TaxProf has provided considerable converage of the media sharkfest over the disclosure on Friday that the IRS's division responsible for overseeing the applications for tax-exempt status had used terms like "patriot" and "tea party" and "9/12" to select applications for scrutiny as to the potential for having passed the cap on political activity permitted for a social welfare organization. See, e.g., WaPo and WSJ agree: IRS targeting of conservatives is appalling, which includes a plethora of links to various Hill and national papers covering the disclosure.
The fact that the IRS searched for suitable key terms to find groups that would have the greatest potential for conducting too much political activity to qualify as a social welfare organization is not at all surprising. As Lois Lerner stated on Friday, this was done as a "shortcut" to pick applications for review, not from "political bias." It is also odd to say that including the term "patriot" would only identify conservative groups--it is quite possible that there are liberal groups using that term, since progressives do think of themselves as patriots who care deeply about our nation. Similarly, there might well be a liberal group with an "anti-tea-party" name, intended to provide a political counterpoint to right-wing tea party groups--that group would be, and appropriately should be, selected for deeper scrutiny to be sure it satisfied the requirements for a social welfare group with such a key-word search. A problem would exist, however, if there were no progressive groups --also likely to be over-involved in politicial activity--identified for deeper scrutiny: that hasn't been established, as far as I can tell from the media reports.
Sunday's TaxProf post provides Professor Schmalbeck's summary of the discussion at the tax-exempt organization committee's briefing by Lois Lerner at the ABA Tax Section's annual meeting. Here's the link: Schmalbeck on the IRS 'Targeting' of Conservative Groups.
Orrin Hatch was the keynote speaker for the ABA Tax Section luncheon today in DC. Having never heard the man in person, I was surprised at the bumbling nature of his speech. He came across as an old man reciting a set of platitudes from the GOP talking-points rulebook.
Asserting that the tax code is "complicated, inefficient, unjust, unfair," he claimed that all are agreed on a need for tax reform, because the tax code is "the major obstacle standing between us and sustained prosperity."
Now, folks. You all know that's bunk, right? The major obstacles standing between us and sustained prosperity are (1) the billions we squandered on two unnecessary preemptive wars and other costs of excessive militarization of our society, along with (2) the billions spent supporting the 'too big to fail' financial giants that have plundered the middle class while continuing to benefit from cheap (subsidized) funding.
Of course, there are a number of areas of the tax code that also stand in the way of prosperity--the preference for capital over labor, the extensive provisions incentivizing consolidation of business empires, the provisions favoring private equity enterprises that eat up and spit out workers for their own profits. Those were clearly not the target of Sen. Hatch in his favored tax "reform."
So what did he say about tax reform? Let's see.
1) The goal is "to produce bipartisan tax reform that can pass the House and Senate."
For my part, I'd just as well stick with the current Code. ANYTHING that the GOP is willing to go along with will be beneficial to Big Business and harmful to ordinary Americans. About the only thing that is bipartisan these days is something that Wall Street likes, so it gets the support of Baucus and other Dems-in-name-only.
2) The Obama Administration has accepted the idea of "revenue neutral corporate tax reform" but Hatch wants broad reform of individual, corporate and pass-through.
Interestingly, the Teaching Tax Committee had a program, staged as a debate, on corporate tax reform. The audience voted overwhelmingly in favor of retaining the corporate tax and against doing reform as "lowering the rate with revenue neutrality". Corporate tax reform as envisioned by most on the right is just another piece of the "tax cuts create growth" mythology that has been repeated ad nauseum in spite of the evidence of the last decade of tax cuts with minimal growth.
Hatch of course says we should do corporate tax reform (lowering the rates) while ALSO lowering the rates on dividends and capital gains yet again. And he wants to lower individual rates generally at the same time that we lower corporate rates--claiming, of course, that such lowering of rates is a "fairness" issue for those pass-through businesses that have only an owner-level tax in order to encourage small business growth, entrepreneurs and job creation.
Funny how no matter what the rate is or how low the effective rate is--Apple's is less than 10%, GE's is even lower--the DC gang will still claim that if we only get the rates lower there will be more jobs.
And he says not doing individual tax reform at the same time would be "unfair," because we'd be "extending a helping hand to corporations and leaving individuals benind, whether families or small businesses" This is the right's typical claim that they care about ordinary Americans. But behind that claim is the perennial desire to 1) aid the owners of capital, with no concern for labor whatsoever and 2) cut taxes generally so that the very government that people like Sen. Hatch serve can be cast as the devil and shrunk to ensure that it provides the minimum services imaginable, in 'starve the beast' fashion.
Hatch then launched into some scattered comments about the "principles" that should guide tax reform. They were the predictable ones from the right
1) Hatch claims the main goal of tax reform is to promote growth through lowering rates
2) Hatch claims that international competitiveness is terribly important. He wants US multinationals to be able to repatriate their overseas profits easily (meaning--no tax). He says competitiveness requires that the U.S. adopt a "reasonable territorial system". That, he claims will increase exports and encourage investment at home.
This is, of course, garbage. Companies go abroad to exploit cheap labor in impoverished countries like Bangladesh where workers have no rights and company owners take all the profits. Having no US taxes would just be the icing on the cake. Until we end the primitive transfer pricing game that companies are allowed to play, companies like Apple and Google will continue to pretend to sell to their offshore affiliates assets that are their core business and never ever would be sold to a third party, purely to avoid US tax on intellectual property generated in the US. The reform we need is to eliminate deferral entirely. (And we certainly don't need to keep extending the ridiculous "active financing exception" that serves as yet another subsidy for financial institutions.)
Here Hatch engaged in a gratuitous insult to every union member in the country. He asserted that the only thing holding the country back from the territorial system he wants is the unions' lobbying of President Obama. He went on to claim that workers "have to join unions and pay unions dues"--this of course is the anti-union screed of the right that misstates the way agency shops work. In my case, faculty can be paying members of the union or they can pay a "fair share" fee for the services the union provides them (grievances, representation, negotiation) or they can contribute to a university scholarship fund and pay nothing to a union and still get those services. Hatch's tone (and facial expression) here was one of sheer hate--I literally had to bite my tongue to avoid standing up to challenge him for his misrepresentations about unions.
Of course, in his hatred of unions, Hatch reveals the contempt in which the right generally holds ordinary workers in the US. They want companies to be competitive--meaning that they want companies to make huge profits from exploiting labor and they don't give a damn about workers' being able to have jobs and decent living.
3) Hatch, like all those who elevate simplicity over distributional justice and compliance needs, talked about the complexity of the tax code, claiming that $168 billion is spent annually in complying with the tax code, while there are 51% who "don't pay tax".
Not sure where Hatch got the $168 billion figure (federal? state and federal? tax shelter planning included?). Much sophisticated tax planning is tax avoidance planning--businesses make the calculation that they're willing to pay accountants and lawyers a good bit to avoid a bigger tax hit. They could avoid much of that expenditure by just doing transactions in commonly accepted ways and not doing transctions that are primarily tax motiviated at all.l
As for the 51% 'shades of Romney's 47%" comment. it didn't even fit in. Came across as another gratuitous insult to those in the lower income distributions who barely make a sustainable living and who pay considerable sales and payroll taxes even though perhaps not income tax. We did, after all, DESIGN our tax system to try to protect lower income taxpayers from paying income tax. That's the reason, for example, that we have a standard deduction and presonal exemptions.
4) At this point, Hatch's speech became somewhat incoherent as he wanted to hit Obama for a "sea change" from the purported wonder years of the Bush tax cuts to the new era of tax increases. So he praised the unfortunate Bush tax cuts of 2001-2003 and contrasted that with the "awful" fact that the estate tax came back after the 10-year gimmick expiration reached its sunset. (He called it, of course, by the right-wing term "death taxes") He noted the "problem" of having to extend the various extender provisions--"tax reform should be more permanent" because, he claimed, the uncertainty "hinders long-term growth."
Actually, almost every single one of those corporate extenders should be let go. The R&D credit, the active financing exception, etc.
5) Another of the perennial GOP tax goals popped up as Hatch claimed we need a "tax environment more favorable to saving and capital investment that will lead to a better standard of living for future generations."
Hey, Congress had the sense to write the capital gains preference out of the Code in the thoughtful reform of 1986. But then the lobbyists for the wealthy got it right back in and they've whittled the rate down to a paltry 20%. We haven't seen any of that promised "better standard of living". IN fact, more of the profits have gone to the capitalists and workers' wages continue to deteriorate.
The rest of the tax reform "discussion" in the speech was one platitude after another. Tax reform will "help the entire economy", help companies "compete better", "help all Americans." It's an "economic necessity" that is worth struggling to achieve even in this "toxic political environment" because we are, after all, the "greatest nation in the world."
Wait a minute, folks. The party that is responsible for the "toxic political environment" is the GOP, the obstructionist party of no that has determined that it doesn't care what it does to the country as long as it can stay in power.
And that claim about "greatest nation" status is highly suspect: we are horribly unequal in resources. We have a high illiteracy rate. We have high deaths in childbirth. We have high teen pregnancies. We have an obscenely high incarceration rate. We have a lower life expectancy than countries with a greater quality of living. We have fewer citizens that are college-educated than other developed countries. We have more children living in poverty. We are fast becoming an oligarchy in which the wealthy buy the laws they want and exploit the rest of us. Guns run rampant in our society and are used for heinous crimes but even when a vast majority supports simply measures like universal registration and limited magazines our Congress heeds only the gun lobby. That "greatest nation" status is highly dubious.
Hatch ended his speech with another political item --you'd think he thought that the ABA tax section must be mostly rich lawyers that are good Republicans from the tone of much of this speech. It has come to the media's attention that the IRS office that review tax-exempt organization applications has focused on those that have "tea party' in their title. But that's the note that Hatch ended on--claiming that this was "harassment and intimidation" and that Congress would folloow up to find out "who was behind it, when it began, and what was done (or not done) to correct it" since "in a country with the First Amendment, no organization should be singled out" so "this is not over by any stretch of the imagination."
Now, what readers should know is that scrutinizing applications for social welfare organization stauts is in fact an important role of the IRS. There is an office in Cinncinati that scrutinizes the apps. Among other things, it looks for those organizations that shouldn't apply as social welfare organizations because their primary activity (greater than 50%) is political so they should be a "527" organization. The IRS office has very limited resources and personnel (another of the 'starve the beast' methods of the right), so it seeks to find efficient ways to focus on organizations that should potentially be denied social welfare status and moved to 527 status. Somebody in that office found that 'tea party' was a reasonable search item--probably somebody who didn't have very good political attenna to be aware of how the Fox News types like O'Reilly would present it as "targeting conservatives'. What was really targeted was any organization, conservative or liberal, that inappropriately applied for social welfare organization status.
The right is making a mountain of a molehill here. And once again creating a media frenzy out of the public's ignorance of the way the IRS has to work to avoid abuse of tax exempt status.
One of the (many) ways by which rich, sophisticated taxpayers who are also ultra-greedy have managed to avoid paying their fair share of taxes is to move money offshore through trusts and "companies" set up in various no-tax/lo-tax, hi-sun jurisdictions like the Cayman Islands, British Virgin Islands, Cook Islands, Singapore, etc. I suppose for many years this scheme served multiple objectives--it stashed the cash beyond the reach of the US government, it provided a nice place to visit the cash, and it had the cachet of belonging to the exclusive jet set behind it.
That's becoming less so as the US continues to pursue tax cheats with unreported offshore accounts. The dam started bursting with the revelation of the way Swiss bankers groveled at their American clients' feet, from smuggling diamonds into the country in toothpaste tubes to secreting gold in deep, hidden vaults to setting up sham companies in the Phillipines or other countries. Over the last half decade, more people have participated in voluntary disclosure and more have been identified for more serious penalty programs (including criminal prosecution). Each voluntary disclosure included full information about those who facilitated the offshoring--bankers' names, other involved lawyers, accountants, and bankers, other entities. That groundswell of information facilitated identification of even more tax cheats, and those identifications yielded a new trove of relational data--those who had assisted them. That finally seemed to begin to put some teeth into enforcement efforts and some gnashing of teeth into the lives of the otherwise obliviously happy tax evaders.
But various commentators (including my colleague at Wayne Law, Professor Michael McIntyre) have been concerned that the offshore gambit can't be cleaned up until countries begin more automatic sharing of the tax information they have without requiring the requesting country to have already identified the accountholder well enough to ask for information specifically about that person. If they can ask specifically, of course, it means they have already been found, which makes for a catch-22 that has made pursuing secret bank account holders an overly arduous task.
That makes the IRS's announcement today of a new coordinated effort among the U.S., U.K, and Australia heartening news. They have agreed to share information about trusts and companies holding assets in tax havens like the British Virgin Islands, the Cayman Islands, and Singapore. See IRS news release IR-2013-48 (May 9, 2013). With the cache of information each country has gleaned from the recent efforts, coordination will allow them all to benefit from each one's effort. That should accelerate the effort to catch the tax cheats.
Most are aware that online businesses have an unfair tax advantage. Under the 1992 Quill Supreme Court decision, states cannot currently require online retailers without physical presence in the state to collect applicable sales taxes. Although customers are supposed to save receipts and then pay over the appropriate amount of sales tax at the end of the year, nobody does. And they get away with not paying since it would be an onerous burden on states to assess those taxes without information from the onlines sellers. The result is that the tax-included price for merchandise purchased online is cheaper than for the same merchandise purchased in stores. So our tax system is essentially subsidizing the replacement of mom and pop small businesses with online giants. The mom and pop business often serves the online business in another way--for free: customers may go try on the merchandise at the local store, but then order online to get the cheaper (sales-tax-free) price.
Local businesses have lobbied for legislation that would permit states to require online retailers of reasonable size ($1 million in revenues annually) to collect sales taxes. Given the ability of today's software to handle these kinds of complex tasks, there is really no justification for subsidizing online businesses over local businesses by not requiring them to collect the taxes.
The Senate finally passed the legislation on Monday. The vote--69-27--demonstrates that when politicians understand that people want a fair tax bill, they can sometimes even in this stridently partisan age manage to get it passed.
The House, however, may be another matter. Tea Party extremists are more likely to rally to the Norquist anti-tax pledge even though this is quite clearly NOT a tax bill. The taxes have long been due. It is the mechanism of collecting the taxes that the bill would change, since collection by the seller works much better than self-reporting and payment by the customer. Right-wing groups oppose the legislation as a matter of "basic principle because they are not only ideologically opposed to ANY revenue going to governments but also don't like the idea of setting up reasonable measures to help government collect revenues actually due. Matt Kibbe of Freedom Works doesn't like "creating a new infrastructure to expand the general power of government."
Will the GOP leadership whip these guys into line. Probably not. Boehner has expressed his reluctance to support the legislation.
Funny, this is really a "state's rights" issue that the GOP would, in ordinary times, likely support. It just ensures that states can collect sales taxes already due. And the GOP has tried to use sales taxes as an argument for eliminating the income tax--remember that one of the purported "pros" of a national sales tax that is claimed is that it could "piggyback" off the state sales tax mechanism, letting the states collect the federal sales tax. So the truth is now revealed. The GOP would be quite happy if the states were incapacitated to collect their own sales tax and thus unable to collect the 'national' sales tax either. The idea of starving government programs lies very shallowly beneath the surface of the opposition to this legislation.
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.
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.
With MoveOn.org, Robert Reich has produced a new video on the proposed change to Social Security that would REDUCE BENEFITS for seniors and wreak the most havoc on the most vulnerable. As he notes in the video, the proposed change--which the Obama Administration has supported, presumably as a way to win favor with the radical right in the GOP that wants to significantly reduce Social Security and Medicare benefits--isn't necessary since Social Security isn't hurting for cash, won't be fair to elderly recipients who already face increased medical costs and decreased income to pay for them, and won't do a thing about the deficit (which is the wrong focus, anyway).
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.
On Monday, Congressman Lloyd Doggett, a long-time member of the House Ways and Means Committee, releases a GAO report showing the continued advance of corporate tax expenditures that allow corporations to pay little or no taxes year after year.
“Of the many Americans who are right now getting their taxes ready to file, I doubt there are very many that think they will be able to pay a mere nickel on the dollar. But there are many of America’s largest corporations that continue lobbying the Administration, and this Congress to let them pay a nickel on the dollar in taxes on a significant portion of their earnings. Over a three-year period, 30 Fortune 500 companies devoted more of their monies to lobbying this Congress than they did in paying taxes to the Treasury. Some have a negative tax rate. Many of our largest corporations are paying effective rates that are single digits.
On Monday, he will again propose legislation to deal with the way corporations can so easily avoid tax liabilities in the US. A press release from Doggett's office lists the following pieces of legislation to be introduced:
The Stop Tax Haven Abuse Act aims to close several different loopholes by deterring the use of tax havens for tax evasion and strengthening the enforcement of our tax laws. The bill would also require SEC-registered corporations to report annually on the number of employees, sales, financing, tax obligations, and tax payments on a country-by-country basis, shedding more light on the extent of use of tax havens. This bill also provides for additional penalties for failing to disclose offshore holdings and for promoting abusive tax shelters.
The International Tax Competitiveness Act addresses a large and growing area of tax abuse: the practice of developing a trademark, patent, or copyright in the U.S. and then transferring that intellectual property abroad to avoid taxes on the vast income it generates. This bill would treat income from the U.S. intellectual property as U.S. income and tax it accordingly.
The Fairness in International Taxation Act would end the current practice of treaty shopping to avoid U.S. taxes. The United States has tax treaties with a number of trading partners that reduce the amount of taxes that a U.S. based entity owes on interest and royalties paid to a foreign parent. Since many of these foreign parent companies are set up in tax havens, these companies now bypass U.S. taxes by routing the payment through a tax-treaty country that then just transfers the funds to the tax-haven parent. This bill would end that legal fiction and say that you only get the tax-treaty discount if the parent company is actually located in a tax-treaty country.
Doggett has tried to get Congress to act on corporate loopholes for more than a decade. The lobbying money has enormous influence. Just as in the gun control arena, where a majority of Americans want stronger gun controls but the manufacturer of weapons want lax provisions, most Americans think that corporations ought to pay a larger share of taxes but Congress is heavily influenced by lobbyists who wine and dine staffers and provide numerous purported "educational" briefings on what Big Business wants.
Each of these legislative proposals has merit. Of particular interest is the "international competitiveness" provision, which would finally make some inroads in corporations' ability to move intangible properties developed in the US into tax haven countries in order to eliminate taxes. We have for too long relied on an outdated transfer pricing mechanism for this kind of transfer. It doesn't work, since no company would ever actually sell intellectual property that is the core of the company's business. These cross-border transfers of IP are shams, and we should finally legislate to prevent this .
Somehow, more Senators need to start doing what Senator Warren does. Review the facts. Ask questions that force regulators to admit to what they are doing. Point out the lopsided nature of the regulators' activities that demonstrate that they are acting more to protect the Big Banks than to protect the American public. And do it in a gentle but precise way that is absolutely clear to anyone watching.
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