ataxingmatter

Economic conditions worsen: especially for the poor

There's a story in the Washington Post that is an appropriate counterpoint to the bailout of Bear Stearns and the Fed's attempt to keep the financial spigot flowing for the markets and investment banks, activities that most directly affect the wealthiest Americans whose fortunes depend primarily on the financial markets.  Neil Irwin & Alejandro Lazo write, in Inflation Hits the Poor Hardest, Washington Post, Mar. 21, 2008, that hidden in the 4% overall increases in the prices of goods and services from a year ago are increases that will be particularly hard for those on limited incomes.

An analysis of government data by The Washington Post found that prices have risen 9.2 percent since 2006 for the groceries, gasoline, health care and other basics that a middle-income American family has little choice but to consume. That would cost such a family, which made $45,000 on average in 2006, an extra $972 per year, assuming it did not buy less of such items because of higher prices. ... This contradiction -- high inflation for staples, low inflation for luxuries and in wages -- helps explain why American workers felt squeezed even before the recent economic distress began.

And as Jaren Bernstein of the Economic Policy Institute notes, these statistics tell us a lot about the "middle-class squeeze."   "The idea that you can understand the kind of budget constraints that middle-class families face by looking at overall inflation is wrong. You have to look at the core items a middle-class family buys."  Id.

Ed Kleinbard speaks out on the AMT

As longtimer readers of this blog are aware, I have written extensively about the alternative minimum tax (AMT).   I have noted that there is no need to repeal the tax, as the right-wing "tax cuts solve all problems" think tanks urge.  In fact, I have counseled that we should appreciate the role of the AMT, as devised by Congress over time.  It prevents taxpayers from benefiting too much from "loading up" on tax expenditures in their favor.  We would be better off with some simple reforms--such as an indexed exemption amount appropriately targeted at the bottom half of the income scale and adding capital gains, charitable contributions deductions in respect of untaxed appreciation, and the home mortgage interest deduction to the preference list--and retention of the AMT as an important revenue source for the Federal government.  This is particularly true to the extent that we retain any of the 2001-2003 tax cuts, which gave the greatest benefit to taxpayers at the upper end of the income distribution.

Ed Kleinbard, the chief of staff for the Joint Committee on Taxation (and a former partner of Cleary, Gottlieb, the New York firm in which I practiced prior to moving to academe), spoke about the AMT in a similar vein at the 32nd Annual Tax Law Conference in Washington this month.  He pointed out that there is no design flaw in the AMT.  It has undergone several revisions since its origination in 1969 after Congress realized that some 150-odd wealthy taxpayers had gotten by with paying no tax at all.  Those revisions broadened the base and increased substantially the group expected to pay the tax.  That historical fact is another inconvenient  truth for the Republicans in Congress, who have mounted an effort to repeal the AMT (at a cost of more than a trillion) without offsetting revenue increases, with political rhetoric that says the AMT was never intended to operate the way it does but was supposed to reach only a few ultra wealthy taxpayers. Kleinbard "avoided linking his argument to the political debate, but he said that the belief in the 'primordial' AMT prevents engagement with the real policy choices about revenue needs, government spending levels, and the relative taxation of different parts of the economy."  Chuck O'Toole, Kleinbard Rebuts AMT 'Mythologies', 118 Tax Notes 1169 (Mar. 17, 2008).

Andrea Campbell: Thinking about Taxes

I have talked frequently here about what I call the "free marketarian" fallacy--that we can just go along and leave businesses and wealth accumulation unregulated and have a good society.  Enron and Bear Stearns offer ample proof of the problem of applying that economic efficiency thinking too strictly, without understanding that the real world had complications that require maintaining an appropriate balance between governmental institutions and private markets.  People don't spend all their income in their lifetime, so basic assumptions in an analysis, from an efficiency standpoint, of consumption taxes are not realistic.  Decisions about taxes need to be made against a context of deciding what we want to spend money on, not just that we'd rather have money to spend rather than "give it away."

Andrea Louise Campbell is presenting next week at the NYU colloquium on her book-in-progress about How Americans Think About Taxes: Public Opinion and the American Fiscal State.  She has posted an excerpt, which is the link for the title.  What she has to say is worth paying attention to, especially in this election year.  So I will excerpt a few key ideas from her introductory excerpt, below.

"How elites--especially politicians, but also interest group leaders, academics, and policy analysts--characterize taxes can heighten or obscure the costs and benefits associated with taxes, altering opinion patterns among the public."  ... "The assymetry of taxes--people would rather pay less than more--and the lack of crystallized attidues toward graduated taxation favor opponents of such a system, who have been successful in reducing progressivity since the 1960s.  Given that taxation is a major tool of redistribution, this change in policy has exacerbated other trends in income inequality."

***

"Chief among those assumptions [about attitudes of Americans towards taxes] is that Americans simply hate taxes .... The ubiquity of anti-tax talk in political campaigns, and the eagerness of politicians to cut taxes, seems to corroborate this view.  This book shows instead that there is considerable variation. ... It is not the case that all taxes are despised all of the time--under certain conditions tax attitudes are relatively positive."

***

"The designs of taxes and elite messages about taxes shape attitudes above and beyond objective conditions; citizens' calculations can be obscured by the ways in which taxes are designed and can be manipulated by elite rhetoric."

***

"The costs of some taxes are better hidden, either because they are taken in small increments and never totaled, like sales taxes, or because they are withheld, and so the taxpayer never has the money in hand, as with income and payroll taxes.  The costs associated with such hidden taxes are perceived as lower than those of taxes that must be paid out of pocket in large lump sums, such as the property tax. ..."

"The benefits associated with taxes can be more or less hidden as well.... Payroll taxes provide some of the clearest linkages ...because they fund public pension and health benefits....User fees for parks and recreational facilities also provide a clear link...."

"[D]uring the 1950s and 1960s, taxes rose rapidly and yet public dissatisfaction with them declined.  [This was attribuatable to various factors, including] real incomes increased even faster than rising taxes... and bountiful tax revenues ...facilitated an unprecedented level of infrastructure spending on highly visible projects....  But an additional key factor ...was bipartisan agreement on tax policy and elite quiescence on the issue.  Republicans had largely acquiesced to popular New Deal programs.  ...[Another factor was] the nature of the congressional committee system in the 1950s and 1960s. ...[Institutional reforms in the early 1970s] heightened the influence of think tanks, lobbyists and other organized interests."

"The tax issue helped unite the disparate elements of the conservative movement in American politics ...--economic conservatives, social conservatives, libertarians....Never mind that ther tax cuts envisioned and passed benefited the rich more--as long as there was some cut for the middle class....[And there were] fewer elite voices arguing for progressive taxation.  ...[A]s maximizing economic growth was increasingly viewed in the postwar era as a central function of government, and as economists with their mathematical tools increasingly had the expertise to guide such growth [sic], the profession moved away from earlier normative concerns with vertical equity [i.e., progressivity] toward promoting the virtues of efficiency and growth."

***

"These trends have undermined the tax system as a mechanism for redistribution and the reduction of economic inequality."

Joseph Stiglitz & Linda Bilmes, The Three Trillion Dollar War

When we think about tax policy, we often talk about it in a vacuum.  Optimal tax theory applies economic ideas about efficiency to cast aside or reduce economic distortions caused by taxation.  I've argued in this blog that efficiency is important, but not the sole concern that should drive tax policy.  We should place extraordinary emphasis on the overall distributive justice of the system.  It is good if fairness and efficiency work hand in hand, since that will likely promote sustainabe economic policies and predictable government revenues.  But exogenous concerns about the sustainability of our democratic institutions need to enter into the decision-making process as well.  How does the current tax policy impact the various constitutencies that need to take part in the democratic process?   Is the revenue stream adequate to this century's enormous demands of government?  Can tax policies promote more deliberative and participatory democracy?  The amount of revenue we need to generate is of course also dependent on other decisions that we make.  Sometimes those discussions are obvious, but often we either lack information about the costs or lose track of the connection between spending, on the one hand, and taxation (or borrowing) on the other.  The Three Trillion Dollar War, by Joseph Stiglitz and Linda Bilmes (W.W. Norton & Co., 2008) (information, and links to interviews and media coverage, available on Stiglitz's home page), is a book that brings those connections home to us about arguably the most important endeavor that this country has undertaken in the last 20 years--the invasion and occupation of Iraq and related Afghanistani, Pakistani, and anti-terrorism activities.

One of the primary aims of the authors is to urge changes in the way we make decisions that have extraordinary fiscal and human consequences.  They make eighteen recommendations for changes to prevent recurrences of the same shortsighted failures that we have engaged in in our relationship to Iraq (and, in prior decades, in Vietnam).  Here's a key paragraph.

The failures in Iraq, like the earlir failures in Vietnam, will have a chastening effect.  Almost surely, America will be more loath to get involved in another venture of this kind; it will, or should, proceed more cautiously in getting involved inanother war that could turn into a quagmire.  But with all the precautions and caveats, the United States will, someday, go to war again, and so we need to start thinking now about how to avoid the problems that have contributed to the failures of this war.  We can, and must, put in place reforms that will help us the next time around.  We can already identify some of the reforms that, if implemented, can help us avoid future mistakes.  Id. at 185.

One of the issues they address is the presentation and justification of the U.S. budget.  They suggest better presentations, including accrual accounting that will give a more accurate picture of spending and future needs.  They note the deep problems caused by the budget's ability to ignore the costs of medical care and disability benefits for the injured (one of the many components of the $3 trillion price tag on the Iraq war), most of which will occur in future years.  The budget also disregards costs of war imposed on other branches of government, such as insurance costs of contract employees.  They deplore the excessive use of emergency budgets long after the time that we can predict the need for additional funds to implement an ongoing occupation.  Perhaps the most noteworthy--and, in my view, salutary suggestions--is "Reform 9":  the proposal to create "a presumption that the costs of any conflict lasting more than one year should be borne by current taxpayers, through the levying of a war surtax."  Id. at 197.

The authors provide two estimates for the cost of the wars in Iraq and Afghanistan.  One is a "best case scenario" where they assume that the troops stationed in the war zone will decrease through 2008, falling to 75,000 by 2010 and to 55,000 by 2012, when the troops essentially become a non-combat force that remains on the ground through 2017.  The other is a "realistic-moderate scenario", in which the number of trooops declines to 75,000 by 2012 and remains at that level, still in a military role, through 2017.

The operating costs for the war through 2007 is about $646 billion.  Under their best case scenario, the operating costs through 2017 would be about $521 billion, and the costs under the realistic-moderate scenario almost double that, at $913 billion.  They add in the following additional costs for the best case scenario: $422 billion for medical, disability, and social security; $132 billion for other military costs (recruiting, etc.), bringing the total to about $1,721 billion.  Interest on the related U.S. debt (assuming we continue borrowing to fund the war rather than raising taxes as we always have historically in wartime) would be an additional $613 billion, leaving the total for the best case scenario at about $2,334 billion.  That total, however, does not count the costs that are borne by the familes of those injured or killed, which Stiglitz and Bilmes conclude would be around $295 billion.  It also doesn't count the macroeconomic costs associated with reduced investment and labor productivity caused by the military action, which they estimate at $187 billion.  Grand total, without interest charges, for the best case scenario is $2,203 billion (and with interest charges, about $2,816 billion--nearly $3 trillion dollars).

For the realistic-moderate scenario, the cost is, of course, even heavier:  $913 billion in future operating costs; $717 billion in future medical, disability and Social Security costs; $404 billion in other military costs; $816 billion in interest; $415 billion in cost to families; and $190 billion in macroeconomic costs.  Total costs, excluding interest charges, would be $4995 billion (and with interest, about $5811 billion--almost six trillion dollars).

The authors warn throughout that these are conservative estimates.

Stiglitz and Bilmes make clear that we have bitten off quite a mouthful.  And we have so far treated the men and women who have done the government's bidding and gone to war fairly shoddily, as the authors empathically describe the way veterans who have risked their lives on the battlefield have come home and faced long lines in hospitals and refusals of disability allowances.  Is the government pinching pennies here to help pay for the mushrooming cost of the war there?

So I find myself wondering about this whole thing--the huge cost of these wars, the lack of discussion about the costs, the way we go about our daily lives exhorted to "consume more" so that we can make the economy grow, the way Congress continues to deal with war funding in "supplemental" budgets that lets it play the game of "out of sight, out of mind" about these military conflagrations that we began so recklessly half a globe away.  Is it that this way of putting the war costs under the rug frees Congress to pretend that it is reasonable to carry out the agenda of the Wal-Mart heirs and their cohorts to "reform" the estate tax and all those other reckless fiscal policies that the Congress has countenanced over the last half a decade that we have been at war?  As to the estate tax, Congress appears to think that those multimilionaire families should not have to fret about losing some of their vast inheritance "entitlements" when the head of the family dies. (And the market cheers when the Fed bails out the big broker-dealer investment banks, run by their multimillion dollar chieftains, which are now apparently "too big to fail" because the entire financial system might implode.  Yet those very same banks were allowed to get too big, and profit wonderfully from it over the last decade, as a result of their own intense lobbying for repeal of the Glass-Steagal laws.)   Meantime, ordinary Americans are losing homes, and Congress cannot even bring itself to extend unemployment protection for a few weeks, as it has in almost every other economic downturn, apparently because Congress wants to be sure that "entitlements" (at least those for ordinary Americans) don't grow.  And Congress isn't doing much for the veterans, either, as they fret over whether they and their families will have disability pay. They have no "entitlement" to disability pay but have to go through submission of arduous paper work from multiple agencies within the federal government to prove that they deserve help (rather than being presumptively "entitled" to such help as veterans who have returned wounded from war). 

Am I missing something here?  Isn't the "reform" of the estate tax an "entitlement" that wealthy families are demanding--they claim an "entitlement" to do with their wealth at death as they please, rather than paying (finally) some share of that appreciation that has occured over their lifetimes over to the federal fisc.   How come their "entitlements" are more important than the ones of ordinary Americans and soldiers who serve their country?  And why aren't we thinking about the total costs that we have taken on as a country (the $3 trillion war being just one of them) and setting tax policy appropriately to deal with those costs rather than thinking that we can continue to borrow to fund these major expenditures? 

Stiglitz and Bilmes appropriately tell us to start taxing ourselves to cover our costs for something so major as a war.  We would then all understand the nature of the beast better, and we might even bring ourselves to make diplomacy work rather than heading so quickly to war.

The Fed's bailout of the big banks: more

I mentioned in several of my posts on economic conditions a concern about the Fed bailing out the big investment banks, essentially lending them money very cheaply while taking as collateral assets that are perhaps not the most trustworthy (mortgage-backed securities). 

This creates somewhat of a vicious circle.  The current credit crisis was caused in part by easy credit resulting in financial institutions awash in liquidity, which was in part created by banks' engineering of exotic derivatives and their ability to sell off risky loans through securitization vehicles, pocketing huge profits along the way.  But all the easy credit drove prices and use of credit up, with homeowners paying more since loans were available and hedge funds leveraging themselves 30 to 1 to buy assets--including securitized mortgage loans. 

The risky loans have now come home to haunt, however, leading to a credit crunch as banks take the money they can get at very low cost (the Fed rate around 3% now) and lend it out at higher rates (mortgage rates have gone up) to try to make up for the money lost on "bad" mortgages.  So the "cure" for the crisis has been the Fed's continuing to lower the interest rate to grease the wheels again.  And over the last six months, the Fed has begun taking on some of those same risky assets.  It announced a 200 billion dollar short-term loan facility for the big banks, and it prevented Bear Stearns' collapse in the end-of-week run on the bank with another short-term collateral-backed loan (through JPMorgan as conduit to get around the restrictions on the Fed aiding an investment bank), taking on the very type of collateral that got us into this problem in the first place.

There's an interesting discussion of all this at Econbrowser, which I've excerpted, below.

What does the Fed hope to accomplish with all this? Steve Waldman draws a colorful analogy:

... Since TAF started last fall, on net, the Fed has not only rolled over its loans to the banking system, but has periodically increased banks' line of credit as well. In an echo of the housing bubble, there's no such thing as a bad loan as long as borrowers can always refinance to cover the last one.

The distinction between debt and equity is much murkier than many people like to believe. ...  If you think, as I do, that the Fed would not force repayment as long as doing so would create hardship for important borrowers, then perhaps these "term loans" are best viewed not as debt, but as very cheap preferred equity....

... Citibank is paying 11% to Abu Dhabi for ADIA's small preferred equity stake, while the US Fed gets under 3% now for the "collateralized 28-day loans" it makes to Citi.... I still think this all amounts to a gigantic bail-out.

Douglas Elmendorf defends the Fed from Waldman's charge:

Taking agency MBS as collateral does not meaningfully increase the risk faced by the federal government. First, the Fed will presumably require a significant "haircut" on the value of the collateral. Second, if the federal government would ultimately prevent a default by Fannie and Freddie anyway, absorbing some of that commitment now does not add to the overall risk. Taking private MBS as collateral does increase risk, unless an adequate haircut is taken, because the government is otherwise unlikely to stand behind the truly private lenders.

Whether one takes comfort in Elmendorf's argument depends entirely on the size of the haircut, about which I know only the following (from WSJ):

Fed officials decline to be specific except to say [the haircut] will seem conservative for ordinary times and liberal for tumultuous times. (One starting point may be the haircuts imposed on MBS collateral at the discount window: They range from 2% to 15% depending on the maturity and the availability of market pricing).

Economic stimulus package: letters in the mail

In case you hadn't heard, the IRS is going to spend $42 million just to tell American taxpayers that they will be getting a check in the mail in connection with the economic stimulus plan.  Seems rather wasteful, if you ask me.  Send the check, ok, but not the announcer mailing.  Sen. Schumer agrees.

"There are countless better uses for $42 million than a self-congratulatory mailer that gives the president a pat on the back for an idea that wasn't even his," Sen. Charles Schumer said Friday, arguing the IRS could spend the money more effectively to catch tax cheats. Statesman Journal 3-8-08 (cited by Robert MacKenzie, Arnstein & Lehr LLP, in his tax season tax humor emails).

House and Senate Budget Resolutions

The House and Senate voted (Thursday and Friday, respectively) on budget resolutions: H Con Res 312 and S Con Res 70.  See this New York Times story.  These are not binding, but give some sense of the direction that spending and tax bills may take as discussions progress--a "policy manifesto", as the Times article points out.

For the House Committee on the Budget description of FY 2009 budget and discussions, see this link.

So what policies are manifest here?  The Senate extended the $1000 child tax credit by a vote of 99-1, but thankfully defeated a move --although only 47-52--by Sen. Graham to make permanent the low capital gains rates (and dividends rates) of the Bush cuts for the wealthy.  Both would either let the tax cuts for the wealthy expire or pay for them with offsets elsewhere.  The House would pay for any AMT action with offsets, while the Senate is adopting an attitude of "gotta do it, no matter what the cost."  (As readers know, this AMT approach is silly.  The Senate should quit thinking of people who earn more than $200,000 as being middle class, since they are clearly not but rather in the very top privileged elite.  We don't have to protect anyone but those earning under $80,000 from the reach of the AMT.) 

Regretably, the House didn't support an amendment offered by Caroly Kilpatrick of Michigan, which would have repealed the 2001-2003 tax cuts for those making more than $200,000 while also cutting back on various of the provisions that have handed corporations a low or zero effective tax rate.  (No Republicans voted for it.)

While McCain disingenously suggested that not making permanent all of the Bush tax cuts that benefited the wealthy would be a tax increase and would keep food off families' tables, Candidate Obama's comment went to the point:

"The notion that we would pile up more mounds of debt, literally borrowing hundreds of billions of dollars to pay for tax breaks for people who don't need them and weren't even asking for them I think is unfortunate," he told reporters Thursday. "I think it's an example of the kinds of flawed fiscal policies that have gotten us in such a hole under this administration and a Republican Congress."  Id.

Not renewing the Bush tax cuts for the wealthiest families in America is not a tax increase, folks.  The tax code is replete with various temporary provisions.  The reason they are temporary is that the enactors are not sure whether it is wise to make them permanent--they may serve a short-term purpose, but they may be harmful in the long term.  The logic for the original Bush tax cuts was that the country had a surplus and instead of paying off debt, the surplus would be "returned" to the taxpayers.  By the time it was enacted, there was no prospect of a surplus, and the logic became a stimulus to growth.  The enactors knew that the price of permanent enactment of the cuts was too high and couldn't be logically supported.  Of course, if you believe the fallacy of the Laffer Curve, then all tax cuts raise money.  But that is nonsense, and members of Congress know it is nonsense.

If we want to fund this country's priorities and the many needed repairs to public infrastructure and human capital needs, we must have sufficient funds.  We have and will spend enormous sums on Iraq:renowned economist Joseph Stiglitz and his co-author Linda Bilmes now estimate that we are funding a $3 trillion dollar war.  All the while, the dollar is going down, oil is heading up and up, and our country's debt is similarly in the stratospheres at $9 trillion or so (with our individual shares being about $30,000!).  It simply makes no sense to continue borrowing money to forego needed domestic programs in order to fund a tax cut for the privileged wealthy in this country who can easily afford to pay taxes at the rate they were paying in 2000.

That goes double for the continuing Republican effort to repeal (or eviscerate so it will be easier to repeal later) the estate tax.  The New York Times editorial page for March 13 described the Republican effort in the Senate as "new hope for the rich."  While Americans are getting poorer, with home equity falling and typical household income, adjusted for inflation, below its 2001 peak, the Republicans want to eliminate the estate tax that in 2009 will only tax couples with more than $7 million!   That's already too large an exemption and shouldn't be retained at that amount.

Economic conditions worsen: Bear Stearns and the Fed

The Fed can, within certain limits, come to the rescue of commercial banks. But with the destruction of the legal wall that separated various types of financial institutions--commercial banks, investment banks, insurance companies, broker-dealers--the Fed assumed a more central role in respect of the entire financial system.  And with the consolidation of financial institutions that has gone on over the last twenty years especially, the US now has a number of truly large financial institutions that have in many ways "marginalized traditional banking and that enabled lenders to evade much of the regulatory framework that had ... begun during the Roosevelt administration."  Floyd Norris, F.D.R.'s Safety Net Gets a Big Stretch, New York Times, Mar. 15, 2008.  As Norris notes, the regulators who let this happen, like Alan Greenspan, claimed that these new financial interactions would actually reduce risk--transferring risk from the highly leveraged banks to broader US and international networks of institutions.

But the banks didn't transfer all that risk--in fact, they retained quite a bit of the risk but it was packaged in securities that hid the danger and did not require the banks to set aside as much capital in reserve.  Norris quotes the president of the New York Federal Reserve Bank here: "A sizable fraction of long-term assets--assets with exposure to different forms of credit risk--ended up in vehicles financed with very short-term liabilities." 

These financial monsters may now be too huge to fail, because of their impact on the overall financial system.  See Jenny Anderson & Vikas Bajaj, A Wall Street Domino Theory, New York Times, Mar. 15, 2008.   The Fed has done just that for Bear Stearns.  Faced with a run on the bank, the Fed, acting through JPMorgan, accepted Bear Stearns' mortgage securities as collateral for a big loan, even though it is quite likely that the short-term loan couldn't be repaid unless the bank is acquired by another bank with more resources (of course, at a significant discount).  Landon Thomas Jr., Run on Big Wall St. Bank Spurs Rescue Backed by U.S., NY Times, Mar. 15, 2008.   "If the Fed hadn't acted this morning and Bear did default on its obligations, then that could have triggered a very widespread panic and potentially a collapse of the financial system," according to James Melcher, head of a hedge fund in New York.  A Wall Street Domino Theory

That has a regrettable effect--big banks took big risks and made big money out of the easy credit over the last 8 years, issuing and then securitizing various financial products, including subprime loans.  If the Fed now comes to the rescue and takes that risk onto itself, those institutions and their investors may take the wrong lesson.  They may conclude that risk doesn't matter--make money while you can, then if losses start to follow from the risky endeavors, count on the Fed to come to the rescue. 

In the meantime, Mr. Bush has made it clear that he thinks the "fix" for ordinary Americans who are suffering from inflation in energy and food prices and deflation of their homes' value is the tax rebate checks scheduled to be mailed early this summer.  See Steven Lee Myers & Peter S. Goodman, President Acknowledges Strains on the Economy, NY Times, Mar. 15, 2008.  Juxtapose the action by the Fed to rescue Bear Stearns with the following statement:

"The challenge is not to do anything foolish," Mr. Bush said, flatly rejecting proposals on Capitol Hill for the government to buy up abandoned and foreclosed homes to stop prices from plunging."

It might be time for the Administration to consider what steps can be taken to assist US homeowners.  Buying foreclosed properties might be an alternative--if the administration can essentially buy bad mortgage securities, it could also buy real estate.  But it might make more sense for the government to negotiate to purchase some home mortgage loans from the banks holding them at steep discounts to their face amounts, letting investors and investment banks take their losses for their risky investments while providing a path to reasonable modification of those loans for homeowners.  The problem with that approach is that most loans have been committed to those innovative securitization vehicles that the investment banks devised to spread the risk--the loans have been sliced and diced and the resulting "tranches" sold off to investors.  That would make it hard to selectively purchase loans at their fair market value discount. 

It appears that the bankruptcy alternative is more feasible.  Lenders (and the same banks or others in their roles as servicers) are likely resisting modifying loans at this point because each such modification is another loss that will have to be recorded on their books.  They would prefer to be able to determine the timing of the losses themselves--delaying as much as possible because of the credit crunch.  That means they may be pocketing the spread from the lower interest rates and not passing it on to potential borrowers, at the same time that they are resisting modifying loans to avoid recognizing losses on their books.  Congress can deal with that directly by making it possible for homeowners to modify their home mortgages in bankrtupcy.

I'm curious--what do readers think are reasonable alternatives for 1) ensuring that the financial system manages through this credit crunch and/or 2) making it possible for more homeowners to stay in their homes?  Are there any answers that aren't being considered?

Private Debt Collection of Federal Taxes: National Taxpayer Advocate continues to condemn it

Nina Olson has told Congress again that private debt collection of federal income taxes does not make sense or cents.  The "experiment" has cost the U.S. government $81 million a year so far, she says, when you consider what is paid for the little returns, and the way the IRS could use those funds to do its job better and collect more.   The program brought in about $32 million last year and is expected to do only about 2/3 that much in 2008.  The original claim was that $150 to $220 million a year.

CEO Pay and Taxes

Henry Waxman's investigative committee is looking at CEO pay.  The committee's website has a good deal of information, including statements of various witnesses at the recent March 7 hearing on CEO pay, including CEOs of Countrywide Financial Corporation, Merrill Lynch, and Citigroup, and a March 6 committee memorandum on the issues.   A few items from the memorandum follow:

• in the five years from 2002 to 2006, the three CEOs received a total of $460 million in compensation
• In 2007, the three companies lost more than $20 billion;
• in 2007, Mozilo of Countrywide received $120 million in compensation and stock sales while the company lost about $1.6 billion; O'Neal of Merrill Lynch, departing the company early because of the company's huge bad bets on suprime mortgages, got to take home a "retirement" package of more than $160 million ($131 million of which would have been forfeited if the board had terminated him for cause rather than allowing him to "retire"), even while the company lost $18 billion; and Prince of Citigroup got a total compensation package of almost $40 million while his company lost $18 billion.
• CEOs of the largest 500 companies received an average pay package of $15.2 million in 2006, "a collective 38% increase from 2005"
• The average Fortune 250 CEO made 600 times the average worker [that means that the CEO earned in little more than one-half a day about what the average worker earned in an entire year)
• Real wages for employees at the bottom of the pay scale declined by more than 10% over the last decade.

And a few stories about Countrywide and its fall:

• New York Times stories on Countrywide's path from biggest mortgage lender in the country to near bankrupt, including claims by former employees that Countrywide steered borrowers to inappropriate high-cost mortgages
• Jeff Bailey, Mortgage Maker vs. the World, New York Times (Oct. 16, 2005) (noting Countrywide's Mozilo's observation of the tiny cubicles that his workers were confined to and his statement that his employees "adapt, like fish in a fish tank", his claim that he thought it was hard in 1983 to try to raise 5 kids on a mere $345,000; his belief that he deserved his multimillion pay packages; and the $30 million lawsuit against Countrywide for failing to comply with state overtime compensation laws (and Countrywide's plan to hire more people only in states with weak labor laws);
• According to Wikipedia, Countrywide refuses to file Form 1099s for independent brokers.

This is an important glimpse at the elite heads of big financial institutions in this country. Like Countrywide's Mozilo, Charles Prince, the head of Citigroup, stated at the March 7 hearing that he thought his $10 million pay was reasonable even while his company lost billions.  When I hear these kinds of numbers, I often wonder if these moguls have any idea what life is like for the underprivileged of this country--some of whom probably scrub their corporate floors, wash their personal cars, and care for their multiple luxury estates. 

And then I wonder why middle class taxpayers and those on even lower incomes--ie, the 80% of us that don't lead an elite lifestyle like that of Messrs. Mozilo, O'Neal and Prince--haven't used their power to vote out of office the Congressional enablers who cut taxes for these same elites and can't even bring themselves to tax the private equity and hedge fund managers on their compensation income the way ordinary Americans are taxed on their compensation income.

Maybe it is the utopian dream that someday, with the grace of God, they will be us.  But I suspect it is more likely attributable to most Americans' outright ignorance of the facts about the distribution of resources and the way that the tax system has been shaped to benefit the elite.   

As noted on this blog in prior postings, this is especially true in the case of the estate tax, where even the Democratic-controlled Congress is apparently going to cave to the superclass lobbying of a group of inordinately wealthy families in this country (including the Wal-Mart heirs).  The elite families got together to convince Americans to eliminate (or weaken drastically) the estate tax that only applies to the very few superelite families in the upper upper crust.  They claimed that small businesses and small family farmers were being driven out by estate taxes.  In spite of numerous studies showing their claims were simply not accurate, the claims were repeated it over and over anyway by enabling media and thinktanks pushing this goal.  And now the House and Senate have passed their initial budget resolutions.  See this Citizens for Tax Justice story.  The Senate, supposedly keeping only the Bush "middle-class" tax cuts, according to Sen. Max Baucus, includes a plan to make the 2009 $3.5 million exemption permanent!  Folks, that is NOT middle class.  It's not even just top 20%.  That's a tax cut that favors the superclass elites like Mozilo who make millions annually and don't care if their employees are crowded together in awful cubicles since, after all, they can "adapt like fish in fish tanks." 

CTJ's recent figures on the estate tax show that [the estate tax] affected less than one percent of estates during 2005 and 2006. And those estates were subject to an exemption of $1.5 million per spouse. Now the exemption is $2 million and in 2009 it will be $3.5 million.

Congress should quit making tax policy to suit the Mozilos of the world, and start making policy that takes care of the real infrastructure and human capital needs and is fair.