again, inequality is the real characteristic that matters.

The sequestration--a response to the GOP-led desire for austerity, shrinking government, and otherwise ensuring that rich people and major businesses don't have to pay much in taxes--was ridiculous from the outset because it cut programs across the board, at a time of significant unemployment, without prioritizing programs that support the safety net or ensure education (like Head Start) or protect critical infrastructure or other needs.  The only reasons it made some sense was that (1) it would finally lead to some cuts in our engorged military spending and (2) it should have permitted Congress to develop enough spine to refuse to make the Bush tax cuts permanent for anybody but those ordinary Americans making $100,000 or less. 

But we all know that latter wise move didn't happen.  Congress made the ridiculous-when-they-were-enacted and more-ridiculous-still-when-they-were-made-permanent Bush tax cuts permanent for the vast majority of Americans, leaving only a smattering of wealthy Americans subject to imperceptibly higher taxes.  Businesses got another extension of the equally wasteful Bush tax cuts enacted in the Bush Administration's giveaway mode--the R&D credit (often enacted retroactively like this extension was, whose ostensible purpose is to incentivize US-based research, which a retroactive credit by definition cannot do), the active financing exception for the Banksters that got us into the Great Recession to start with, and all the rest.

So we ended up with across-the-board cuts that could not reasonably be expected to work out well for the economy--especially when Keynesian theory (the only kind of economic theory that hasn't been roundly disproven by actual facts) suggested that we should be continuing to increase government spending to make up for the gaps in the economy from MNE hoarding of their cash offshore and consumers drawing back because of the steady decline of their spending power from job cuts and real salary decreases.  IN fact, these damaging cuts were never actually expected to go into effect--Dems hoped (rather naively) that the sequester would force Republicans to support more reasonable tax increases.  Repubs hoped (rather reasonably, in retrospect) that they could blame any problems on the Dems and claim credit for protecting ordinary Americans by not increasing taxes, and of course they've been claiming for the last months that any complaints about the problematic impact of the sequestration cuts are "exaggerated," and "they have relished the success of forcing visible spending cuts on a Democratic administration."    Alex Pareene, Senate fixes the (part of the) sequesteration (that affects rich people)!, Salon.com (Apr. 26, 2013). 

Few in Congress were ever willing to stop the gravy trains for the rich--carried interest for private equity, publicly traded "master limited partnerships" for oil and gas pipeline companies that are excepted from the ordinary treatment of publicly traded partnerships conducting businesses as corporations subject to an entity level tax; so many tax expenditures that favor Big Business that very few companies actually pay any tax on their huge profits; the assignment of income benefit of a stuck in the last century transfer pricing tax system that allows some of today's biggest companies (Google, Microsoft, etc.) to transfer their indispensable intangible properties offshore to avoid US taxation of profits attributable to the support provided by this country, while nonetheless retaining 100% ownership and control; and of course the biggest boondoggle of them all, the preferential rate for capital gains coupled with an absurdly lenient estate tax, that together allow the rich to live richly during their lifetimes and then pass their estates with negligible tax cost and substantial tax benefits (from the "step up in basis at death" that, for example, allows heirs of master limited partnership interests to restart the perpetual tax-free profits machine).

But hark, what is this?  The reductions caused by the sequester affected the ease with which rich people can get on a plane and fly to their business and vacation destinations!  Such suffering.  So incomprehensible how we could allow it.  The Senate swiftly moves into action--this was something they hadn't anticipated--that the sequester could actually bother some of their own class.  Suddenly, They acted.  In just a short time last night, with unanimous consent, the Senate voted to "let the FAA transfer some money from the Transportation Department to pay air traffic controllers."  See Alex Pareene, Senate fixes the (part of the) sequesteration (that affects rich people)!, Salon.com (Apr. 26, 2013).  The House was expected to act today.

At the beginning of the sequester, most of the Republican politicians who had pressed for even much larger cuts, insisting there was much dross in the federal government, pooh-poohed any complaints that the sequester was leading to real pain for ordinary Americans.  That story changes only when the rich feel any squeeze at all.  As Pareene implies in his story, the media is too much of the time an unquestioning go-along in this conning of the American people:

the story of Congress hurriedly making sure the well-off minority of Americans who fly regularly don’t get briefly inconvenienced — while ignoring the costs of brutal cuts on programs for low-income Americans facing housing or hunger crises — is treated as a wonderful and encouraging display of bipartisanship.

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Baucus Will Not Run in 2014 (yay!)

Max Baucus announced to his fellow Senators today that he will not seek re-election to the Senate in 2014.  He has been the top Democrat on the Finance Committee since 2001.  See Senate Finance Chairman Max Baucus Won't Run Again in 2014, Bloomberg.net (Apr. 23, 2013).

As someone who thinks that Baucus has been a hindrance to progressive reform of the tax code and financial regulation, I must admit that I do not find his retirement a loss.  His chairmanship of the Finance Committee has been marked by a failure to understand the most important issues related to federal income and estate taxation and by adoption of positions that are too favorable to Big Money and Big Business (especially Big Banks).  He has been tone-deaf, in other words, to the class warfare waged by the right against the middle class and the resulting growth in inequality in the country that has been worsened by the current tax provisions that support redistribution upwards to the very wealthiest owners of financial assets and businesses.  In particular, he has failed to use his position to push for reasonable reform of the capital gains preference and the wealth-favoring versions of the estate tax passed by the Bush administration.  He has refused to consider a reasonable financial transactions tax. In fact, Baucus was too willing to go along with the initial passage of the Bush tax agenda in 2001-2004, and he did nothing to ensure that the Bush tax cuts would fade into oblivion on the sunset date.  In fact, he worked to make permanent almost all the Bush tax cuts and supported the corporate-friendly "extension" of the broad menu of corporate tax cut provisions (including a retroactive extension of the R&D credit, which cannot possibly serve the purpose it is claimed to serve when enacted retroactively).  The tradeoff provided only token items on the progressive menu. 

Of course, the Republicans will cast Baucus' choice to retire as a reflection of problems for Democrats.  See the Bloomberg News article cited above, in which Rob Collins of the National Republican Senatorial Committee says as much.  I suspect that Baucus knew he would be targeted by liberal Democrats for his failure to vote for gun control and for his failure to support progressive tax policies. 

That said, he remains as Finance Chair through 2014, and he has said he intends to produce a rewrite of the tax code.  He is the wrong person to do that, and so it is important that other Democrats relegate him to a position of less influence in order to come up with more progressive changes than he would support.

Is Ron Wyden (who would become the most senior member of the Finance Committee when Baucus leaves) capable of carrying the banner of progressivism?  His emphasis on "tax simplification" is worrisome, because it suggests that he does not understand the relationship between complexity in the tax code and sophistication of taxpayers to whom the complexity applies.  The main reasons for complexity are two-fold:  (i) existing tax rules are expanded to cover abusive schemes developed by sophisticated tax advisers (attorneys and accountants), and (ii) existing tax rules are riddled with exceptions to provide subsidies (tax expenditures) favoring industries represented by heavy lobbying.  To the extent that tax simplification reduces the anti-abuse rules needed to prevent various tax scams and manipulation, simplication is a policy mistake.  To the extent that simplication results in changes to the tax expenditures, it can be useful  but it is often also mistaken, because the easiest way to "simplify" such rules is to expand them to cover even more of heavily lobbied-for industries.  Wyden needs to expand his understanding of the relationship between simplification as a goal and fair allocation of resources to the extent that resource allocation is handled through tax expenditures in the Code, reasonable rules to ensure that the most sophisticated taxpayers pay their fair share, and fair distribution of the tax burden.  Baucus did not serve the publci well in regards to these issues.  Let's hope that Wyden does better.

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The Inequality Gap

Robert Reich, former labor secretary, has some worthwhile advice for the President's State of the Union address:  he notes that the focus should be the "central issue you want the nation to help you take action on".  That's "not immigration, guns or the environment" (though "[a]ll are important") but rather "joblessness, falling real wages, economic insecurity, and widening inequality" . See Robert Reich, Memo to Obama: Focus on the inqueality gap, Salon.com (Feb. 11, 2013).

He's right.

"It's the economy, stupid", that old slogan from the Clinton campaign days, goes only so far.  It doesn't tell us, for example, what parts of the economy are most important--is it the stock market's well-being, and indirectly the fortunes of the very few at the top of the income distribution who own significant amounts of those items being sold on the market?  Or is it the unemployment data, with its distressing litany of continuing failure of our economy to provide decent jobs for ordinary people?  Is it the way that corporate owners and managers can use the powers of government to make unionization difficult and thereby make it much easier for corporate management and shareholders to retain all the productivity gains while workers wages stagnate (everything from Wal-Mart's tendency to tear down union fliers in worker areas (based on my personal observation) to the CEO's determination to beat unions down any way possible (see the New York Times story in the 2/12 edition, At Cablevision, Norma Rae's Been Escorted Outside, New York Times (Feb. 12, 2013), at A23, regarding Cablevision's firing of two  dozen employees for being off work, after claiming to have an "open" management that invited worker conversations yet allowing those same employees to cool their heels for 40 minutes waiting to talk to him and then walking out and firing them for not being on the job)?  Or is it the general optimism of the upper class, who can pass on untaxed estates to heirs who will get those stocks at stepped up basis and renew the cycle of monetization without taxation for their own account?

Stock market statistics mostly tell us about the upper class, along with the upper part of the middle class that has some share of that bounty:  they don't tell us about how well the economy is serving others, unless the general well-being of corporate America spills over to the general well-being of average Americans.  It doesn't do that in an era of push-down on unions to ensure that workers have no voice, push-back on taxes to ensure that the wealthy managers and owners not only get all the productivity gains but have to pay too little in taxes to support the system that made those gains possible.  Mostly, stock market statistics tell us about how the privileged are maintaining their privilege, as their ownership of most of the financial assets continues to mean their heightened influence over most laws and their garnering of most of the gains that do take place.

This is well noted in a post on Economist's View (Mark Thoma), embedding a post by Miles Corak on Free Exchange about research on inter-generational social mobility.

The real lesson from the historical research is not that there is anything inevitable about a low degree of inter-generational mobility, or that it signals more persistence than other research. The most privileged will do everything they can to perpetrate their status across generations, and in past eras the structure of labor markets and public policies permitted, and in some measure continue to permit, a non-level playing field.

I've long argued that the way to evaluate the economy is in terms of how well it is serving ordinary people who make up the middle class (roughly defined as the middle three quitiles of the income and wealth distribution)  and how adequate is the safety net it provides for those who make up the lower class (the bottom quintile of income and wealth).  What matters is economic sustainability, in terms of  adequacy of those many intangibles by which we measure quality of life--like accessible quality health care, accessible quality education, accessible quality jobs, decent wages for decent work.  That means that government's intervention in the economy will need to be on the side of the little guy, ensuring that resource allocation isn't so skewed to the already rich that we become an oligarchy where most of us live off crumbs and a few of us live like kings.  If we want a sustainable economy and sustainable democracy, democratic eqalitarianism demands that governments temper market forces with protections for underdogs, providing counterforces to the redistribution upwards tendency of brute force capitalism.

Today, the rise of the US oligarchy and the frightening power of wealth in determining how laws work have put us in a terrible situation:   "debtor prisons, once a relic of the 18th century, are making a frightening comeback in the U.S. justice system."  Alex Kane, Miss a traffic ticket, go to jail?, Salon.com (Feb. 11, 2013).

So an appropriate slogan for progressives today should be something along the lines of "It's the inequality, stupid."  And that certainly doesn't mean more of the same old failed GOP policies that favor the wealthy, mistakenly labeled "job creators" by the GOP in its constant effort to undo unions (witness Michigan's disastrous anti-union legislation or Cablevision's determination to aid anti-union forces and squelch union activists), favor capital over labor (from the problematic preferential rate for capital gains to the ridiculous "carried interest" taxation of the compensation payments to so-called profits partners (a category of "partner" for tax purposes not provided for in the tax code but essentially an invention of Wall Street) to the squandering waste of an estate tax and charitable contribution deduction that favor meritless accession to and use of untaxed wealth and pushes the burden for government revenues to laborers instead).  And it certainly doesn't mean more of the same "deficit hawks, austerity mavens, trickle-down charlatans, and government haters who have commanded center stage for too long."  Memo to Obama: Focus on the inqueality gap, As Reich says:

The President should make it clear that any Republican effort to hold the nation hostage to the GOP's ideological fixation on the budget deficit and a smaller government will slow the economy, likely pushing us into another recession.  And that those most imperiled are the middle class and the poor. 

He should emphasize that the real job creators are not the rich but the vast majority of ordinary Americans whose purchases give businesses reason to add jobs.  And that if most Americans still cannot afford to buy, the government must be the spender of last resort.  Id.

Reich goes on to make some specific policy suggestions for acting to reduce inequality.  These include

• reversing the impact of the reinstatement of the higher Social Security tax rate by exempting the first $20,000 of income from the tax and lifing the ceiling on income subject to it;
• reviving government-run work corps, like the WPA and CCC, "to put the long-term unemployed directly to work"
• raising the minimum wage
• imposing a 2% tax surcharge on wealth in excess of $7 billion to be dedicated to education
• Cutting corporate and military welfare
• not cutting public investments or safety nets
• giving tax credits for actual job creation
• supporting states that rehire teachers, firefighters police and social workers.  Id. (quoting and paraphrasing).

Sounds like a pretty good plan.   As Corak noted (in the Economist's View post cited above):

[D]ynamic labor markets offering new opportunities to the population as a whole, progressive public policies of relatively more benefit to the relatively disadvantaged, and strong families with growing incomes and human capital will lead to much more mobility than aristocrats of a pervious era could ever have imagined.

And the Reich plan is certainly better than what most of the GOP-led state experiments like Michigan are coming up with, which read like a plan for even more redistributing upwards to the top few, including:

• eliminating income taxes in favor of regressive sales taxes,
• eliminating business taxes in favor of regressive user fees (a GOP-led Michigan "upward" redistribution "innovation"),
• pushing hard against unions  (a GOP-led Michigan "innovation"),
• reducing safety net support like Medicaid (being considered in Michigan),
• taxing vulnerable seniors on pension income (another of Michigan's recent "innovations"),
• cutting support for state universities while reallocating the support that remains to those that serve the upper class rather than underprivileged who will generally need to borrow more and take longer to succeed (another of Michigan's redistributionist efforts).

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Intangible assets hard to tax--France has an idea...

One of the ways that technology-based businesses like Big Pharma and Big IT companies dealing primarily with intangible assets (patents, copyrights, licenses, information databases) escape paying much in taxes anywhere is their ability to move those assets around almost costlessly and to claim whatever site seems most convenient as their home jurisdiction.  Not having any "real" property within a jurisdiction can seem to render them invisible to taxing systems.

One example in this country is the way that online sales networks have tried to avoid state taxes by having no physical assets in the state and claiming not to 'do business' in the state.  Recently, states have been wising up, in part due to an intensive lobbying effort aimed at pointing out the inherent unfairness in taxing only local businesses with physical stores while their main competitors rake in the tax-free dough.

Another example is the way that multinational enterprises (MNEs) with mostly intangible valuables claim to "sell" their essential intangible patents to offshore affiliates in low-tax jurisdictions, thus claiming to move valuable income-producing assets offshore.  Since they would in fact never actually sell such essential property to a competitor, the "transfer pricing" mechanisms that the US uses to police such deals by attempting to require a "market price" are  inadequate, resulting in offshoring of profits.  Offshore captive insurance companies operate similarly, with premiums paid to offshore affiliates permitting an undeserved decrease in domestic taxable income.

"Google generates more than $30 billion a year in advertising revenue, including an estimated €1.5 billion, or $2 billion, in France. Yet, like other American Internet companies, it pays almost no taxes in France."   Eric Pfanner, France Proposes an Internet Tax, Jan. 20, 2013.  France, frustrated with its current inability to tax such MNE IT giants like Google, Facebook and Microsoft, is considering new ways to attack the problem.   A report commissioned by President Hollande suggests a tax on internet data collection.  See id.  Data collected by these companies, the report says, is the "raw material" of the digital economy and is insufficiently captured by current economic analysis. 

(ASIDE:  Of course, almost nothing is sufficiently captured by current economic analysis, since economists mostly still operate with the wacky theoretical models that assume everything is at equilibrium (which it never genuninely is), and that every actor is rationally maximizes his own greedy objectives (which is never true either).  There are various other problems with the current popular "free market" economic theories, but those suffice to suggest that most politicians are being rather silly when they go to most economists for advice on how to structure their tax systems or how to make their economies work better--particularly if those economists ascribe to the Friedman school's notions of "free market" dogma.)

Like the financial transaction tax, which would help to stem rampant speculation by the big banks that puts world economies at risk, a  data collection tax on the big data companies would offer some help in stemming the rampant speculation by those companies in personal data.  Such data collection may well also prove to put economies--and individuals--at considerable risk, as genetic information, interconnected banking and investment strategies and other data is reached, stored and used. 

And like the financial transaction tax, a data collection tax is not likely to work very well without OECD cooperation among advanced countries.

These are the kinds of issues that Congress should be discussing when they talk about "tax reform"--NOT how to lower the corporate tax rate in the US, which is fine where it is; NOT about how to provide more tax expenditure subsidies to corporations that are already making huge profits (like Oil, Insurance, etc.) but rather about how to ensure that the externalities like pollution, catastrophic risk, and other ills that Big Business has been so good at shoving off on the rest of us get paid for out of business income and how to use the tax system more effectively to cause the economy to work for ordinary folk rather than to cater to the wealth accumulation of the very small percentage at the very very top.

If we want an economy that works well, we should stop the current s0-called "tax reform" train that is being run by lobbyists for Big Business and doesn't even begin to consider the appropriate paramenters.  Instead, Congress should make a priority the consideration of real reform ideas like the following:

1.  eliminate the capital gain preference and increase the estate tax:  the combination of preferences for capital income and capital wealth unfairly allows the wealthy to accrue income at very low rates with assets that also permit them to monetize their assets while retaining them to pass along to their heirs at very low rates of taxation.
2. use the tax code to discourage conglomerate formation and pseudo monopoly formation (limit rather than extend tax-free reorganizations);
3. discourage  tax-subsidized speculation in real estate by eliminating section 1031 nonrecognition "like-kind exchanges";
4. push for more prudent banking and financial systems (enact a financial transactions tax; treat most derivatives as bets rather than financial transactions);
5. require more responsible citizenship from big MNEs (treat any offshoring of business assets as a fully taxable event; disallow offshoring of key patents and other intangibles to affiliates by treating such transactions as disregarded for federal income tax purposes)
6. protect personal privacy while also ensuring that IT companies pay a reasonable amount of tax on their profits (tax collection of personal data)
7. end tax expenditure subsidies for hugely profitable enterprises that are also highly culpable of offloading pollution impacts (and climate change impacts) onto the general public, like Big Oil and Big Gas
8. protect workers by reforming the labor laws to ensure that no state can deprive public workers of their rights to bargain collectively and  at the same time reform the tax laws to limit deductibility of pay for top administrators by tying the limit on deductible pay to the average pay of the company's non-administrative workers (nothing deductible in excess of 10 times the average pay for non-administrators, for example);

 

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McConnell Tossing the Gauntlet on Debt, Taxes and the GOP's dream of dismantling Social Security and Medicare

Pretty much as I predicted, Obama's failure to go over the fiscal cliff--instead "negotiating" and settling for a half-assed deal that hardly got rid of any of the stupidities of the Bush tax cuts--convinced the Republicans that they can play their brinkmanship game on the debt ceiling debate yet again and perhaps finally get the Democrats to undo their own most significant programs of the last 100 years--Social Security and Medicare.

What we ought to be doing is cutting the military/defense and corporate welfare budgets.  And then increasing taxes--with (1) new layers of tax brackets and tax rates corresponding to our new levels of income inequality, so that multimillionaires are taxed at a higher rate than mere millionaires and billionaires are taxed higher than multimillionaires and (2), at the least, legislation to eliminate the farce of the so-called "carried interest: privileged compensation taxation for LBO managers, who get mostly preferential capital gains for their "services" in buying companies and loading them with debt that makes the managers but not the workers wealthy.

But the Democrats somehow still thought they would get some kind of credit, even from the staunchest of the right-wingers, for being "bipartisan" and working out a "deal" to avoid the "fiscal cliff."  So they made the ridiculous Bush tax cuts permanent, except for those in the upper-upper crust making three times as much as anybody in the middle class.  And they made the estate tax cut even larger than it was--with a $5.2 million exemption (double for a couple) and only a 40% rate.  Inequality will continue to grow at accelerated rates.  And they extended the litany of truly egregiously stupid corporate tax breaks, like the bonus depreciation/expensing provisions that ultimately permit corporate multinational giants a NEGATIVE effective tax rate (read Cary Brown on the way noneconomic frontloading of expensing amounts to nontaxation under time value of money principles).

The GOP however is currently running deranged.  The party that purports to care about fiscal conservatism only wants to fund more military and make sure that vulnerable elderly don't get as much in their Social Security checks and have to pay even more for their health care.  McConnell--the MINORITY leader in the Senate--has pronounced his party's views on the matter:  "The tax issue is finished."  Brian Knowlton, McConnell Takes Taxes Off the Table in New Talks, New York Times (Jan 6, 2013).

Folks, the stuff about the debt ceiling and the need to cut benefits under Social Security and Medicare is baloney.  The US government isn't a family--it's a sovereign regime .  We should learn from the Euro nations that are embroiled in a self-defeating austering regime that leaving citizens suffering while trying to toady to big business is a recipe for disaster.

President Obama had damn well better take Social Security and Medicare off the table as well as any corporate tax reductions.  Get rid of corporate loopholes and let corporate tax revenues INCREASE.  It is the only way left to try to re-balance an economy that is skewed in favor of the uber-rich and the multinational corporations and against ordinary Americans.  Oh, it would also help to move to single-payer single-provider health care and get profit-making out of what should be an important human right.

And are we "spending way too much" anyway, as McConnell declares?  Surely not, since we are only spending on things that the Congress has voted to spend on.  If McConnell wants to spend less, let him propose a spending cut and put it to the vote.  If it fails, then he should vote the taxes or borrowing needing to pay for the spending Congress has legislated.

So, just as my advice in the "fiscal cliff" debate was to go over the cliff, let the Bush tax cuts expire, and then put in place some decent cuts for the REAL middle class (those making less than $100,000 a year), my advice here is to go over the "sequester cliff" and let the across-the-board cuts, with the first real cuts to the military in decades, take place.  We should damp down our military zeal and start to put our money where it will build good schools, good colleges, good public transportation, and ultimately good jobs.

As for the debt ceiling, the best thing would be for the Senate to eliminate the filibuster rule (or at least make the right-wingers do a physical filibuster) and eliminate the debt ceiling.  It is an artifact of a different age, and is meaningless.  Think about this.

1) we have spending bills that require us to spend X dollars

2) we have tax bills that only raise X-Y dollars.

3) we have a governmental obligation to pay the X dollars that we spend to those who provide the goods and services amounting to X dollars.

4) Therefore we have a governmental obligation to borrow the Y dollars that we don't raise with taxes.

 

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The War Against Social Security

Growing inequality calls for both "predistribution" and (rightly directed) redistribution

In putting forward my theme of democratic egalitarianism, I have often noted that there is no such thing as an economically egalitarian society--there will always be differentials among people, those differences often relate to social class and the education, privileged upbringing, and networking connections that ensure success for some and deny success to others as well as to innate abilities, so that those differences inevitably translate into some being better off economically than others.   

Because of those differences, the "powers that be"--i.e., existing concentrations of financial assets, prestige and associated political power among the privileged class at the very top of the income and wealth distribution-- result in redistribution upwards from poor and middle class to the upper crust.  And most in that privileged upper-crust think they've acquired it all on the basis of their own merit and that the reason others don't have it is because they are irresponsible, don't work hard enough, don't have a good business sense or are just incompetent. 

(That is of course the tale told by the like of Mitt Romney at his private fundraiser in Flordia, where he revealed his utter disdain for half of the US population and his self-indulging belief that he got where he is entirely on his own merit .  He can't even see, much less acknowledge, either his silver-spoon upbringing of class, wealth and connections or the various government-subsidized upwards redistribution from which he has benefited through capital gains preferences, carried interest treatment, disregard of the harm caused by his leveraged-buyout business model, and government subsidies through high-value government contracts and low-cost government loans.) 

Therefore, I have argued,  democratic institutions (government, programs, policies) must target achieving a sustainable economy that provides a decent livelihood for all.  They must also prevent inordinate inequality, because huge inequality among the citizenry foils all attempts to achieve either a sustainable economy or sustainable democratic institutions. 

That means that government policies must focus on creating paths for redistribution downwards from the upper crust to the middle and lower classes, undoing the corporatist top-down approach that has supported class warfare and allowed the wealthy to capture most of the productivity gains since Reagan's presidency.  Two government systems can work, on the margins, to achieve some level of downwards redistribution--benefits and taxes.  Benefits do so by providing a safety net under those most vulnerable who have never achieved a sustainable economic livelihood--the unemployed and unemployable, the sick, the elderly, the children who have poor schools, poor families, and inadequate shelter, nutrition and opportunity.  Taxes do so by taking more from those who have grabbed an inordinate portion of the resource pie and using those revenues to fund benefits as well as infrastructure (human and physical) that supports the efforts by ordinary Americans to achieve sustainable livelihoods.

We have been moving backwards on both of these systems.  The radical right has spent the last 30-40 years pushing an agenda that ultimately wants to (i) dismantle or radically reduce benefits programs (voucherizing medicare, privatizing social security, cutting back on unemployment, allowing states to reduce medicaid and children's health coverage, etc.) and (ii) eliminate taxes on corporations and the primary source of income of high-wealth individuals through a gradual reduction in progressive rate structure, elimination of the estate tax, elimination of capital gains taxes (and treatment of wealthy people's wages as though they were capital gains, through provisions like stock options and carried interest).  Paul Ryan's positions on Medicare and Social Security should be a clarion-call to get out the vote--against the Romney-Ryan ticket-- of every person who does not earn more than $300,000 a year.   The Norquist-Koch Brothers-Karl Rove-Ryan-Romney agenda on taxes should similarly cause ordinary Americans who earn less than $300,000 a year to take to the streets and to refuse to vote for any member of the GOP.  Recall that the beginning of the current trend towards too little tax revenues and especially too little taxation of the ultra rich was radical reduction of rates with purported base-broadening (such as elimination of the capital gains preference, creation and then ramping up of the alternative minimum tax).  As could be expected, lower rates lived on (and were lowered even more by Bush) but much of the base broadening was short-lived:  lobbying by the privileged at the top led to a quick return to a capital gains preference and the undoing of the AMT as an inequality leveler.  The Bush tax cuts rewarded corporate owners and managers and the wealthy class with extraordinary tax relief, while imposing long-term deficits on the country, behind a cheerful facade of "tax simplification" that was irrelevant for the 70% of the population that uses the standard deduction.

There is a third leg to the reduction-of-inequality stool.  Tax reform that restores a truly progressive income tax is one leg.  Benefit reform that builds on the achievements of the New Deal rather than destroying them is another.  The third leg is what some call "predistribution"--paying attention to the means by which the uppercrust has seized all of the productivity gains and reduced the ability of everyone else to have a decent, sustainable livelihood. 

British Labour leader Ed Miliband has called for predistribution as a new agenda in Britain.  See Predistribution: A Big New Idea, Noted, The Nation (Oct. 8, 2012), at 5. 

The term [predistribution] was coined by US political scientist Jacob Hacker, who in 2011 noted that discussions of government responses to inequality often begin and end with redistribution [downwards]--taxing the rich to provide benefits for the rest.  But that's only half the equation, Hacker said, uring progressives to pay more attention to 'the way in which the market distributes its rewards in the first place.' That includes regulations that protect consumers and empower workers: 'The regulation of markets to limit extremes and give the middle class more voice is hardly easy. ... But it is both more popular and more effective than after-the-fact mopping up.'

Milibrand agrees.  Noting the high human cost of austerity, he said, 'We need to care about predistribution as well as redistribution.' After trying 'to make work pay better by spending more on trasfer payments,' he argued, government must 'also make work pay better by making work itself pay.'

These concepts--predistribution (making up for malfunctioning markets to make work itself pay) and redistribution downwards (actual reallocation from market results through taxation and benefit policies)--are closely interrelated.  Successful redistribution downwards augments the ability of workers to afford necessities and small luxuries, and that economic activity empowers workers in the markets and gives workers an opportunity for a voice in the markets and workplaces compared to a position where employers and owners have almost dictatorial control and can garner all the workers' productivity gains for themselves.  Focus on predistribution, however, reminds us that worker rights are essential to a sustainable, broad-based economy

What kinds of rights are we talking about?  Surely a critical right is the workers' right to collective bargaining (supported by a "yes" vote on Proposal 2 in Michigan that would put that right in the state constitution where it could not be removed by the radical right legislative block).  Surely the right of the state to build infrastructure (that will create worker jobs) rather than allowing a wealthy tycoon to corner the market on international bridge crossings in Detroit and hog the revenues for himself rather than allow them to be earned by the people (Proposal 6, vote "no" so that Matty doesn't have veto power allowing him to co-opt public infrastructure for his private profits).

Predistribution pays attention to how much ordinary workers are paid compared to how much the managers at the top get out of a company.  We should be "pushing local employers to narrow the pay ratio between the top and the bottom ranks of their workforce."  Id.  For too long, we have acted like it is just fine for the "market" to demand that the wealthy be allowed to exploit communities and workers for their own benefit.  We need to say no.

Predistribution pays attention to regulations that protect workers--from worker safety to time off to family leave. It disregards the multinational corporations' pleas for laws to suit them and instead asks why we should be subsidizing their ability to move active business assets to foreign countries and leave US workers unemployed.  It acnkowledges that we have for too long allowed corporate owners and managers to snow us with their claims that "globalization" and "free trade" worked for our benefit, when in fact these are excuses for offshoring jobs so that the owners and managers can enjoy even higher "rent" profits.  As Milbrand says, "It's just not true that all the top CEOs will leave the country unless we pay them whatever they demand."  Id. 

Romney shows he's a "know-it-all" who has no real ideas at all

I missed almost all of the first debate but watched most of this one.  My quick sum-up of the action was the Obama was straightforward, prepared, and much more energetic than in the first debate.  While I don't think he has been a great president, he has nonetheless acted on a number of matters in ways that move us away from the disastrous policies of the Bush years--fairer immigration actions, more interest in the middle class and jobs, wise action to save the auto industry when Romney would have allowed one of the midwest's major industries to rot on the vine, attempting to move the corporate tax debate away from giveaways for the multinationals and towards more reasonable tax policies, movement on health care reform (though still not towards the single-payer option that we must eventually embrace), movement on financial institution reform through Dodd-Frank (though still not sufficient control of the financialization of the economy).

Romney, quite frankly, came across as an arrogant shell who doesn't have any substance underneath the expensive coif of hair and Armani suit.  He constantly blames Obama for the Great Recession that stemmed directly from the failed Bush economic policies favored by the Republican party's right wing, the same policies that Romney and Ryan want to re-install if they take over the White House.  He consistently fails to acknowledge that the deficits under Obama were temporary ones caused by the trillions of dollars of unnecessary Bush individual and corporate tax cuts, the Bush preemptive wars, the class warfare of tax policies that favor the 1%, privatization of education and the militaryh, and the financialization of the economy egged on under Bush by the right's misguided views of "free" trade (meaning business can run over the workers and the environment at will and pay less taxes even while causing more societal harm).  Romney (as Obama noted in the debate tonight) goes George W. Bush even further--he would ruin Medicare by turning it into "voucher-care" that was insufficient to meet vulnerable seniors' needs, and he would destroy Social Security by privatizing it so that seniors are at the whim of the stock market and Wall Street traders for their very livelihood.

Yet this guy born with a silver spoon in his mouth and with a family of connections to power really thinks that he got where he is on his own!  What a laugh.  And then he thinks that he can bamboozle the American people by saying "I know how to do that" about creating jobs, getting rid of the deficit, creating growth, solving immigration, making us "energy dependent in 8 or 5 years" and everything else he can promise us.  But he doesn't think he has to bother to tell us anything about how he will do that.  Often when asked specific questions, he fell back on his "The last four years with Obama have been awful and I feel your pain" absurdity,   His claim of empathy with the ordinary folks asking questions in the audience was absurd because one only has to harken back to that tape of his disdain for the 47%--and his arrogant view that anyone in that group was dependent on government and unwilling to take personal responsibility for themselves--to know that he doesn't really give a damn about ordinary folk like those in the audience tonight.  He'd follow that with another claim that he would fix everything because "I know how to do that", yet in every instance there was nary a specific word about  exactly what he would do.  

 One thing is for sure--Romney's view that cutting tax rates across the board by 20% will jump-start the economy is "nonsense", as even conservative GOP economist Bruce Bartlett acknowledges.  See Bruce Bartlett, Romney's Tax Plan and Economic Growth, Economix Blog, New York Times (Oct. 16, 2012) (statng that "the idea that tax reform will jump-start an economy suffering from the after-effects of a cyclical downturn is nonsense" and concluding that "even if Mr. Romney’s plan is enacted as proposed the growth effect will be small to nonexistent").

On taxes, Romney now claims that he will not cut the amount of taxes paid by the top 5% but will give everybody else a tax cut.  Note that isn't the same that he has said for months on end, when he made clear that everybody would get the same 20% rate reduction (which would give the wealthy a huge dollar cut, and the middle class a piddling cut) and mocked Obama for wanting to hold the upper-crust more accountable for helping reduce the deficit.  He claims he'll not increase the deficit, even though he wants to cut taxes and eliminate the estate tax and increase military spending.  He won't say what deductions he'll cut or what protections for the poor he'll keep.  He claims the numbers add up but won't tell us what the numbers are.   I think it's perfectly clear:  he won't say how he can do that in a revenue-neutral way because it can't be done.  The New York Times editorial yesterday chimed into the growing list of reputable organizations asserting that his numbers simply don't add up, noting "the many deceptions in the campaign’s blue-sky promises of low taxes and instant growth."  See Editorial, Mitt Romney Needs a Working Calculator, New York Times (Oct. 15, 2012). 

[The Joint Committee on Taxation] asked its staff what would happen if Congress repealed the biggest tax deductions and loopholes and used the new revenue to lower tax rates. The staff started adding it up: end all itemized deductions, tax capital gains and dividends as ordinary income, and tax the interest on state and local bonds, along with several other revenue-raisers.

The answer came last week: ending all those deductions would only produce enough revenue to lower tax rates by 4 percent. 

Mitt Romney says he can lower tax rates by 20 percent and pay for it by ending deductions. The joint committee’s math makes it clear that that is impossible. Id.

Note that Romney doesn't intend to tax dividends and capital gains at the same ordinary income rate that us ordinary folks pay on our compensation income, so he wouldn't even get to a 4% reduction in rates with his version of tax "simplification."  He wants to keep allowing people like him to get a tax-advantaged "preferential rate" on carried interest that they get as their compensation in vulture capital "private equity" funds that buy up American businesses and load them with debt and offshore their jobs.  He wants to keep taxing capital gains and dividends at the ridiculously low rates achieved by the Bush tax cuts that were a major factor in driving us from surplus to deficit.  He even wants to cut capital gains and dividend and interest tax rates to zero for those making less than $200,000.  (Of course, that group doesn't have much of that kind of capital income--it is mostly the province of the very rich at the top.  One suspects the rate cut for the upper middle class that would apply to is just a prelude, like most of the Bush-era tax cuts, to a Republican push to eliminate taxes entirely on capital income, which Romney and Ryan have supported in the past.)  He wants to cut taxes for the huge multinational corporations and encourage them to continue moving our jobs offshore.

There is no way that such a tax policy makes sense for America.  It will let the rich get richer, when we are already at a point where the middle class is shrinking because of the way big business has grabbed all the productivity gains for the managers and owners and left ordinary workers hanging out to dry.

Reaganomics--with its push for privatization, tax cuts, militarization, and deregulation--stabbed at the heart of the US economy.  The Bush tax cuts drove us from surplus to deficit in one fell swoop and set the stage for the Republican obstructionist games that have gone on during the four years of the Obama administration, in which the radical right GOP has cared more about pushing for extremist policies beneficial to the wealthy and the big corporations they run rather than considering what is good for the country.  Romneyomics would be even worse--right-wing market fundamentalism at its most extreme, with the rich making off like bandits and the rest of us left to scramble for crumbs. Surely the American folk aren't going to buy this idea of rehashing the very ideas that got us into the Great Recession mess from the guy who says "I know how to run the country because I got rich as a vulture capitalist". 

Romney's Tax Returns--What We Do Know --Tax Avoidance (Part VII)

I've written a series of postings on what Romney's scanty release of tax information shows us about his wealth and his concern for his country.  The last of those was Romney's Tax Returns--What we do know (Part VI).  (interested readers can follow the links back through earlier parts, to see the various types of questions that are raised about his tax avoidance techniques and the potential issues that are likely to be lurking in the tax returns that he refuses to release, especially the 2008-2009 returns.)

Romney finally released his actual 2011 tax return, after having provided an estimated return at the time of the release of the main parts of his 2010 tax documents (but not of everything we would like to see connected with his federal tax status).  I will try to cover the additional information gleaned in posts through the end of this week, but readers may be interested in reading the Drucker article featured in Bloomberg today:  Jesse Drucker, Romney 'I Dig It' Trust Gives Heirs Triple Benefit, Bloomberg.com (Sept. 24, 2012).

It's worth reminding readers of Romney's derogatory comments at a May fundraiser in a wealthy donor's Florida home implying that those who don't pay federal income taxes (but do pay payroll and Medicare and sales and property and state and local income taxes) are freeloaders who mooch off of everyone because they think of themselves as victims.  See various postings on this "47%" topic, such as this one, this one, and this one.

It's also worth pointing out up front that the wealthy have many legal techniques for making high income while paying very little taxes (carried interest being one of them) and for passing along their wealth to their family without much payment of gift or estate taxes (the I DIG IT trust being one of them).  Congress can and should eliminate many of these tax avoidance techniques.  For example, Congress could eliminate the carried interest game (essentially a "Wall Street Rule" not incorporated in the Code) through very simple legislation making clear that managers of private equity funds and real estate partnerships and hedge funds shall treat all of their "profits interest" distributive shares as compensation income taxed at ordinary income rates like their secretaries, gardeners and nannies pay.  Congress could eliminate the various estate tax gambits with legislation to forbid the various kinds of trust games the rich play and the various kinds of "discounts" that they claim for self-created (and easily undone) restrictions on transferability of passed-along assets through S corps, family limited partnerships, and trusts.

Now, on to Romney's intentionally defective grantor trust (commonly called the "I DIG IT" trust). Here's what Drucker says:

He [Romney] has also enhanced his family’s wealth by moving assets worth $100 million into a trust while taking steps to avoid paying any gift taxes. The trust’s value isn’t counted in the $250 million that his campaign cites as Romney’s net worth.

... The return doesn’t show how much Romney paid for [the fund and other investment] holdings [added to the trust], nor the value assigned to them when he gave them to the trust, so it’s unclear how much in total the trust has saved in gift and estate taxes.

...The Obama administration estimates that closing the loophole Romney used would bring the gederal government almost $1 billion in the coming decade.  That's a 'laughable' under-estimate, said Stephen Breitstone.... A single billionaire could pay $500 million more in estate taxes if these trusts are shut down. ...

Romney or his trust received shares in DoubleClick eight months before the company went public in 1998.  The trust sold them less than a year after the IPO.  The trust's sale of the DuobleClck stake made it possible to save hundreds of thousands of dollars in estate and gift taxes.

Multimllionaires use such trusts to avoid those taxes in three ways.  First, they can assign a low value to assets they donate to the trust.  Second, when the trust sells assets at a profit, the donors can pay the relatively low capital gains taxes on behalf of the trust.  By doing so, they leave more money in the trust, untouched by the much higher gift tax.  Third, by paying those taxes, they can reduce the pile of wealth eventually subject to an estate tax when they die.  

***

Here's how they work: the person setting up the trust, like Romney, contributes assets such as an interest in a fund or shares in a company.  If he makes that contribution before those assets appreciate--particularly when they are privately held and difficult to value--he can claim the gift tax obligation is low or non-existent since the declared value is low or zero.  If the trust generates any income--such as by selling stock--the eventual tax bill is the responsibility of Romney, not the trust.  By paying the capital gains tax, which was 20 percent in the late 1990s [when Romney's trust was established] and is now 15 percent, he can avoid depleting the funds in the trust--in essence making an additional donation that's free of gift taxes.  That benefit in particular makes this type of trust 'a more powerful driver of wealth transfer in estate planning than almost anything else' said Breitstone. ... Id.

The defective grantor trust strategy was presented to Romney and Bain by a Boston lawyer at Robes & Gray as "a strategy for avoiding gift taxes by conservatively stating the value of assets put into a trust."  Id.  It was fairly common for such stakes related to profits interests to be valued at zero for figt tax purposes, though in 2005 there were proposed regulations that "discouraged the practice."  Id. 

Can Romney be faulted for taking advantage of this kind of trust to avoid taxes and pass along millions to his dynastic heirs tax free?  Surely all the wealthy people that he thinks of as his peers do so--more than 3 million U.S. trusts and estates had $91 billion of income in 2010.  Id.  But for someone who wants to be president, wouldn't you think he would have some sense of at least "noblesse oblige"--a duty to pay a little more than the measly 14% or so that he pays in taxes to the country he wants to boss (er....serve)?

Clearly Romney doesn't have any sense that wealthy people should be paying more.  He has indicated that part of his agenda as President would be to eliminate ANY gift and estate taxes, making it even more likely that America by 2040 will be a country of a plutocratic elite with enormous wealth living in protected communities of like-kind people and completely segregated from the overwhelming majority of ordinary Americans who earn their living with hard work that is actually taxed as hard work.

As for myself, I do think Romney can be faulted for using these trust techniques to preserve his family dynasty at the cost of the federal fisc.  But I don't think wealthy people like Romney care what ordinary people think about this issue (refer again to his comments about many Americans, above). 

But he has perhaps done us a service by running for President, because even with the scanty information he has released, we can see something of the way the ultra-rich avoid paying taxes.  As Breitstone says in the Drucker article, he "uses every trick in the book" and "It's going to be harder to do tax planning in the future [because] he's bringing attention to things that weren't getting attention."  Id.

Congress needs to act to eliminate these known types of shelters used by sophisticated wealthy taxpayers to get around the estate tax.   And let the rate go back up as it is slated to do at the end of the year.  Maybe if we get a saner Congress, Congress would even consider enacting a graduated rate that goes from 55% on the above-exemption amount to as high as 70% for those estates in the tens of billions.

 

 

Paul Ryan's tax and other lies

It's interesting that Paul Ryan is being cast by the GOP and the media as an intellectual who is sharp with numbers and that rare breed--a truth-telling politician.  Too bad none of it is true.

Ryan is an Ayn Rand devotee who somehow failed to recognize the anarchism and me-ism of the Randian philosophy.  He's a scion of a wealthy family who pretends that his short stints at humble jobs like waiting tables were the same as what the disadvantaged suffer when they are stuck in dead-end jobs and have no recourse to a wealthy family to create new opportunities. 

And he is a person who has devised plans that privatize and cut Medicare benefits for the most vulnerable, leaving them to pay more and more out of pocket over time while cutting taxes for the wealthiest--eliminating the estate tax to hand billions more of windfall dollars to heirs that do nothing to earn them; eliminating capital gains taxes entirely to hand billions of dollars to the weallthiest few who own most of the financial assets and passing the burden of supporting important government programs to the middle class. 

Joan Walsh's article in Salon is worth reading, Paul Ryan's Brazen Lies, Salon (Aug. 29, 2012).