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.
It seems that billionaires think they are entitled to it all and think they should be able to run their speculative games without paying much of anything at all in taxes to the government they depend on. And none of this is good for the economy or good for the taxpayers not in "the 1%".
Case in point--John Paulson, the notorious hedge fund manager who got a CDO built to his desires with a bunch of iffy subprime mortgages and then took the short side of the bet, making a fortune off the bet against subprimes in the mortgage crashes underlying the 2007-8 Great Recession. See, e.g., Zuckerman, Trader Made Billions on Subprime, Wall St. J. (Jan. 15, 2008).
What has Paulson done? He established a new "reinsurance company" in Bermuda in April, that turned around in June and put the money invested in it back into Paulson's hedge funds in New York, as a portfolio of insurance "reserves" to be held to pay off insurance risks that go bad. The result is tax deferment for Paulson and other executives of his hedge fund along with recharacterization of ordinary compensation income as preferentially taxed capital gains.
For a discussion of the hedge fund reinsurer gambit, see , e.g., any of the following. The story at Bloomberg has reinvigorated media attention to this issue.
Barile notes that these hedge funds are using reinsurance premiums and investing in a very aggressive way, compared to traditional reinsurers". This aggressive position produces a downside if there are low investment returns, especially if there are catastrophes for which they have to pay claims when their investment strategies have produced losses. He says that "it remains to be seen" whether hedge-fund reinsurers are in it for the long haul, since they have a shorter time frame on making greater returns on their money.
Looking at this as a global concern, Baker ultimately suggests that the Basle Capital Accord rules should be extended to hedge fund reinsurer operations, "Another area in which the BIS should take a leadership position," he says, "is the role in which reinsurance firms play in hedge fund operations. The tax implications of hedge funds using reinsurance firms in their funds for tax advantages points to the need for more government regulation of this activity."
He describes the basic problem as follows: "wealthy individuals invest in private placement offerings of offshore reinsurance companies. These companies, many headquartered in Bermuda, buy insurance policies written by name-brand insurers...and "may then invest its stock issue returns in a hedge fund. ...[That reinsurer] pays no taxes on the trading profits until it sells the fund shares and then the reinsurer is taxed at a lower capital gains tax. The tax savings are passed on to the individual investor.
He goes on to say that "The problem ... is that insurers are exempt from registering as investment companies....These reinsurers do not have to make annual distribution of profits as mutual funds do and they are not taxed by the Internal Revenue Service as investment vehicles. ...In short, the activity ... is a method for wealthy investors to reduce their tax burden as a result of a tax loophole. Since these insurance companies are mixing insurance business with investment business, they need more supervision.
This is especially true when hedge funds are involved. "[H]edge funds work with reinsurers to reduce tax liabilities for their wealthy clients. ...U.S. hedge fund managers and investors form a tax-advantaged reinsurance company offshore in...Bermuda, which has no corporate income tax. The Bermuda-based reinsurer sends investment assets to the hedge fund to invest. Investors return to the United States with shares of the reinsurer and pay no taxes until the company goes public. At that time, investors [and managers] sell their shares in the reinsurer company and are taxed at a lower capital gains rate.
These schemes are worrisome from both tax and insurer regulatory perspectives. "Aside from the tax loophole problem, the real issue in these cases is the added underwriting risk incurred in the process. ... [Hedge funds acting as reinsurance companies] have insufficient insurance expertise.... Much of this activity has stemmed from financial engineering and deal making of the 1990s. ... [W]ithout the bailout of LTCM [Long-term Capital Management hedge fund] by national bank regulatory authorities, many banks and reinsurers might have collapsed as well."
So why do it and how does the hedge fund reinsurer gambit work? Remember that these hedge fund execs get a ridiculous amount in compensation in the form of a "fee" (usually 2% of assets under management) and a "carry" (usually 20% of the profits). (The fee and carry are often represented as 2 and 20, but can be much higher for some firms with status, rising to as much as 5 and 50.) Without more, hedge fund managers don't get as much benefit from the claimed treatment of a "profits" partner as private equity fund managers do. Though the managers claim classification as "profits" partners whose taxation is based on their share of the partnership's gains and ordinary income and not as payments of (ordinary) compensation, hedges mainly yield ordinary income so don't act directly as "converter" entities. Private equity fund managers also claim they are "profits" partners whose income should not be classed as compensation but as pass-through shares of the partnership items: in their case, most of the private equity fund's gains will be deferred anyway (for several years at least until the partnership sells the leveraged company) and they claim those deferred gains should be characterized as pass-throughs characterized by the partnership rather than being characterized as ordinary compensation income to them.
So for hedge fund managers, gaining deferment (of what is clearly in substance their compensation as managers) can achieve minimal current tax. If the money is cycled through an offshore corporation that pays no taxes, that's even better because it gets preferential rates as well. The deferrment is achieved by waiting to sell the stock, and the sale of the stock is reported as a capital gain. Thus what is really current compensation income is recharacterized, through the reinsurer "conduit" scam, as a deferred capital gain. So hedge fund and private equity managers ultimately both claim to get the best of all possible worlds--their wages from work are not currently taxed as wages at ordinary income rates, they pay no payroll taxes on their compensation, and their compensation is deferred and taxed at preferential capital gains rates.
This is so obviously unfair to the vast majority of ordinary taxpayers who pay taxes on their compensation income even before the end of the tax year through the withholding mechanism that Congress should step in with legislation. It seems hard to justify a "profits" interest in a partnership at all: it has been created by the "Wall Street Rule" that gains credence because big-money people claim it is correct. As usual, tax administration eventually mostly went along with it (Rev. Proc. 93-27) and a few court cases (Diamond, Hale) mostly treat the notion of a profits partner who pays no taxes on his compensation as reasonable. Congress could easily legislate away the profits interest and define partner in a partnership for tax purposes as someone who has made a genuine at-risk equity contribution of cash or property to the partnership. There really should be no such thing as a services partner with a "profits" interest who hasn't contributed up front for a capital interest. And all compensation shares to what are currently treated as profits partners could be treated as ordinary income --i.e., compensation currently subject to the income tax and to payroll (Social Security/Medicare) taxation.
This use of reinsurers by hedge funds is itself a tax dodge that has been around a decade or so. In 2007, the Senate Finance Committee held a hearing on Offshore Tax Issues: Reinsurance and Hedge Funds (S. Hrg. 110-875, Sept. 26, 2007) (179 pages). In his introduction, Baucus described insurance tax avoidance schemes as follows:
Insurance companies make a living by doing two things: they assess premiums based on the prediction of the likelihood of events against which they insure—that is called underwriting—and they also make money by investing the premiums that they collect until they have to pay out claims. If they are good at those two jobs, they make a profit.
Customers buy insurance from insurance companies to guard against the risk of fire, disaster, or some other calamity. In exchange for paying premiums, the customers shift some of their risk to the insurance companies. Insurance companies also buy insurance. Property and casualty insurance companies pay premiums to reinsurance companies in exchange for shifting some of their risk to the reinsurance company. Sometimes the reinsurance company is also the parent company of the property and casualty insurance company. In that case, the property and casualty insurance company shifts risk to their parent reinsurance company at something less than an arm’s length transaction.
Here is where the tax avoidance comes in. Some parent insurance companies set their headquarters in low-tax jurisdictions, like Bermuda. Subsidiary property and casualty insurance companies shift risk to the Bermuda parent. Because of Bermuda’s low tax burden, the Bermuda parent can get a greater after-tax return on their investment activities. As a result, subsidiary property and casualty insurance companies can charge lower premiums for their insurance. They get a competitive advantage over insurance companies doing business in jurisdictions that tax investments.
The second setting that we will examine today involves hedge funds. Foundations and other nonprofits are some of the largest investors in the world. The law requires a nonprofit investor that invests directly in hedge fund partnerships to pay the unrealized business income tax, otherwise known as UBIT. The policy behind the law is that tax-exempt entities should not be able to have an unfair advantage over taxpaying entities doing the same thing. To avoid UBIT, nonprofit investors sometimes invest in hedge funds through offshore entities incorporated in lowor no-tax jurisdictions, such as the Cayman Islands or Bermuda. These offshore entities are called blockers.
The third setting we will examine today is the compensation of hedge fund managers. Hedge fund managers receive fees from offshore blocker corporations used by nonprofits and foreign investors.Some hedge fund managers elect to defer their income, and deferring income means you pay taxes later, which is the same as a significanttax savings.
The IRS has already noted that offshore arrangements using reinsurers for hedge fund managers may be shams that are subject to challenge on audit. See Notice 2003-34 (indicating that "Treasury and the Internal Revenue Service have become aware of arrangements, described below, that are being used by taxpayers to defer recognition of ordinary income or to characterize ordinary income as a capital gain. The arrangements involve an investment in a purported insurance company that is organized offshore which invests in hedge funds or investments in which hedge funds typically invest.") Although the notice says that these purported insurers may be challenged as not insurers because they are not using their capital and efforts "primarily in earning income from the issuance of insurance", and although it states that such arrangements will be subject to close scrutiny that could result in the application of the PFIC rules (leading to current taxation), it has apparently not bothered to challenge any of the big hedge funds' reinsurer companies.
Again, why would they be subject to challenge? On the basis that they are not real reinsurers, since the low amount of reinsurance that many provide is the less risky part of the business and provides a buffer to the very high reserves that they retain, sometimes invested solely in a single promoter's hedge funds. And if they are not insurers, they are at the least "passive foreign investment companies" (PFICs) on which shareholders are subject to current taxation on profits. (Or perhaps the IRS might go further and recharacterize the arrangement as a sham , causing the hedge fund executive to have current ordinary compensation income.) In other words, there is good cause to think that for many of these, the tax haven corporation is acting as an offshore tax-avoidance pocketbook for the hedge fund executive, and not really as an insurer.
By the way, if you think these hedge fund managers who are making multi-millions and billions from managing other people's assets and hardly paying any U.S. taxes on those huge compensation payments are incredibly smart people who add to the economy's well-being and therefore merit that kind of out-sized pay or because of the returns they bring to people that then invest them in needed projects in the good ole US of A, you need to rethink that. Hedge funds typically pay out very poor returns, when all the expenses and profits to managers are taken into account.
Roughly speaking, if the typical fund manager worked for free, and if the investment firms didn’t charge, these masters of the universe would still have underperformed a balanced index since 2003, by roughly 2.5 per cent per year. Andrew Hallam, Think you're smarter than a hedge fund manager?, The Globe and Mail (Feb. 19, 2013) (emphasis added).
Most of us who follow tax issues in the news and in political campaigns are aware that GOP candidate Mitt Romney has been very secretive about various items.
First and foremost, he has been secretive about his own extraordinary wealth: he has refused to follow his father's example in releasing more than a decade of tax returns and he has maintained numerous accounts offshore, including in jurisdictions that are known for banking secrecy. This secrecy is problematic for many voters, because without those returns it is difficult to evaluate his aggressiveness in using shelters or taking controversial positions on returns to save himself tax dollars --a topic that is surely relevant to his qualification to hold the highest executive office in the land.
Second, he has been secretive about his plans for achieving across-the-board tax cuts of enormous benefit to the uber-rich and multinational corporations while claiming to maintain revenue neutrality. Respected non-partisan tax analysts have concluded that his plans simply don't add up--the "arithmetic", as Democratic speeches noted, is against him. When he refuses to specify just what programs he would cut while cutting taxes and increasing military expenditures, many voters are naturally suspicious that the cuts will all be taken out of the safety net--voucherization of Medicare, privatization of education funding, and even more of the deregulation that cost us so much in the 2007-8 financial crisis--while continuing the over-spending on military and various lucrative loopholes for the wealthy like the "carried interest" provision for private equity managers.
Third, he has been secretive about his lack of commitment to the disadvantaged in our society. His failure to describe how he will create jobs (other than through his claim that managing vulture capital "leveraged buy-out" funds is good preparation for the presidency) suggests that he has no ideas other than the long disproven ones being pushed by the Chamber of Commerce and other business lobbying organizations--less regulation, more privatization, more reductions to earned benefits like Medicare and Social Security, and more tax provisions that favor the rich that the GOP labels--without empirical support-- as the "job creators". But he has nonetheless tried to foster an image of caring about American people who weren't born to the life of wealth and luxury that he's enjoyed.
That third point of secrecy was shattered by the revelation of a taped video of Romney comments to major donors (delivered at a May 17 fundraiser at an investment banker's home in Boca Raton, Florida), in which Romney showed utter disdain for the large segment of the US population who ultimately do not pay any federal income taxes. Romney called those who pay no federal income tax "dependent on government" and indicated that they see themselves as "victims". He concluded he'd "never convince them they should take personal responsibility and care for their lives." See David Corn, Secret Video: Romney Tells Millionaire Donors What He REALLY Thinks of Obama Voters, Mother Jones (Sept. 17, 2012).
Romney's 47% comment fairly drips with disdain and scorn for ordinary Americans, casting them, as the Mother Jones article cited above notes, as "a mass of shiftless moochers who don't contribute much, if anything, to society." David Corn, Secret Video: Romney Tells Millionaire Donors What He REALLY Thinks of Obama Voters, Mother Jones (Sept. 17, 2012). It is of a par with comments by a woman that I met at a reception in Boston over the weekend, who spewed scorn as she claimed that anybody that is on welfare or getting unemployment is just a lazy bum that wants the rest of us to hand them a living on a silver platter. Romney's and the woman's comments both show absolute insularity from the real world of povery and near-poverty in America in the aftermath of Bush's Great Recession, when able-bodied men despair of their situation in being unable to find a job, any job, and young folks grow hopeless as they fill in application after application. Without government programs to fill in the gaps for these groups, their lives would be truly desperate. Their non-taxpayer situation has nothing to do with lack of personal responsibility and everything to do with a society in which the economy for too long has favored the uberrich at the cost of ordinary Americans.
Remember that the federal income tax is specifically designed to protect taxpayers in the lower income distributions from paying federal income tax through the use of the standard deduction and personal exemptions. That's because Congress has always assumed that there should be a minimum below which the federal income tax does not reach. And Congress has enacted a number of other exclusions and credits designed to ensure that the federal income tax doesn't fall too heavily on the more vulnerable amongst us.
About half of those [46% of households] did't pay [federal income taxes] because of standard deductions and personal exemptions designed to exclude subsistence levels of income from taxation. The rest received tax breaks, including the earned income tax credit, the child tax credit and tax benefits for older Americans such as the exclusion of Social Security benefits from income." Richard Rubin, Romney's 47% With Not Taxes Combines Elderly with Poor Workers, Bloomberg Businessweek (Sept. 18, 2012).
Furthermore, most taxpayers who pay no federal income tax do pay other taxes: state and local income, property and sales taxes eat up a substantial amount of income, as do federal payroll taxes, which often amount to the most significant tax bite for these lower-income taxpayers. And as the Rubin article also notes, people who don't pay income tax one year--because of returning for education, job losses, extraordinary medical expenses and other causes--come back on the tax rolls in later years when they finish studies or find work.
Regrettably, Romney's remarks at the fundraiser mainly reveal an eager player in the class warfare game that the right has engaged in for the last few decades--it reflects a firm support for tax policies that redistribute upwards to the elite, at whatever cost to ordinary Americans who are disdained and even despised as irresponsible and lazy. With CEOs making 200-400 times what their average workers make and the productivity gains contributed most especially by the workers being siphoned off for increasingly higher pay for the executives, ordinary Americans already are hurting. Tax policies that continue the rip-off by continuing preferential rates for capital gains, providing even more preferential marginal rates for the uberrich, and eliminating worldwide taxation on multinationals will do even greater harm to ordinary Americans and the sustainability of our economy.
Corporate taxes used to constitute a significant portion of federal revenues, almost a third in 1950. Payroll taxes from workers were considerably less--around 10% in 1950. Andrew Leonard, Who Really Pays Taxes? Salon.com (Aug. 28, 2012).
The times have changed. Corporate taxes have declined steeply in the 21st century as a percent of GDP, while payroll taxes paid by workers have become a significant part of tax revenues--more than a third in 2007.
That is one cause of the inordinate inequality of income and wealth that this country now endures--an inequality that has dire consequences for the economy and for the well-being or the vast majority of ordinary Americans.
UPDATE: the filibuster rule again permitted a minority in the Senate to prevent good legislation from getting off the ground. On May 8 the Senate fell 8 votes short of the 60 vote supermajority needed to bring the loan provision with the S corp payroll provision to a vote. The right wing has by this vote explicitly condoned the gamesmanship that most closely held S corp owners engage in whereby they pretend that their service compensation is a return on investment.
The White House has endorsed a move by Senate Democrats to tighten up partnership and S Corps payroll tax payments--something long needed anyway--in order to fund the protection for students from paying too high interest rates on their loans. See Statement of Administration Policy (May 7, 2012); Stop the Student Loan Interest Rate Hike Act of 2012 (S. 2343). The payroll tax provision would require owners of certain closely held partnerships and S corporations to pay payroll taxes on their income from the entities if they have income in excess of $200,000 (singles)/ $250,000 (joint filers). The provision would raise almost $6 billion over the next 10 years to pay for a one-year extension of the current 3.4% rate on government-guaranteed loans.
A procedural vote will take place on Tuesday, but the routine use of the filibuster by Republican opponents will likely make it hard to enact. Both parties claim a desire to hold the student loan rate steady, but Republicans can't stand the idea of rich people not being able to use their S corporations to avoid paying payroll taxes on all of their compensation, so the GOP passed a bill in the House that would pay for student loan relief by eliminating funding for a preventive care program!
Back in 2002, Tim Johnson represented a safely red district in Illinois and the radical right was pressing on his back with its reaganomics-inspired program to cut-taxes-to-shrink-(nonmilitary)-government-and-eliminate-public-infrastructure-and-social-justice-programs; de-regulate-to-free-up-big-business; privatize-wherever-you-can-especially-schools-bridges-and-other-essential-services. Not to be outdone, Tim Johnson signed the no-tax-increase pledge on the dotted line, with his right-hand aide as witness.
In spite of the decades of extraordinarily well-funded anti-tax/anti-government propaganda spewed by purported think tanks like the "Americans for Prosperity" arm of the Koch Bros, the anti-estate tax "American Family" coalition arm of the Walton heirs, the Big-Business oriented Chamber of Commerce and Club for Growth and similar groups, the American public seems to be finally beginning to learn to read between the lines and recognize self-serving propaganda for what it is. Even with all the money being spent to misrepresent and distort the truth about taxes, it is worth noting that Rasmussen polls (run by a leaning-right head) are finding Americans more willing to support tax increases than they were a few years ago. For example, back in December 2011, despite the anti-tax nonsense of the Tea Party and other radical right-wing groups, only 52% thought tax cuts would help the economy--in the low end of the 51% to 63% range answering that question affirmatively since July 2008. Similarly, a recent poll showed that 47% favor a candidate who wants to raise taxes on the rich over a candidate who wants no tax increases. Back in September 50% of Americans favored a mix of spending cuts and tax increases (but 64% weren't willing themselves to pay higher taxes, a product of the NIMBY syndrome). And a March poll found a significant decrease in Americans responding who thought that America is an "over-taxed" nation.
[N]ew Rasmussen Reports national telephone survey finds that 56% of Likely U.S. Voters believe America is overtaxed. But that’s down from 66% two years ago and 64% last year. One-out-of-three (33%) now believe the country is not overtaxed, while another 12% are not sure. (To see survey question wording, click here.)
[ASIDE: The problem with the question about whether Americans are overtaxed--especially in this age of 527 groups spending buckets of money to convince them that they are--is that it depends on who you are asking and what facts they actually know about taxes, the economy, and what the difference is between effective tax rates and statutory rates. Everybody hears the radical right prattle on about how high our (statutory) tax rates are. Very few hear much about effective tax rates and fewer still understand the difference. The wealthy are not over-taxed, though they have spent a good bit of their money to convince typical Americans that they are. Those who escape federal income taxation because they earn amounts covered by the standard deduction and personal exemptions and earned income tax credits--amounts intended to keep lower income taxpayers from having to pay income tax--nonetheless have to pay signficant state and local property and sales (and often also income) taxes and have to pay significant federal payroll taxes. Not surprisingly, they may well feel overtaxed when their wages are going down and their tax burden is staying the same and they hear the think tank spew of anti-tax stuff on the airwaves day and night.]
And now Tim Johnson's district has changed. He represents a more Democratic electorate, that is less likely to swallow the Tea Party tax aversion hook, line and sinker. So he is backtracking. Which is good. It's a shame he backtracked bit by bit, at first claiming he'd never signed and then suggesting his aide signed for him before he finally admitted he had signed the pledge but just didn't consider it cast in granite. See Are you Now and Have You Always Been?, New York Times editorial (March 11, 2012).
But to give him credit, he finally did take a stand against the idiocy of the tax pledge. See Pat Garofalo, GOP Rep. Blasts Norquist's Anti-Tax Pledge as "Disingenuous and Irresponsible", Think Progress.org (Mar. 8, 2012). He ought to do it more straightfowardly--by admitting that it is a mistake to assume that tax cuts are always good or that tax increases are always bad and by acknowledging that there is plenty of room to tax the rich more without harming anybody's economic recovery. His statement (quoted on ThinkProgress) weasles by making clear that he is leery of tax increases other than fixing tax loopholes or raising the Social Security tax.....
One hopes that these few quasi- brave Republicans who are beginning to speak out against the idiocy of a "pledge" to cut off a key tax policy tool of democratic institutions for supporting public infrastructure and public needs will cause Norquist's pledge to go to the same ignominious fate that awaited Joe McCarthy's anti-liberal binge (under the name of anti-communism) when a lone lawyer questioned his decency. As a constitutent told GOP representative Rick Berg in a North Dakota town hall meeting (quoted on Think Progress), these guys are supposed to work for their constituents, not for Norquist.
Bloomsberg.c.com announced late Tuesday that congressional leaders are "very close" to settling on a plan for extending the payroll tax deduction through 2012, without requiring an offset. The plan would also extend the "doc fix" that prevents the rollback of doctors' reimbursements under Medicare from taking place (and apparently also the unemployment benefitsm with some term less than the current 99 weeks), by requiring offsets for those costs elsewhere. The GOP plan for drug-testing unemployment benefit recipients has thankfully been tossed into file 13, and so has the requirement that such recipients work for a high school equivalency degree.
Revenues for the offset may come in part from higher pension contributions from higher-paid government employees.
According to the Bloomberg piece, Camp, chair of House Ways & Means, has said that "a structure and a framework" for a deal is in place.
I must admit I don't get the Medicare doc fix. Doctors are well paid generally, and paying them less under Medicare sounds like a good start to reducing the rentier profits that doctors make out of providing medical care. I would prefer to see a phase down of the amounts they get reimbursed--27% is a significant cut in a one-year period, so it would make more sense to phase the cut in over at least 5 years.
The committee working on the extension of unemployment benefits and the payroll tax cut is not making much headway. A number of issues set the GOP's intent to cut assistance for those at the bottom of the income distribution as much as possible against the Dems' desire to fund the needed additional aid by a reasonable increase to the taxes of those who have enjoyed the most benefit from the last decade of tax cuts--those with a million or more in income. See Needham et al, Payroll tax, jobless benefits land on weekend agenda, The Hill (Feb. 9, 2012).
Number of weeks: The Republicans want to limit assistance to 59 weeks, incredibly stingy when many Americans are still jobless from the Great Recession. The Dems offered a cut to 93 weeks, but the GOP wants to cut the unemployed much more than that so they said no deal.
Pay-fors: The Democrats offered a surcharge on millionaires. The GOP wants federal workers to face more job cuts and a third year of pay freezes. Not hard to see which of those two proposals makes the most sense and is the most humance, but the GOP hasn't been into being humane for quite a while now.
Whose to blame: Dave Camp knows that the GOP's obstructionism was noticed last fall, so he wants to be sure the Dems get the blame for this round. He's already badmouthing the Democrats, claiming that they are "dragging their feet". One wonders how one side can drag feet when the other side is not willing to negotiate on anything that doesn't give them 95% of what they want. The GOP, meanwhile, treats the Dems' bargaining positions as a "joke"--as though nobody on the right can imagine ever deciding to tax millionaires more than their currently very low rates. See David Dayen, Payroll tax cut committee on brink of failure, FireDogLake (Feb. 7, 2012).
Payroll tax cut extension: Boehner has made noises to suggest he doesn't want the House Republicans to cut their noses to spite their faces like they did the last time the payroll tax cut came up. But at least some in the GOP don't want to extend the payroll tax cut, because they think that will make it look like Obama is an effective President. Id. Maybe those Congresspeople should start thinking more about the wellbeing of the Americans who are their constituents and less about whether their party will win the presidency in this year's election. Simon Johnson's Baseline Scenario essay on the issue of mean-spiritedness is worth reading (hat tip: Mark Thoma's Economist's Blog):
In negotiations currently under way, House Republicans propose to cut back dramatically on these [unemployment] benefits, asserting that this will push people back to work and speed the recovery. Does this make sense, or is it bad economics, as well as being mean-spirited? ...
Why would anyone now seek to punish these people when they seek work but cannot get it? ... Extended unemployment benefit provides on average about $300 a week – ...only about 70 percent of the poverty level for a family of four. If you strip even this money from people who remain out of work through no fault of their own, you will push more individuals and families onto the streets and into shelters. The cost of providing those fall-back services is very high – and much higher than providing unemployment benefits.
How does it help any economic recovery when the people who lose jobs cannot even afford to buy basic goods and services – enough to keep their family afloat? ...
Back when John Edwards was trying to get the presidential nod instead of Obama, some attention got focused on the way Edwards was able to avoid certain payroll taxes by having his compensation as a lawyer funneled through his professional service corporation, a Subchapter S corporation for US federal income tax purposes. Doesn't make sense, when you really think about it, that a lawyer's income for services would magically be transformed when a corporation, the only meaningful services of which are performed by that lawyer, is paid the compensation on his behalf and then pays the lawyer a (smaller) salary plus a purported "dividend". But that was the gimmick.
Now, another campaign has again brought attention to the issue. Newt Gingrich similarly avoided taxes on his compensation income by using an S Corp format.
And finally maybe Congress will act?
Pete Stark, D-CA, has introduced a bill to undo the gimmick. Similar to bills introduced in prior Congresses, the bill would treat dividend payments as payments subject to the Medicare tax for principal shareholders of a small S Corp whose principal assets consist of the skills and reputations of three or fewer shareholders. See the January 31, 2012 Stark e-Alert, announcing the introduction of H.R. 3840, the Narrowing exceptions for Withholding Taxes (NEWT) Act:
I introduced the Narrowing Exceptions for Withholding Taxes (NEWT) Act (H.R. 3840) yesterday, which would close a tax loophole that allows self-employed individuals -- typically lobbyists, lawyers and investment managers -- to avoid paying Medicare payroll taxes by routing earnings through an S corporation and classifying them as profits or dividends, instead of as wages.
Teachers, firefighters, and nurses can't structure their income to avoid payroll taxes. ...
See also Stark Introduction Statement, which points out in simple language the rationale for the bill.
Medicare payroll taxes are imposed at a rate of 2.9 percent on all wage income. Under present law, certain self-employed individuals try to avoid paying Medicare payroll taxes on a portion of their wage income by routing it through an S corporation. In general, S corporations do not pay income tax. Instead, the income gains and losses of an S corporation “flow through” to shareholders’ individual tax returns. By law, S corporations can have no more than 100 owners; but they are typically far smaller, with the GAO estimating that 94 percent of S corporations have 3 or fewer owners.
A shareholder of an S corporation who performs services as an employee is subject to Social Security and Medicare payroll taxes on his or her wage income, but generally is not subject to payroll taxes on amounts that are not wages (such as dividends and profits). Nevertheless, an S corporation employee-shareholder is subject to payroll taxes on the amount of his or her reasonable compensation, even though the amount may have been characterized as other than wage income. Where an employee-shareholder is entitled to a significant amount of S corporation income, there may be a temptation under present law to understate what portion of the income is compensation for services (and subject to payroll taxes) and correspondingly increase the amount treated as a dividend or profit.
The provision would produce about $11.2 billion more in taxes annually, according to the JCT estimate.
Apparently, Senate leaders on Friday ironed out the difficulty between the GOP and the Democratic party. The GOP got most everything it wanted, and the Dems got just barely more than nothing. That's the way "negotiating" seems to go in the Congress these days. The right demands and demands and demands and gets most of it by obfuscating and obstructing.
This time the Dems were worried about not getting a spending bill. So while the House passed a spending bill to carry the Federal Government through September 2012, the Senate caved on all the things they'd said they wouldn't cave on--like the ridiculous provision for expedited approval of the Keystone Pipeline. All to get just a 2-month extension of the payroll tax cut and expanded unemployment benefits--which the GOP knew it could not afford not to pass, no matter what. And Obama has already flipped on his earlier looks-like-he's-finally-figured-out-how-to-stand-tall position that he would veto any bill that carried the expedited Keystone approval provision. See Steinhaur & Pear, Senate Agrees to a Two-Month Extension of the Tax Cut, New York Times (Dec. 16, 2011).
The GOP continues to call the Keystone pipeline project a "job creator", even though it will create no more than 50 permanent jobs, at a considerable environmental cost. Schumer calls the Keystone provision a "Pyrrhic victory" for the GOP, because he says Obama will not approve it if pushed. That's not so clear to me. Schumer also spins the cave-in as a victory for Dems! saying that the GOP won't have the leverage of the need to pass a spending bill when this issue comes back. See Rubin et al, U.S. Senate Leaders Agree on Two-Month Payroll Cut , Bloomberg.com (Dec. 16, 2011).
Again, past experience suggests this may be too rosy an assessment. There were commentators who thought that surely the Congress would not pass further tax cuts after the 2001 tax cuts resulted in large deficits but instead we got the 2003 bill and the 2004 tax giveaway for corporations bill and many others, with the deficits mounting with each one. One would have thought that the sunset of the various Bush tax cuts in 2010 would have been a perfect time for the Dems to develop a spine, but they didn't. And the Dems weren't even able to pass a bill ending the carried interest subsidy for hedge fund managers, in spite of the Great Recession and the need to reign in financial institutions.
The Senate bill will apparently at least not include some of the bad stuff that was in HR 3630 as passed by the House--it is "scaled back" so it looks like medicare premiums won't rise for seniors, and the GOP won't win its attempt to end medicare's coverage of outpatient rehabilitative therapy for stroke victims and medicare payments to doctors will not be affected. Nor will it include the "extensions" of expiring tax provisions like the R&D credit or the active financing exception for the financial industries' deferral of its offshoreprofits. Id.
The Senate bill will apparently be paid for by raising the guarantee fees for Freddie and Fannie, something that was included in HR 3630. Id. Vote is to take place at 9 am Saturday.
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