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 redistributionupwards 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 redistributiondownwards 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.
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.
These days, one hears a great deal from politicians on the right about how a corporate tax "overhaul" is needed because our taxes are "too complex" and/or "too anti-competitive" or because our tax rates are "too high". The same GOP politicians who whine and whimper about how huge the deficit is, and accuse President Obama of driving our country to ruin with the deficit are willing to lower the tax burden paid by highly profitable corporations considerably (thus increasing the deficit and adding to regressivity of the tax system)--so long as they are appeasing their multinational constituency, the huge corporations who are the new providers of campaign funds and the new decisionmakers in elections--even though the corporate entities have no vote. Claims of revenue neutrality are generally little more than PR cover for corporate giveaways.
Just a couple of examples from a recent Bloomberg piece:
Republican Senator Robert Portman says he will unveil a new proposal soon that will cut taxes for multinational companies' repatriated offshore profits--i.e., a permanent tax holiday for multinationalsm as a first step towards a very MNE favorable move to a territorial tax system--that will remedy "an inefficient and complex maze of tax preferences". See, e.g., Kathleen Hunter, Portman Corporate Tax Plan to Include Low Repatriation Rate, Bloomberg.com (Feb. 1, 2012). Portman claims this huge tax cut for the high and mighty MNEs (and their managers/owners) is needed because they "pay[] a very steep tax bill if and when they choose to bring their money home." Ludicrous. There is a very generous foreign tax credit provision that allows many MNEs to reduce their taxes to near zero anyway. Further, the deferral they are allowed on active business income gives them the time value of money benefit. Most of what foreign corporations want to do is allow their taxes on non-US income to reduce their taxes on US income--which is a kind of subsidy for offshoring that costs US jobs. And of course, as I've noted in earlier posts on tax holidays and proposals for a territorial system to replace a worldwide system, corporations hold more money overseas when they think there is a good chance that their buddies (or "bought pols"?) will give them the tax break they have been lobbying for--so these proposals encourage corporations to engage in the activity that these proposals say they are addressing, thus giving them more ammunition to get the change they want. Portman, of course, says he wants to "streamline" the corporate tax and lower the rate to 25%. We have a statutory rate of 35% now and most corporations that pay taxes (which are not by any means all of the corporations that make significant profits) pay less than 25%. If we lower the statutory rate to 25%, it is quite likely that most corporations that actually end up paying taxes will be a smaller number than with the 35% rate and at a much lower rate--probably around 10-15% instead of 20-25%. Of course, what the result will be--as it was in the 1986 tax reform that lowered rates for ordinary income and ended a number of problematic tax preferences such as the capital gains preferential rate--is that the lower rates will stay, and all of the loopy tax preferences (and more) will be reenacted within a couple of years under heavy lobbying for the same by the corporations that benefit from this round.
Dave Camp, Michigan Republicans and Chair of the House Ways and Means Committee, wants to exempt 95% of overseas profits.
Is there merit in this drumbeat of (lobbyist-induced) calls for "corporate tax overhaul legislation"? The simple answer is no.
On Complexity:
Most complexity in the code is there for one of two reasons.
The most likely reason for complexity is the creation of tax preferences heavily lobbied for by corporate lobbyists. One example is the so-called "domestic production activity deduction" that lowers the tax rate by 9% for most industries (even ones that don't really produce anything) and 6% for natural resource extractive industries. There are tax breaks on top of tax breaks for the resource industries, of course, that get numerous special benefits throughout the Code, while joining in various coalitions that lobby AGAINST even extraordinarily modest support for green industries (such as reasonably low cost loans for solar power).
The second main source of complexity is the clear need for specific anti-abuse provisions to undo the harm done when corporations use what can most charitably be called aggressive and inventive interpretations of Code provisions--often ones that are hyper-literal in nature (the kind of analysis that allowed the Bush Treasury to redefine what "exchange" means in the reorganization provisions in order to allow taxpayers to manipulate the allocation of consideration to create a hitherto unrecognizable tax loss in the reorg transaction) or turn the Code's clear textual provision on its head (look at the briefs for the defendant--or for that matter the lousy statutory interpretation in the district court opinions-- in the Black & Decker contingent liability shelter case, where Black & Decker argued for application of a provision in section 357(c) (which says explicitly that it applies only where paragraph one of that provision applies) in a context where paragraph one did not apply). As a result of the contingent liability shelters, Congress added various Code provisions, including section 358(h) (having to do with the basis for corporate assets in transactions with significant liabilities) and section 357(d) (having to do with calculating the amount of liability assumed).
Complexity, in other words, is not an evil in itself. Sophisticated taxpayers aren't harmed by complexity, and in fact complexity is needed to provide sufficient detail to prevent sophisticated taxpayers (with the help of their tax advisers) from cheating. There is generally less complexity in provisions that are relevant for unsophisticated taxpayers, though it is more clearly an obstacle to good tax compliance behavior there.
On Competitiveness:
Competitiveness is used so frequently that it seems doubtful that anybody really knows what they mean by it. If one company destroys a union and is able to pay their workers lower wages as a result, then a company that produces a similar product will claim that "competitiveness" requires that they be allowed to do the same. Of course, another approach would be for the company that retains an active union, and continues to provide pension and health care benefits could lobby Congress to enact stronger laws protecting worker rights to pension and health care benefits. In other words, competitiveness is consistently used as an argunent, when it comes to corporations, for taking away benefits to workers, communities, states and the nation for the benefit of the corporations. Competitiveness could just as easily be used to argue for maintaining programs, procedures and benefits for workers, communities, states and the nation by considering what would be necessary to buttress the system that supports those benefit levels. And in fact that view of competition--that we are competing globally to create both profitable companies AND a secure and well-paid workforce that can support a healthy economy that can in turn support a quality of life in all dimensions--would lead to different decisions not only about taxation but also about anti-trust, excise taxes, trade treaties, environmental protection, and many regulatory projects.
Furthermore, competitiveness is often used as an argument in the abstract when the main competitors are both US based companies. There, the argument for reducing taxes to enhance competitiveness is at its weakest, but few competitiveness arguments reveal just how the competititon is playing out even on a globalized playing field.
On Rate Structures:
The 1986 tax reform act is a frequent reference these days when people talk about amending the Code generally and specifically about amending the corporate tax provisions. But the context for that act's passage was quite different. Individuals were taxed at rates that were reasonably progressive--with a top rate at 70% (though the brackets could probably have been better defined to differentiate among top income recipients). Further, the 1954 Code had built up a plethora of tax preferences (especially useful to the rich) and the Congress had realized that the preferential capital gains rate was wreaking havoc on sensible provisions because of the arbitrage opportunities it created. Thus, there was room for "base broadening" (removing ill-advised preferences spread throughout the 1954 Code) as a means of paying for "rate lowering" (lowering the fairly high rates about half, without costing the fisc because of the higher amount of income on which those rates would be charged).
We are not in the same situation today. We have very high deficits because of an economic crisis caused by two interwoven problems--(i) the lax regulatory oversight of 40 years of Reaganism, which permitted the financialization of the economy and led to excessive incomes for people at the top (managers and owners, hedge fund and equity fund managers, and speculators generally) and excessive debt for banks and especially people not at the top (because of their stagnant or reduced incomes in the face of growing costs, caused in part by the relaxation of regulations and anti-trust activity coupled with the anti-union attitudees and activity); and (ii) the success of a radical right-wing fringe in characterizing government and business as having adverse interests and progressive programs supporting social well being (from Social Security to Medicare to Medicaid to (modest) heatlh care reforms intended to reign in the cost of medical care to unemployment benefits to efforts to reign in contracts of adhesion in the consumer credit markets) as "unmerited" "entitlements or costly and anti-competitive regulation of businesses that counters the "free market" that will ensure "growth and jobs". The result of the rhetoric is a citizenry that is ignorant of the actual income distribution, tax burdens, and impact of government spending on jobs and the health of the economy. The result of the 40-year "reaganomics" effort from the right to cut regulations, cut taxes, privatize and militarize is that this is no context for rate reduction but in fact a context in which those who can afford to do so--for sure those individuals and households in the top two quintiles of the income distribution that comprise the upper middle class and the upper class and all profit-making corporations--should be paying taxes at HIGHER rates, not lower rates.
It should be noted that President Obama--who is at best a middle of the roader on tax issues--also is said to plan to propose an "overhaul of the U.S. corporate tax system" in connection with his budget plan for FY 2013 that involves lowering rates and base broadening. See Steven Sloan, Obama said to propose corporate tax overhaul next month, Businessweek.com (Feb. 2, 2012). Again--lowering the rate is a bad idea. Lowering the rate without base broadening is a stupid idea. But the kind of base broadening that is included, if such a proposal eventually passes, matters an awful lot. The problem is that if Obama proposes such a reform, the GOP won't support it unless the "base broadening" is essentially inconsequential and can be undone easily later or affects only little guys and not the big-monied lobbyists. Thus this looks like another of those initiatives from the White House that play into the right's agenda and do little to advance any progressive idea.
[editorial note: back from a great break in Colorado with children and grandchildren, so postings will resume normal routine. edited in afternoon to add cite to Angry Bear post by Mike Kimel.]
The Congressional Research Service recently released a new report on U.S. income inequality. See Hungerford, Changes in the Income Distribution Among Tax Filers 1996 to 2006: The Role of Labor Income, Capital Income, and Tax Policy, CRS (Dec. 29, 2011) (Download Hungerford. Changes in the Distribution of Income Among Tax Filers Between 1996 and 2006. Role of Labor Capital and Tax. 122911). The CRS report is a sobering document, especially in light of the growing unrest as ordinary people realize how their opportunities are limited by the increased control of resources at the top (e.g., Occupy Wall Street, the "99% vs. 1%, etc.). For example, see the New York Times article today on inequality and the fact that U.S. mobility trails that of Europe and Canada. The article is based on a number of different studies such as that of Marcus Jantti and colleagues, American Exceptionalism in a New Light, and suggests that inequality has lingering impacts, especially on the poor and the ability of the poor to move out of the bottom. See Jason DeParle, Harder for Americans to Rise from Lower Rungs, New York Times, Jan. 4, 2012 (in print edition, Jan. 5, at A1). The article discusses the considerable evidence that there is limited access today to what we have called the "American Dream": stickiness exists especially for the poor and the affluent, as the poor generally lack opportunities to get out, and the affluent generally have all the advantages they need to stay affluent. See especially the graphic accompanying the article, Comparing Economic Mobility. Id. at A12. The causes of America's mobility problem are multiple--poverty; a thin safety net (threatened even more now by the right-wing's determined attack on earned benefits like Social Security and Medicare under cover of their purported concern about deficit reduction); the disadvantages of single motherhood; high incarceration rates, especially for black males; a long history of racial stratification that still impacts daily life; the pay tilt towards educated workers (usually made up of children of the affluent); the decline in unionization compared to other affluent countries; and the magnitude of the gap between the rich and the vast majority of Americans. Even conservatives, who tend to think that mobility is overrated as a policy goal, may conclude that "stagnation at the bottom [is] alarming and warn[] that it will worsen." Id. at A12 (citing conservative journalist Reihan Salam of the National Review and Daily Post).
Meanwhile, not surprisingly, the right-wing in this country continues to pursue exactly those policies that have so contributed to the decline of mobility, the stagnation of incomes for the lower income population, and the loss of employee power in the workplace. See, e.g., the plan of the Republican majority in Indiana to enact so-called "right to work" legislation that allows non-union members to freeload off unions by getting the bargained for rights and wages without paying dues to make that bargaining possible.
What those interested in tax policy should pay especial attention to is the role of tax changes over the last 40 years in augmenting the inequality gap. Tax is not the sole culprit, but it is a contributor and something that Congress can easily do something about, if it can summon the political will to act. From the report summary:
Inflation-adjusted average after-tax income grew by 25% between 1996 and 2006 (the last year for which individual income tax data is publicly available). This average increase, however, obscures a great deal of variation. The poorest 20% of tax filers experienced a 6% reduction in income while the top 0.1% of tax filers saw their income almost double. Tax filers in the middle of the income distribution experienced about a 10% increase in income. Also during this period, the proportion of income from capital increased for the top 0.1% from 64% to 70%.
Income inequality, as measured by the Gini coefficient, increased between 1996 and 2006; this is true for both before-tax and after-tax income. Before-tax income inequality increased from 0.532 to 0.582 between 1996 and 2006—a 9% increase. After-tax income inequality increased by 11% between 1996 and 2006. Total taxes (the individual income tax, the payroll tax, and the corporate income tax) reduced income inequality in both 1996 and 2006. In 1996, taxes reduced income inequality by 5%. In 2006, however, taxes reduced income inequality by less than 4%. Taxes were more progressive and had a greater equalizing effect in 1996 than in 2006.
Three potential causes of the increase in after-tax income inequality between 1996 and 2006 are changes in labor income (wages and salaries), changes in capital income (capital gains, dividends, and business income), and changes in taxes. To evaluate these potential reasons for increasing income inequality, a technique to decompose income inequality by income source is used. While earnings inequality increased between 1996 and 2006, this was not the major source of increasing income inequality over this period. Capital gains and dividends were a larger share of total income in 2006 than in 1996 (especially for high-income taxpayers) and were more unequally distributed in 2006 than in 1996. Changes in capital gains and dividends were the largest contributor to the increase in the overall income inequality. Taxes were less progressive in 2006 than in 1996, and consequently, tax policy also contributed to the increase in income inequality between 1996 and 2006.
The members of Congress who pass such preferences (the GOP in particular, but certainly various members of the Democratic party such as Max Baucus fall into the same group) spin such preference for the rich (a group which includes most members of Congress) as supporting job creation. Their spin suggests that anytime anyone invests in corporate stock, they are acting as entrepreneurs and increasing the possibility of jobs for the rest of us.
The spin is mostly just that. Most of the capital gains from sales of corporate stock have nothing to do with having invested in a company directly in ways that provide more capital to the company and lead to creationof jobs. Most of such gains are from secondary market sales--sales of stock from one rich person to another. Secondary market sales have absolutely nothing to do with job creation or entrepreneurship: they have everything to do with acquiring more money with taxes that are at extremely low preferential rates.
Similarly, getting dividends from a corporate enterprise has nothing to do with job creation--they just make the corporate stock holder richer at a preferential tax rate (under the 'temporary'[ provision enacted in 2003 and extended several times since). Many 'freshwater' economists and many tax professionals argue for "integrating" the corporate tax and the tax on dividends or outright elimination of the corporate tax, claiming that the dividend tax represents a 'double' (and therefore wrong) taxation of corporate profits. That logic has led to an increasingly rich variety of corporate loopholes built by Congress into the Code--from the various expensing and bonus depreciation provisions (letting corporations reduce their taxable income compared to their actual business profits by claiming a deduction for capital expenditures) to various preference gimmicks, such as the "domestic manufacturing deduction" that provided a significant reduction in the corporate tax rate to all kinds of industries, including many processes that few would consider to qualify for "manufacturing."
But the double taxation claim is merely that--a claim based on the way the theor treats corporate entities. Economists been unable to prove empirically that shareholders actually bear the burden of the corporate tax. But even if they do, there are other reasons having to do with institutional power and the sustainability of democracy for supporting a corporate tax. If you start out thinking that "only people pay taxes", you would likely conclude that "corporations can't pay taxes; therefore, the corporate tax is 'really' being paid by the owners of the corporation." Of course, we used to say that only people can vote, so only people should be allowed to spend money on campaign speech. Now the Supreme Court--which has treated corporations as "persons" under the Constitution since the nineteenth century--has decided that corporations have free speech rights that are broad enough to allow them to use their vast resources to influence who gets elected. Thus, corporatism has paved the way for corporations to buy elections and then lobby for the laws and regulations that suit them, while arguing that corporations shouldn't pay any taxes to support the government that grants them various subsidies through the election/lobbying/regulation (deregulation) process. It has supported the US movement towards "free trade" agreements, such as NAFTA, that have been difficult for the poor in countries with whom we trade, for environmental protections in the U.S., and for locally owned businesses and local workers in the U.S.
If you avoid the corporatist agenda and start out with the assumption that corporations pay tax (because we have treated such entities as taxpayers under the Code), then you can recognize that corporate tax policy can be set to permit reasonable profits and to disincentivize unreasonable--i.e., societally undesirable--behavior. An example would be the problem of corporate consolidation in a globalized economy, which provides inordinate power to multinational entities (I have called them quasi-sovereigns) and significantly reduces the power of ordinary employees.
To understand something about the problem of corporate consolidation (as if the 2007-08 financial crisis caused by "too big to fail" financial institutions shouldn't have been enought), read the book Methland: The Death and Life of an American Small Town, by Nick Reding (Bloomsbury 2009). In trying to understand the causes of the meth explosion in U.S. rural towns, it details the devastating effect of corporate consolidation on rural workers and economies--Big Agriculture and Big Pharma essentially bought out the vertical processes (for Ag, from seed to table, with a few firms like Cargill, Tyson, and ADM controlling huge swaths of the American food system). In the process of gaining control, they consolidated many small, local producers, shut out unions, sought-out illegal immigrant labor to avoid wage and benefits laws, and dropped wages--in one case, wages for workers in an Iowa meat processing plant dropped overnight from around $18 an hour to less than $6 an hour, with a simultaneous cut off of benefits. See Methland, at 69 (noting the decline in wages when Cargill took over the formerly locally owned Iowa Ham plant in 1987).
"[T]he evolution of the meth epidemic had occurred in lockstep with three separate economic trends that had contributed to the dissolution of small-town United States. ... And the things that spurred this simultaneous rise and fall: the development of Big Pharmaceuticals, Big Agriculture, and the modern Meican drug-trafficking business." Id. at 109.
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"By 1999 ... Cargill-Ecxel [an agribusiness plant in Ottumwa Iowa] placed newspaper advertisements in the poork, industrial border towns of Jarez and Tijuana offering two free months' rent to workers who could make it to Ottumwa from Mexico. For Cargill and the rest of the packing conglomerates, employing illegals would appear to have been the best of all possible situations, for the simple reason that these employees, lacking legal identification, didn't technically exist, and therefore had no rights. Nor were they apt to argue with the harsh conditions of an industry that continues today to have the highest rate of employee injury in the United States. A failed 2001 federal criminal case brought against a Tyson plant in Shelbyville, Tennessee made clear that corporations would essentially not be held liable for employing or recruiting illegal immigrants to work in the plants. Despite the fact that two Shelbyville managers were caught on tape by federal investigators asking human traffickers for five hundred undocumented workers over four months, Tyson's defense team successfullyh maintained that it's too difficult for Tyson employees to determine who's who among legal and illegal employees. The ruling institutionalized the notion that employers of immigrants are not beholden to offering the same rights to workers that other companies must, for the simple reason that they don't know--and don't need to know--who works for them." Id. at 153.
***
"Consider what used to happen in Oelwein, Iowa before the large scale consolidation in the 1980s and 1990s of almost every niche of the food-production chain. Corn farmers...would have bought seed from the local seed company. Once harvested, that corn would go to a grain elevator, also locally owned. It would be shipped to a small feedlot in order to fatten cattle raised in Nebraska, Wyoming, Florida or Arizona; or perhaps it would go to a dairy in northern Missouri, a chicken farm in Indiana, or a pork outfit in Kansas. The variables were infinite and the market was dynamic. The barge, truck or railroad car that carried the grain was likely independently owned, too, as would have been the pigs, cows, and chickens it fed. At each stae, the price would have to be 'discovered' as multiple potential customers vied to handle the product, with competition keeping the price 'true'... in the context of the marketplace. Eventually, the Oelwsin corn used to feed sows in Topeka might return to Oelwein in the form of hocks to be disassembled, packaged, and shipped at the Iowa Ham plant... From there, a whole new market ... would take over in order to distribute the food and sell it at the retail level, perhaps at the grocery once owned by the Leo family (which today is an IGA). James and Donna Lein would have been the essential building blocks in a vibrant system in which the variables contributed at all stages to what's called the 'social capital' of rural communities.
Beginning with the precedent set in 1987 with the IBP takeover of Hormel in Ottumwa--and the subsequent takeover of Iowa Ham by Gillette--a few companies would come to control most of the U.S. food business. ... Price discovery no longer happens; the value chain is controlled by a limited number of entities. Seed is not sold; it's biogenetically engineered by companies like Monsanto, which entered into a joint venture with Cargill in 1998. Cargill--not the farmer--owns the corn this is grown [under contract].... In the Illinois and Ohio river valleys, Cargill owns 50 % of the grain elevators and other storage facilities. Along with Tyson, Swift and the National Beef Packing Company, Cargill owns 83.5% of the beef packing inustry [and so on for turkey production, flour milling, ethanol production, animal feed plants, and soybean crushing]. Id. at 169-160.
***
Once competition has been annihilated ... the surviving companies, like Cargill, begin to effect political decisions through their enormous lobbying capabilities. The government no longer governs unimpeded: it does so in tandem with the major companies. Id. at 161 (citing Douglas Constance, a rural sociologist at Sam Houston State University, Huntsville Texas).
This loss of local ownership through massive consolidation of business enterprises was a change orchestrated from the top of the U.S. government under Reagan's policies of privatization, deregulation, tax cuts (and loosening of tax and antitrust mechanisms that had worked against consolidation), and militarization. It is a change continued today through the more and more flexible tax regulations and Code provisions governing tax-free reorganizations. These policy approaches supporting consolidation of enterprises both vertically and horizontally favor the development of powerful corporations that can influence governmenbt in their favor while demanding subsidies (bonus depreciation, expensing, and other tax loopholes that have steadily reduced corporate taxes well below 25% for most of those that pay them at all, even while the rates remained statutorily at 35%. Looking at the way corporate consolidation has harmed rural America should lead us to ask whether reversing the policies favoring such consolidation--such as making tax-free reorganizations much more difficult, pursuing anti-trust violations under new theories that look to the problems inherent in quasi-sovereign corporate entities, charging corporate and other businesses an expatriation fee equal to the increase in value of business assets while in the United States--may not be worth considering as one step in remedying both the "too big to fail" and "quasi-sovereign" problems while also providing resources to address the thin safety net and falling wages of the bottom of the income distribution.
[edited 2 pm 12/13 to provide additional links to news coverage of some of the changes]
Congress has been playing politics as usual over the few policies that are on the table that have a real chance of assisting, to some degree, the plight of ordinary Americans and perhaps even the slow recovery that is still trying to gain steam--extension of the reduction in payroll taxes (from 6.2% to 4.2%) and extension of unemployment compensation.
The Republicans have refused to pay for these common sense tax reductions for ordinary Americans with a similarly common sense tax increase on the wealthiest Americans who have continued to capture all the productivity gains in the economyt. Republicans in the House think that these kinds of provisions should be offset by more goodies for the "uberclass"--at least as evidenced by the H.R. 3630, the bill introduced by Dave Camp (R-MI) and to be voted on today at about 4:30 pm.
It would restructure unemployment compensation in ways that add hurdles and make it less likely that unemployed Americans will qualify--providing more state flexibility and experimentation (including paying employers to cover part of cost of wages exceeding the recipient's prior benefit level), permitting demeaning drug testing of all unemployment compensation recipients (section 2127), and requiring a high school diploma or participation in state "reemployment services" for which recipients may be charged up to $5 weekly out of their unemployment compensation. It would severely curtail the total number of weeks for which federal unemployment assistance is available--moving to a 59-week limit from a 99-week limit. Methinks I see Scrooge here.....
It will interfere with the Environmental Protection Agency's ability to regulate, letting corporations continue to harm the environment at the expense of ordinary Americans. See Subtitle B. Section 1102(b) lists rules that are "stayed" by the legislation and provides that no new rules can have an effective date earlier than 5 years out and requires consideration of various factors in determining that date. Further, it requires adoption of the laxer 2000 definitions for certain key terms and the imposition of the "least burdensome" among potential regulatory alternatives. This is a key cave-in to corporate polluters.
It will expedite the KeystoneXL pipeline by requiring a permit to be issued within 60 days unless within that time the President determines that the pipeline will not serve the national interest (in which case within 15 days the President must provide various committees and members of Congress a report justifying that conclusion from various perspectives). It indicates that the environmental impact statement from August will be treated as satisfactory for environmental and historical preservation purposes and shall not have to be supplemented if there are modifications to the plan and no further federal environmental review shall be allowed. This is a clearly ideologically driven provision, failing to give due regard to the potential longterm environmental impact on drinking water aquifers or historical preservation impact.
It would provide yet another tax reduction for US corporations that have paid less and less taxes over the last decade, with a renewal of the ill-advised 100% expensing provision in section 168(k)(5) (along with the alternative of accelerating AMT credits)
it makes further changes to medicare such as applying a cap to hospital outpatient therapy services and reversing part of the Health Reform Act passed earlier, by permitting new doctor-owned hospitals and permitting existing ones to expand, even though it has been shown that such hospitals spend more on testing and procedures (and profit more from them). See, e.g., Pear, G.O.P. Bill Would Benefit Doctor Owned Hospitals, New York Times at A24, Dec. 13, 2011.
it would continue funding for the "healthy marriage and responsible fatherhood" initiative, see 42 U.S.C. section 603(a)(2) (the cynic in me suspects that these funds primarily go to programs supported by religious institutions and that they proselytize more than they teach reasonable relationship skills)
it includes an extensive section remaking flood insurance provisions, including, in section 3005, lifting the cap for premium increases for flood insurance from 10% to 20% (an apparent boon to insurers), and another section prohibiting the administration from "disregarding" any levee or floodwall, even if it is not accredited. The goal, made clear in section 3009, is privatization of the national flood insurance program.
It includes extensive broadband spectrum auction provisions in Title IV, Subtitle A, reallocating spectrum from federal to nonfederal use. These provisions, among many detailed ones, e.g., permit private administrators of state public safety networks to use the public spectrum for private purposes as well as the public safety purpose and prevent states from denying requests for modifications of existing wireless towers that do not substantially change the physical dimensions thereof.
It increases the guarantee fees charged by Fannie Mae and Freddie Mac.
It requires a social security number for the refundable child credit
It provides in section 5895 a 100% tax on "excess unemployment benefits" that go to millionaires (unemployment compensation is reduced proportionately as the adjusted gross income increases from $750,000 to $1 million)--The Times today has an article on the bill and notes that the number of millionaires receiving unemployment compensation is very small, but that their participation is predicated on the fact that the unemployment compensation program is a type of insurance into which payments are made to cover payouts. Means testing such insurance programs is in sync with the right-wing goal of means-testing as a prelude to privatizing and/or eliminating all federally administered social welfare insurance programs, such as medicare and Social Security (and, see above, national flood insurance).
It increases pension contributions from longterm federal workers by .5% a year for 2012-2014 and for those "secure annuity employees" with less than five years of service, by more than 10% a year and using 5 year average pay rather than 3 year average pay, sets annuity amounts, and ends the annuity supplement for post-2012 retirees.
it extends the general freeze on federal pay for another year
It increases the premiums for Medicare Part B and Part D for those making $80,000 or more (for those making $200,000 or more, the applicable percentage is 90%)--this again appears to move these national social welfare insurance programs towards more means-testing that will facilitate privatization or eventual elimination.
It sets up a number of procedural hurdles in the Senate, which is already hogtied by the ease with which a minority of its members can filibuster and thus stop legislation that is supported by a solid majority of its members. For examples,
it requires a 2/3 vote in the Senate to amend the dates for section 601(c) of the 2010 Tax Relief Act--that's the temporary employee payroll tax cut;
it provides that a point of order by any Senator against an emergency designation in a bill eliminates that designation and makes it impossible to bring the designation through a floor amendment unless there is a supermajority 3/5 vote in favor of doing so (limiting debate to 1 hour)--thus one right-wing Senator intent on obstructionism can make it very unlikely that an important provision can pass by preventing even reasonable debate about the importance of the provision!
The GOP, of course, touts its bill as creating jobs. While the Keystone pipeline may create some short-term jobs (the New YorkTimes reports estimates from Transcanada itself and the State Department of only about 6500 temporary construction jobs and maybe 50 permanent new jobs--see Keystone Claptrap, Editorial, New York Times at A34, Dec. 13, 2011), the potential negative impact on aquifers could be life-threatening. Most of the other provisions are Scrooge-like additions of hurdles and caps on social welfare provisions or attempts to roll back the social welfare insurance provisions into means-tested ones that will be even more susceptible to the derogatory and inflamatory class-action warfare that the right has increasingly unleashed on anything that doesn't give a break to the wealthy and corporate clients of the all-powerful Washington lobbies.
On lobbies, just read the New York Times article about the wealth that online educators are getting from state and federal taxpayer dollars for delivering no or sub-standard education, and the amount of taxpayer money being spent on lobbying to ensure the continuous flow of that wealth. See Saul, Profits and Problems at Online Charter Schools, New York Times, Dec. 12, 2011. It's obvious that the corporatist agenda sees no problem with siphoning off taxpayer dollars for private benefit with little public good created, but complains mightily about any siphoning off of exorbitant corporate profits--that tend to go to wasteful excess managerial compensation or portfolio enhancement--for taxes intended for public benefit.
The inclusion of the Keystone and other right-wing-rhetoric-driven items in a bill to provide the payroll tax cut and a limited unemployment extension (with hurdles) demonstrates the absurd level of ideological partisanship engaged in by the House Republicans. Senate Majority Leader Reid characterized the bill as loaded with "ideological candy" that the Senate would reject. Sloan & Rubin, House to Vote on Payroll Bill as senate Eyes Tax Sweeteners, Bloomberg.com (Dec. 13, 2011). Of course, most of the sweeteners that Reid proposes adding are components of the right-wing corporate-friendly agenda--like the R&D credit that rewards what companies do anyway; the active financing exception for big banks, insurers and other financial institutions that lets them defer taxation on their financing income earned overseas; and accelerated depreciation for restaurants and motorsports tracks that provide special tax subsidies to particular industries!
OMB Watch provides another progressive perspective on the ideology driving the Ryan budget proposal.
Like all congressional budget resolutions, House Budget Committee Chair Paul Ryan's (R-WI) fiscal year (FY) 2012 Budget Resolution is not simply a chart of preferred spending and revenue levels, it's also a political statement guided by ideology. And Ryan's ideology demands that the federal government divert ever increasing sums from middle- and low-income families to big business and high-income families.
Importantly, they note that the call for cuts to programs that serve the more vulnerable amongst us is justified by an arbitrary decision to cap federal revenues at a level guaranteed to create deficits unless there are significant spending cuts. This is the "starve the beast" idea at its culmination.
On the revenue side, Ryan's budget revolves around locking down federal revenues to below 19 percent of gross domestic product (GDP). While this number is the average for the past 30 years, it has consistently lagged federal spending, resulting in the steep deficits we see today. In order to maintain this deficit-inducing level, Ryan's plan calls for cutting income taxes for high-income earners from today's top marginal rate of 35 percent to 25 percent. (Interestingly, the last time we saw federal budget surpluses, between 1998 and 2001, the top marginal rate was 39.6 percent.) Ryan plans a similar giveaway to corporations, slashing the corporate tax rate from 35 percent to 25 percent.
Pay-fors for the big tax cuts to Big Business and the wealthy? Well, those should come partly from those pesky large subsidies in the Code, right? But Ryan avoids naming any of those. My guess is that he knows the GOP isn't serious about eliminating large tax expenditures that primarily benefit the wealthy and Big Business, such as (i) active financing exception for overseas finance subs, (ii) deferral for multinational corporations' active business income, (iii) mortgage interest deduction that primarily gives huge tax cuts to elites with million-dollar homes, (iv) charitable contribution deduction that lets the wealthy donate stock and take a deduction for its value rather than for what they actually paid for it and have invested in it, etc.. And besides, even if he thought that the GOP might have to eliminate a very few of those nice juicy wealthy-friendly provisions, he isn't about to name them and then get a well-funded lobbying group working against him on this. The GOP has benefitted much too much from having those well-heeled lobbying groups for Big Business and wealthy families (like the Walton heirs) on their side, along with the right-wing purported "think" tanks like Cato, American Enterprise, Tax Foundation, etc.....
The proposal also indicates that "large" tax expenditures should be eliminated to pay for tax cuts for the rich. It states that "deductions, credits and special carve-outs" in the corporate tax code should be modified to pay for tax cuts for businesses. Notably left out from the discussion of removing these tax code "distortions" is any identification of which tax expenditures Congress should nix. Far from being bold, Ryan's proposal ducks these critical questions, shifting the heavy lifting and political daring to the tax writing committees, staving off attacks from powerful special interests that will no doubt flex their campaign contribution muscles to retain their federal largesse.
Not really cutting the rich doesn't mean that the GOP won't carry through with cutting the vulnerable. Ryan is quite willing to list specifics here--after all, the poor and the young and the unemployed and the underemployed don't have much way to work together to have their voices heard (especially in those states where the GOP's anti-union drive is squelching unions).
In exchange for these tax cuts, spending for the old, the young, the poor, and the sick would be lopped off by two-thirds. Ryan laments the notion that the current social safety net is a "hammock, lulling able-bodied citizens into lives of complacency and dependency," while worrying about Medicaid health care providers "fleeing the system to escape endless red tape and underpayments." His solution is to apply the same failed "get-back-to-work-you-lazy-bum" policy that ended the old income assistance program and created Temporary Assistance for Needy Families (TANF).
In fact, the welfare reform of the 1990s that is approvingly cited in the budget plan did nothing to curtail poverty, and it only managed to reduce welfare rolls by forcing low-income parents to take low-wage jobs A similar approach to health care, nutrition, and housing assistance will likely result in only cutting families off from these vital programs when they need it the most.
Headlining the section of Ryan's proposals to "strengthen the social safety" are $771 billion in Medicaid cuts. Ryan's plan would convert this low-income health care program from a system in which states and the federal government share costs into a block grant program that would allow states to abandon the eligibility and benefit guidelines currently in place. Ryan argues that relieving states of this "one-size-fits-all" approach would result in significant cost savings, allowing states to pay for higher-quality care. But this is just window dressing beautifying almost $800 billion in health care cuts to low-income families that will ultimately result in poorer health outcomes for millions of people.
Nutrition and housing programs are also prominently featured on Ryan's chopping block. Ryan is clear that far too many people have access to the Supplemental Nutrition Assistance Program (SNAP, formerly "Food Stamps") and housing assistance. Applying a circular logic, Ryan insists that without kicking people out of these programs, the expenditures will be so great that people will have to be kicked out of these programs. Thus, he is just doing what will have to be done eventually. Yet cuts to health care, nutrition, and housing for low-income families is the bedrock on which Ryan builds his tax-cutting and corporate support programs.
OMB Watch points out that Ryan's plan is really a "two-fer"--it manages to take away from the vulnerable (the young, the poor, the elderly) even while giving to Big Business by letting corporations skim off the cream from the federal funding formerly dedicated to the vulnerable. Here's where the Reagonomics mantra of privatization comes in--tax cuts with privatization is just another way of saying let's convert this funding for the poor into a subsidy for Big Business.
Ryan's plan was formulated with the goal of allowing private corporations greater access to federal funds. At the front of this effort is a form of privatizating Medicare. He calls for use of “premium supports,” which means Medicare would be changed from an entitlement with defined benefits to an insurance system in which the government provides a fixed sum of money to individuals to buy coverage. The phrase “premium supports” is used because “vouchers” doesn’t poll very well today. But a rose by any other name is still a rose. By giving vouchers to seniors to pay for their own health care, Ryan's plan would insert a middleman between patients and health care providers, giving health insurance companies the ability to skim untold billions in federal health care spending.
Ryan's plan would also voucherize federal jobs programs by doing away with them and creating a "career scholarship" program that would have the effect of giving for-profit colleges a bigger bite of the national education and training budget. And although having little, if any, impact on the budget, Ryan's proposal calls for gutting the recently passed Wall Street reform – a boon to big banks who loathe the legislation – and removing sensible oil drilling regulations despite last year's BP disaster in the Gulf of Mexico.
But if you think that this means an open look at the way we waste billions annually on militarization (one of the other four cornerstones of privatization, deregulation, militarization and tax cuts that make up the GOP's radical reagonomic agenda for continuing the devastation of the American economy that began when Reagan took office), think again. Eisenhower's view that we had to maintain a military-industrial complex but should be very wary of its power has been translated with reaganomics into the view that we should constantly feed the military-industrial complex because it is the friend of the rich and Big Business, and we need never hold it accountable for anything.
Security spending, however, would go untouched compared to President Obama's budget request, increasing compared to the Congressional Budget Office (CBO) baseline. This aspect of the budget proposal makes it a rarity among the many floating around Washington – the president's deficit commission plan is clear in its call for "equal percentage cuts from both [defense and non-defense]". The Pentagon awards hundreds of billions of contracts to private corporations every year. Cuts to the Pentagon's budget as deep as those to non-security programs would have significant impacts on the bottom lines of the nation's biggest businesses. The Ryan budget keeps the taps wide open and continues to pump billions of dollars of federal funds to these contractors.
So the Ryan budget is a disaster.
Despite claims to the contrary, Ryan's proposal would increase the debt in its first ten years. According to the CBO's analysis of Ryan's plan, in the first ten years after the enactment of his proposal, debt held by the public would actually increase compared to doing nothing. Under the hood of this clunker of a plan are draconian cuts to non-security spending that are less than the tax cuts that would be handed out to the rich and big businesses. The real cost savings in Ryan's plan come after the ten-year budget window that budget resolutions typically address. In 2022, the Medicare voucher system comes into effect, which essentially shifts health care costs from the government to senior citizens. In short, even with drastic spending reductions, the first ten years of Ryan's budget have no positive fiscal impact, while the out-years look improved because of radical Medicare cuts.
This is the budget of Big Business and the anti-government crowd. Ryan's budget doesn't dial back the laundry list of national priorities so much as it simply hacks away at the amount of resources devoted to accomplishing them. And in areas where he can, he opens them up to private corporations to skim funds as they flow from the Treasury to the provisioning of services. For what's left of programs operated by the federal government, Ryan's budget leaves a fraction of the funds necessary to implement an effective social safety net, protect the public, and invest in the economy as businesses and the wealthy contribute less.
[edited to add a link to the Washington Post article by Glenn Kessler and to correct Rand typos in references to Ryan--somehow the two must have blurred themselves in my mind]
As most of you undoubtedly know, the federal government is operating under spending authority that ends Friday. Without some resolution, government will partially shut downm resulting in closed national parks, no processing of paper returns at the IRS, no paychecks for military personnel (who will nonetheless still report for work), delays in clinical trials at the NIH, and many other impediments to decent functioning of government. See e.g., Nicolas Johnston, Government Shutdown Would Suspend IRS Audis, Close Parks, Bloomberg.com, Apr. 6, 2011.
As the Johnston article notes, this kind of a shutdown is not just an easy exercise in downsizing government--it would have a sizable, negative economic impact as 800,000 government workers would essentially be furloughed (no income), loan guarantees from FHA would stop, construction projects under review by the EPA would stop, and many other vital governmental functions would be slowed or stopped pending approval of a budget. That negative impact would have repercussions throughout the local, regional and national economy. Government workers would buy fewer commodities and stay home more, impacting local and national businesses from bus services to movie theaters, restaurants to new car manufacturers. Delays in construction, of course, would add to the problems that this sector has had since the onset of the Great Recession, leaving construction companies and workers in the lurch yet again. Not a pretty scenario when the economy has just begun to turn the corner.
Why are we facing a shutdown? Because the House, controlled by right-wing Republicans, wants to excise all the government spending represented by programs that (i) benefit low-income, vulnerable Americans, such as Head Start, public education spending, basic research funding, , etc. OR (ii) require Big Business to take on at least some of the costs (externalities) associated with the business being able to reap huge profits, such as environmental protection, business regulation, consumer protection, financial consumer protection, etc.
How do we know this? Look at the "The Path to Prosperity: Restoring America's Promise: Fiscal Year 2012 Budget Resolution" drawn up by Paul Ryan (Rep. Wisc.) who is chair of the House Committee on the Budget. This document is the right-wing flim-flam artistry at its peak. And it will not take us on a path to prosperity. It is, instead, a recipe for oligarchy. It will leave the lower income sectors of the American population in a trench of despair from stagnant or declining wages coupled with decimated or non-existent social safety nets. This document augers well only for the Wall Street banksters, the big multinationals, and those who own them. The wealthy and ultra rich will do fine, as their GOP stooges in Congress (and in the Tea Party) enact legislation to ensure that the rich continue to garner most of the productivity gains in the country, camoflaged with enough of the "values" issues that appeal to the lower-income religious fundamentalists to get them to continue to vote with the rich against their economic interests.
Let's consider the intro (page 4) and the summary of Ryan's budget pages 5-. One thing should jump out at you--this document just repeats ad nauseum the same old, historically invalidated, right-wing economic "free market" fundamentalism ==> a claim that tax cuts for Big Business and the wealthy, combined with spending cuts that favor Big Business (and the wealthy) but take away important public functions and safety nets for those who are not well off, will result in economic growth and jobs (that will trickle down to the lower-income rungs).
Translation guide (hat tip to Lloyd Doggett): whenever Paul Ryan says he wants to "save" or "reform" or "advance" or "repair" a program that benefits ordinary Americans, please translate with "eviscerate" that program. Whenever Paul Ryan says he wants to "reform" a major area of federal law (like environmental protection, federal income taxation, corporate taxation or health care), please translate as "make it work to the benefit of the wealthy or Big Business".
It says it is committed to "timeless principles"--"liberty, limited government, and equality". Liberty is meaningless unless it includes opportunities to lead a decent life and to fulfill one's own potential. This use of liberty is an excuse for creating oligarchy.
It says that it wants to "free the nation from the crushing burden of debt". But we don't have a crushing burden of debt. And the debt we do have can be resolved by borrowing more long-term at these cheap rates, undoing the revenue-side silliness enacted during the Bush years by restoring most of the tax laws to the pre-2001 tax legislation provisions (but getting rid of the preferential rate for capital gains and enacting a more progressive estate tax, etc.), and pulling away from the obscene military expenditures that we have been embarked on in particular dating from Reagan's presidency when militarization became one of the fundamental pillars of all his decisionmaking.
Claims to cut $5.8 trillion over 10 years; "curb[] corporate welfare" and "bring[] government spending to below 20% of the economy
note that there is nothing sacred about having spending be below 20% of the economy; historical patterns have ranged up and down but in fact we could spend much more than 20% of the economy if we think that is a high priority--this therefore represents a decision that spending at less than 20% is an a priori "good" without any basis for reaching that decision, since of course one has to know what one is spending on to know whether it is good to do so or not
the Ryan plan does not curb corporate welfare--it extends it incredibly
Claims to "reach primary balance in 2015"
this claim is absurd on its face.
it uses the Heritage Foundation's figures (based on so-called "dynamic" analysis) which means that it assumes its conclusion--ie., that cutting government spending and cutting taxes for the rich and for Big Business will create economic growth
the plan repeals the health care reform legislation passed by Congress; therefore, it eliminates the savings achieved by that bill, which means it will increase the deficit by more than a trillion over a decade. The document absurdly claims (with no basis), however, that eliminating health care reform will reduce the deficit
claims to "keep taxes low so the economy can grow"
This is just the so-called Laffer "theory" out for yet another GOP ride--this is the false mantra (tax cuts promote growth) that has been repeated by the GOP for four decades to justify cutting taxes no matter what the economic situation and no matter what the result of prior tax cut legislation;
tax cuts are not panaceas for economic growth or job creation;
Bush tax cuts didn't work as sold to the public--things got worse for everybody but those at the top
There is no reason to think that these will either. In fact, it is less likely that the Ryan proposal for tax cuts will have a good impact on the economy, since they continue to favor outsourcing of US business, decreasing revenues from corporate multinationals, decreasing revenues from the ultra wealthy, and by negatively impacting job growth and retirement benefits and health care, will more than likely cause the economy to shrink.
claims that the tax code resulting will be "simpler and less burdesome for households and small businesses" while "top rates for individuals and businesses [are set] at 25 percent [to] improve incentives for growth, savings, and investment":
70% of households do not itemize their returns. That's a very simple tax return. So except for the earned income tax credit--which is a complexity worth having, since it gives a positive refund to those in the lowest income distributions--tax returns are already really simple for the vast majority of American taxpayers
a top rate of 25% is a huge tax cut--yet again--for the wealthiest Americans and for Big Business --that provides no benefit whatsoever to the overwhelming majority of Americans who have been "losers" in this economy at least since 2007 and a huge benefit to the very few at the top who have been the "winners".
The assumption that lowering taxes provides an incentive for growth, savings and investment is unproven and, to the extent it does, it is beneficial only to the wealthy who have enough so they can save and invest. Investment incentives are not good if they result in American wealthy elites investing even more of their excess profits in other economies (which is the likely result of this proposal). Investment incentives are only a good thing for the country if they result in more money supporting small entrepreneurial business undertakings--something with which cutting the top rate on wealthy Americans and Big Business has almost nothing to do.
Claims to "create nearly 1 million new private -sector jobs next year" and 2.5 million in 10 years from now; to "spur economic growth", and to "unleash prosperity and economic security" with "higher wages" and more income per family
note that this disregards the fact that it will result in the loss of at least the same number of public sector jobs as the federal government downsizes and the states cut jobs (as they have already begun to do) because of the lack of federal redistribution funding revenues
besides which, this is just wishful thinking--there is NO SUBSTANCE WHATSOEVER IN THESE FIGURES FOR JOB CREATION, ECONOMIC SECURITY, or WAGE INCREASES.
every GOP taxcutter from Reagan forward has claimed that the particular tax cut proposed will create jobs. But tax cuts don't create jobs--they just make the rich richer.
Private entrepreneurialism in the US can create jobs--but not much here supports private entrepreneurialism in the US. To do that, you need funding for public education (especially higher education, as in the GI Bill), funding for basic research, funding for extended unemployment periods so that the un-and under-employed can buy stuff and give business to small businesses in their community, a health care system that works (ideally, single-payer to remove the "rent" profit-taking of health insurance companies from the system; certainly not the return proposed by Rand to the problems that the health reform act begins to deal with), etc.
For the last few decades, what prosperity we have had has gone to the benefit of the upper class, not to the benefit of ordinary wageearners. There is nothing in this proposal to reverse that--in fact, it continues the same failed policies that got us into this situation
the claim for economic security is a particularly laughable claim. Remember that Paul Ryan and his radical right GOP cohort intend to eviscerate Social Security, Medicare and Medicaid, with the result that the baby boomer generation would find itself without retirement income or medical care. That is no promise of "economic security". It would be a joke if it weren't so deadly seriously devastating for ordinary Americans.
On health care, for example, Ryan wants to just give states block grants for Medicaid, resulting in cuts to even more vulnerable Americans. Ryan claims to "save Medicare" by getting rid of it--replacing a government-payer system with "the same kind of health care options now enujoyed by members of Congress". While not directly dealing with specific "reforms" to Social Security, Ryan claims to "advance Social Security solutions" to force changes that "ensure solvency". But the Social Security system will likely be still solvent 75 years from now, and if we needed more funding, we could simply lift the cap on the wages that are subject to the payroll tax. That would solve any problem that might exist years down the road by taxing the wealthy the same way we tax the poor. That isn't on Paul Ryan's agenda.
The "entitlement" provisions--Medicaid, Medicare, Social Security--reveal the heart of the right-wing agenda. The intent is to get rid of the New Deal while giving the savings to the wealthy and Big Business in terms of yet more in tax cuts and relief from regulatory oversight that protects ordinary Americans.
It's worth reminding everybody yet again that most of those same Republicans who are crying crocodile tears about the deficit these days voted for the $1.3 trillion Bush tax cut package in 2001, and for the 2003, 2004, 2005 etc tax cut packages that got us into most of the deficit situation, as well as for the AMT "patches" for the mostly upper-middle class group with income from 350,000 and up. They weren't crying about the deficit then. They intentionally structured the tax cuts as temporary through a "sunset provision" that would make them look like they cost less than they actually did cost--even though they intended, explicitly admitted at the time, to make all of the changes permanent. They just didn't want to have to put it in writing that the tax cuts were going to cause such incredibly huge deficits, but they didn't mind actually causing them. The mantra then was that "deficits don't matter". They also said that the huge Bush tax cuts, enacted in a series of bills over the entire Bush presidency, was going to "stimulate the economy" and "create jobs". Remember that the 2004 tax bill that allowed multinationals to repatriate billions from overseas while paying almost no tax on it--a "repatriation tax holiday"--was labeled the "American jobs creation act"; instead; most of the companies that brought home big amounts of cash used it for share buybacks and actually laid off workers in the US instead of creating jobs.
Remember that along with their "tax cuts create growth and jobs" mantra they also said that "deregulation will create growth and jobs". Deregulation, of course, led us directly to the Great Recession--and we now have tens of millions of ordinary Americans out of work because of that, as well as tens of millions of ordinary Americans who have lost their homes because of that.
The Reagan fundamentals--deregulation, militarization, privatization, and tax cuts--didn't work under Reagan and haven't worked since. Yet here Paul Ryan is, like one of those salesman in the old West who went from town to town selling watered down whiskey as the "miracle cureall"--only Ryan is smiling sweetly, looking genuine, and trying to sell us the same old melarkey that tax cuts and deregulation will give us an astounding cure for the Great Recession by creating growth and jobs.
Don't buy that "hair of the dog" argument, folks. It's the same old song, sung no matter what the facts are. Tax cuts for the wealthy, less help for the vulnerable, and the gradual demolition of the social safety net that we established in this country after the Great Depression based on our understanding that allowing all the benefits to go to a few wealthy leads to disaster.
Of course, when even the ever-GOP-friendlier Washington Post says watch out for the trickery and in the Ryan budget document, you know there must be something there. Glenn Kessler, Fact Checking the Ryan Budget, Washinton Post, Apr. 6, 2011 does just that, concluding that "the Ryan budget relies on dubious assertions, questionable assumptions, and fishy figures."
Lloyd Doggett's statement at the Budget Committee markup session says a good deal of what needs to be said in response to this GOP idiocy: "This is not a 'Path to Prosperity'--it is a path to mediocrity, insecruity, and the wrong path for America". Here is the prepared statement as released:
This is not a path to prosperity; it is a path to mediocrity; it is a path to insecurity; it’s the wrong path. We welcome a spirited debate about our economic future. Mr. Ryan fails to offer a balanced approach to achieve our shared objective of a balanced budget. You might say that in short, we Democrats say that this budget is just not our cup of tea.
Yes, this is a “choice of two futures” for our country, but the choice that this budget presents is really one between their ideology and reality, it’s between a fact-based analysis and fiction-based mythology and ideology. The only thing that is real about this budget are the harsh cuts that will bring real insecurity to the many while providing a largesse for the wealthiest Americans who have been taking a bigger and bigger share of our national wealth.
In this budget, wherever you read the terms “modernize” or “reform,” just understand that these are Republican euphemisms for a four letter word that hurts—“less”—less retirement security, less educational security, less health security, less economic security. This budget does not share the sacrifice, but it certainly does spread the pain.
We get less of what matters not because they tackle our soaring national debt in a courageous way, but because of how they choose to tackle that debt consistent with their ideology. This proposal, I believe, makes very wrong choices for our future.
There is, for example, a much better alternative than eliminating $4 billion from early education or student financial assistance that will only deny students the means to get all of the education for which they are willing to work to achieve their full God-given potential. Instead of cutting that $4 billion, I would cut the $4 billion that is being spent every year through the Tax Code to enable Wall Street financial enterprises to avoid taxes on profits from loans and financial activities overseas and which are, at the same time, encouraging the export of American jobs.
Instead of eliminating $500 million in cancer research and other scientific research that saves lives and creates jobs in America, I would eliminate the $500 million a year spent through the Tax Code, in what's called the look-through provision, which enables multinationals to shift income earned abroad among through their foreign subsidiaries.
Instead of eliminating $3 billion a year from our crumbling bridges and roads, I would eliminate the $3 billion loophole in the Tax Code that grants a corporate tax deduction on interest charges when you borrow money to build a factory overseas without having to pay taxes on the income you earned from that factory. We need to stop exporting American jobs, exporting American manufacturing, exporting American tax revenues, and start developing a more competitive workforce and rebuilding America. And we can choose to have the same effect on the deficit by choosing to close harmful loopholes instead of yielding to harmful Republican cuts.
You can watch Doggett at the Budget Committee April 6 markup session on YouTube here:
Paul Krugman's op-ed on the "Wisconsin Power Play" (New York Times, Feb. 20, 2011) is worth reading. As he notes, it isn't about the deficit (not much is that the GOP claims to be these days). It's about power--the power to bust public employee unions (before private workers get dangerous ideas about the benefits of collective bargaining).
You might also want to catch the comments on Thoma's post of same at Economist's View, including this one from E Michael who notes that in Wisconsin Governor Walker's budget bill is a proviso for the sale of state-owned heating, cooling and power plants:
"16.896 Sale or contractual operation of state−owned heating, cooling, and power plants. (1) Notwithstanding ss. 13.48 (14) (am) and 16.705 (1), the department may sell any state−owned heating, cooling, and power plant or may contract with a private entity for the operation of any such plant, with or without solicitation of bids, for any amount that the department determines to be in the best interest of the state. Notwithstanding ss. 196.49 and 196.80, no approval or certification of the public service commission is necessary for a public utility to purchase, or contract for the operation of, such a plant, and any such purchase is considered to be in the public interest and to comply with the criteria for certification of a project under s. 196.49 (3) (b)."
The bill would allow for the selling of state-owned heating/cooling/power plants without bids. And E Michael quotes another blogger who notes that this is "like a highlight reel of all of the tomahawk dunks of neo-Gilded Age corporatism: privatization, no-bid contracts, deregulation, and naked cronyism. Extra bonus points for the explicit effort to legally redefine the term “public interest” as “whatever the energy industry lobbyists we appoint to these unelected bureaucratic positions say it is.”
This is the agenda initiated by Ronald Reagan--deregulation, privatization, tax cuts, and militarization--laid bare. Remove power from ordinary people. Put state assets in the hands of the already well-heeled through exercises of naked cronyism. Cut taxes for big business and the wealthy even while cutting back on services for the middle class and poor and increasing taxes (sales taxes, payroll taxes) for those same groups. The only part of the Reagan destructive agenda that Walker apparently isn't doing is increasing the military budget for ridiculous projects that line the coffers of the wealthy military-industrial complex.
As the extraordinarily conservative Republicans in the House (and in the Senate) press to turn back progressive initiatives, the White House and responsible Democrats (assuming there are a few) need to be cautious that they don't concede before they even try to fight and end up dumping out important provisions to appease the right like they did with the "public option" in health care reform.
For example, Obama made a point in his State of the Union address of going along with the demand by small businesses for alteration of the 1099 reporting provision enacted as part of the Health Care Reform bill. See, e.g., Lavante, What President Obama Really Said in the State of the Union Address about 1099 Reporting (Jan. 2011). Businesses complain about any new reporting requirement. First, because they don't want to do any reporting at all if they can get out of it. Second, because they know that information reporting has a huge impact on the ability of small businesses generally to evade taxes by simply failing to report income. Compliant businesses ought of course to support reporting requirements, since they end up paying their taxes in full, while the noncompliant businesses that earn income "under the table" are the ones that benefit when there is no reporting requirement.
Think about this a minute. Businesses inevitably track their invoices and their customers. They know who pays and who doesn't. They know what they've bought and who they've bought it from. It doesn't require much to file that information (already maintained by most modern businesses on computerized accounting programs) in the appropriate forms so that the IRS has the information to match against what various business vendores report as their income. This should therefore be a nonissue: for a small additional cost in the time to do the paperwork, the government will be able to hold businesses accountable in the same way that it holds ordinary wageearners accountable--through the information reports filed by third parties.
Raising the threshold on the amount for reporting or excluding all "small" businesses from reporting would be a bad idea. Small businesses are the place where failure to report income likely adds up because of the ease with which such things can be obscured without third party reporting, whereas large companies have various audit and public reporting requirements that would hinder such failures to report: one has to think that it is a number of those family-owned businesses running sole proprietorships and S Corporations that are evading their responsibility to report their income and causing all of us to have to bear a disproportionate amount of the burden.
Of course, this is a broad issue that relates to reporting by third parties in many different situations. With third-party reporting, the tax gap--somewhere in the range of $200 to $300 billion annually made up of taxes evaded by cheaters--would be significantly reduced, and compliant taxpayers would be restored to equity. Noncompliant taxpayers would no longer garner a tax advantage from simply failing to report their income on the assumption that the IRS would have considerable difficulty figuring out the additional payments they've received. It is a no-brainer, given the way that third party reporting assists in overcoming the problems of assymetry of information faced by the government. See, e.g., United States Government Accountability Office Report to the Committee on Finance, U.S. Senate, "Tax Administration: Costs and Uses of Third-Party Information Returns," GAO-08-266, Nov. 2007 (noted in Citizens for Tax Justice report cited below). But neither the Republicans nor the Democrats seem to be able to see past the hullabaloo raised by people (presumably including a good many of those who profit from the lack of third-party reporting) about "burdensome" reporting.
There are similar complaints about the IRS's proposed regulations requiring banks to report interest paid to foreign accountholders in the same way that they have been reporting such interest for domestic accountholders for some time, in order to be able to comply with our information reporting requirements under treaties. Citizens for Tax Justice notes that the so-called "center for freedom and prosperity" (hereinafter CFP) (often represented by Dan Mitchell of the Cato Institute) has as usual distorted and misrepresented the issue here. See The Tax Cheaters' Lobby is Wrong about IRS Proposed Regulations, CTJ, Jan. 31, 2011. Not only do we have a responsibility to provide information to other governments under our agreements on tax information exchange, but such reporting will likely aid in the ongoing battle to catch flagrant tax cheats who hide as foreigners to avoid paying income tax on earned interest, as CTJ notes.
(Again, one suspects that these are some of the same people who hide money in offshore secret banking jurisdictions and conveniently forget to report the income on it on their tax return. At the recent ABA tax section meeting in Florida, I spoke with a lawyer whose practice includes representation of many of these tax shirks. He estimates that there are more than 250,000 such shirks with "substantial" amounts socked away in offshore tax havens. The right-wing CFP, of course, gathers money from these rich folks and spends it vilifying the efforts to squelch tax havens and tax competition, which it considers a wonderful thing because it permits the extraordinarily wealthy to hang onto "their" property (i.e., avoid contributing taxes to pay for the government that made that property possible). Don't believe anything you read on the "prosperity" center's site--it will almost certainly be distorted by misleading innuendo and misinformation. The CTJ report is an excellent takedown of the many exaggerated and misleading claims made in the "prosperity" center's materials. You can also find a number of my own website where I have reviewed some of their videos and found them to rest on a very shaky foundation of speculation and conclusory assertions.)
The Dodd-Frank financial reform bill included a similar new reporting requirement for broker-dealers. Some experts have concluded that about 25% of those who report capital gains from sales (in most cases, the most affluent amongst us who are making trades in financial assets such as stocks and bonds) have cheated by overreporting basis and thus underreporting gains. That adds up to a huge part of the tax gap. Dodd-Frank raised some revenues by requiring brokers to report basis, providing a third party check against an individual's claimed basis amount. The banks have this information automatically when they conduct trades on stocks or bonds they've sold to the investor and they are gearing up for the initiation of this reporting this year. See Larry Barrett, Broker-Dealers Brace for Cost Basis Reporting, Security Monitor, Feb. 2, 2011.
Of course, in enacting the provision, Congress provided much too much flexibility to investors selling financial assets, by allowing them to specifically identify which of completely fungible items they sell (thus cherry picking the basis that gives them the lowest tax liability). If average basis isn't used (and this is an area of considerable complexity regarding the appropriate rule), then there should be a first in-first out rule that requires investors to be treated as selling their oldest acquired items first. It is hard to see any justification for allowing cherrypicking that has nothing but a tax-minimization goal as its object--these are fungible financial assets that are exactly the same for every purpose other than tax, so recognizing the tax differences as a basis for a tax beneficial election makes no policy sense at all. The identification provision that has been in the Code for a long time should be deleted, and owners of financial assets should not be able to specfically identify consideration received for such items in any context, whether reorganizations (where the Bush Treasury instituted a rule permitting such identification in 2006, claiming wrongly that it was a necessary corollary to their decision to treat a share of stock as the base unit of property in reorgs) or otherwise.
Meanwhile, other provisions in the Dodd-Frank reforms, limited though they were, now face a struggle against a headwind of Republican cost-cutting and business-friendly attitudes. The SEC seems to be suggesting that it thinks it will have to rely on the banks' own self-regulatory apparatus--i.e., it appears to be willing to let the fox watch the henhouse when it comes to the Dodd-Frank fiduciary standard. And the CFTC sees itself needing considerably more resources in order to institute the swaps exchange which is essential to the re-regulation of the swaps market that lay at the heart of the financial speculation carried on by TBTF banks. See Dodd-Frank Tax Battle Coming, Securities Monitor, Feb. 2, 2011. Too many in the new Congress seem to think that the tea party crazies represent the majority of American voters, and are planning a range of truly stupid actions, from failing to approve a new debt ceiling (this, of course, after fighting singlemindedly for hundreds of billions of tax cuts for the extraordinarily wealthy) to failing to fund the regulatory apparatus necessary to give us any hope that 21st century global capitalism can be responsive to democratic, people-centered objectives for society.
The working group was led by several people, including Michael Desmond, who just happened to be at Treasury during the Bush Administration. (There are lots of people in private practice now, writing reports on government decisions, who were in government under Bush just a while ago. Is that a good thing? I suppose it has its pluses and minuses. On the plus side, it ensures that there are always those in practice who understand how government works and where important decisions can get hung up or expedited. ON the minus side, the very decisions that were put in place during a person's tenure in government may be susceptible to persuasive lobbying (using that insider perspective) from those who worked on the provision in government and now comment on it on the outside.)
The practitioner community is generally concerned that the codification of the economic substance doctrine will mean that it will "chill" regular business transactions because of the uncertainty regarding its exact application. So the report asks for clarification--just what are the transactions that are susceptible to the application of economic substance, what is a substantial purpose, what does it mean to have a potential for profit, how do we know when state tax provisions are related to federal tax provisions, and what, in fact, does "economic substance doctrine" mean.
While the desire for absolute clarity is understandable, I am not sure that it is a desire that the Treasury should attempt to satisfy. One of the benefits of judicial doctrines, compared to very specific statutory anti-abuse provisions, is their flexibility. Courts, in the context of particular cases, review the circumstances of a transaction and conclude that it lacks economic substance. The doctrine has developed as part of the federal common law of tax, and it has gone through periods of being particularly useful in curbing super-aggressive tax avoidance shelters.
For people like me who were worried that codification of the doctrine could lead to its demise by narrowing its scope and defining away its power to adapt to unforeseen abusive pattersn (and to create enough uncertainty among tax practitioners to discourage the most aggressive tax return gambits), the ABA's demand for "clarification" is therefore worrisome. If we take Congress at its word, it expected the courts to continue applying the doctrine in the circumstances in which they applied the doctrine before codification. Codification solves the problem of different tests for economic substance applied in different jurisdictions by settling on one test, but it leaves it to the courts' careful case-by-case analysis to add more meat to the bones of the test. This is as it should be.
Practitioners would nonetheless like an "angel" list of transactions to which the economic substance doctrine can't apply. Treasury has wisely refused, since the power of the doctrine is in looking beyond form to substance and recognizing that abusive transactions (shelters) are highly innovational within the confines of existing statutory provisions. The creation of an angel list would be an invitation for creative tax genuises to manipulate code sections to create an abusive transaction out of the angel one.
Let's be honest. Many practitioners would also like to see the significant test for business purpose narrowed in scope. Here too I disagree. it is important for transactions that are honored in their form for tax purposes to have a significant purpose that is germane to the business and not conjured up solely to achieve favorable tax results.
While some guidance would be helpful, Treasury should be careful not to put the pliable economic substance doctrine into a straitjacket that limits its ability to police aggressive transactions.
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