ataxingmatter

Wesley Snipes: convicted tax criminal in the news

Wesley Snipes was convicted of the crime of intentionally failing to file a tax return.  He missed a lotta tax payments (in the millions), so he was trying to rip off Uncle Sam and all the honest taxpayers who pay their taxes with their returns each year (the vast majority of us).

The prosecutors are now before the court arguing that he should receive the full punishment for his crime as allowed by law--3 years in jail and an appropriate multimillion dollar fine.  Sounds right to me.

You can read about it at the BBC, here.

Citizens for Tax Justice: on Bush's impact on "Tax Day"

Citizens for Tax Justice (CTJ) has a new report out on the Bush tax cuts: President Bush Has Made Tax Day Easier for the Rich--at the Expense of Everyone Else (Apr. 14, 2008). 

The tax cuts have been an ongoing "good news" story for a few Americans-- the superrich who benefited from thousands of dollars of lowered tax liability.  Those superrich, by the way, are the ones reported in the New York Times to be spending as always--$35,000 bottles of champagne, private jet flights with buddies to vacation spots, $200,000 bonus on a more than $400,000 car they just can't not have, $100,000 on a car for a girlfriend at the same time as several more hundred thousand on another luxury car for themselves.   Christine Haughney & Eric Konigsberg, Despite Tough Times, the Rich Keep Spending, NY Times, Apr. 14, 2008.  As CTJ notes, once the tax cuts are fully phased in, the majority of benefits go to these  superrich in the very top 1% of America's income distribution.

What have middle income Americans  (say, people who make $90,000 or less) gotten out of the Bush shrinking tax regime?  Mostly long term U.S. debts that will be payable for the rest of current adults' lives (and their children's lives, and their grandchildren's lives, unless the tax cuts for the rich are reversed).

And what is the cost of the Bush tax cuts from 2011-2020, if made permanent?  $5 trillion.  That's slightly more than the most conservative Stiglitz-Bilmes $3 trillion estimate of the costs for Mr. Bush's other boondoggle, the preemptive war in Iraq.  It's about the same as the more likely cost of the war, which Stiglitz and Bilmes say may run in the range of $5 trillion to $6 trillion. 

Here's a telling bullet point from the release sent out by CTJ on this report.

• "The Bush tax cuts just going to the richest one percent in 2008 will be more than the funding received by the Department of Education, almost twice as much as the funds received by the Department of Homeland Security and over ten times as much as received by the Environmental Protection Agency."

Surely Congress will reverse this fiscally disastrous policy of Bush tax cuts that are terribly unfair to the vast majority of ordinary Americans. They'd better change the compensation taxes of the superrich hedge and equity fund managers while they are at it.  (One of the guys in the Times article runs a private fund--making his millions by paying half the tax on his compensation for services that his secretaries and other ordinary workers have to pay on their compensation for services.) If Congress doesn't, it will be because they are in the pockets of the superrich.    It will not be because their continuing acquiescence in this unfair charade in favor of wealthy shareholders and their businesses is the right thing for America or ordinary Americans

Fresh Air with Terri Gross: Michael Greenberger

One of my readers pointed out that on April 3rd, Michael Greenberger appeared on NPR's Fresh Air to talk about the shadow economy.  It's worth taking the time to listen.  He nails the current credit crunch on the creation of "structured investment vehicles" (SIVs) and on Phil Gramm's pushing the Commodity Modernization Act in December 2000, which put many of these exotic engineered financial products outside the scope of anybody's regulation.

Here's the link to the NPR broadcast:  http://www.npr.org/templates/story/story.php?storyId=89338743

Senate and House on Housing

The Senate passed its purported "housing" bill (H.R. 3221) Thursday, by a vote of 84-12.  They call it the "Foreclosure Prevention Act."  Folks, that's just sloganeering.  This bill doesn't do much of anything at all to help the ill-fated people who got stuck with subprime mortgages when they qualified for a regular mortgage or those who got led into a too-large loan for a house that was more than they could afford by the mortgage broker, appraiser (often on the payroll of the mortgage broker) and real estate brokers who were making bigger and fatter commissions and fees the larger the purchase and loan. 

The biggest chunk of money in the Senate bill --around $25 billion up front, but claimed to reverse to only a net $6-7 billion or so when all is said and done--goes to line the pockets of businessmen (and the shareholders of the businesses) who will get to carry back this year's net operating losses to 4 years ago when they had really big profits and paid a fair share of taxes on those profits.  That makes no sense at all.  Businesses won't invest those profits in more capital assets that need more employees and create more jobs.  Businesses are already pulling back from making investments because of the economic uncertainty!  Construction workers who have been laid off won't be rehired--the businesses will want to pocket the money for their managers and owners.  Look at my previous post on this issue, noting that the CEO of Toll Bros. was given a bigger bonus, even though the company was starting to lose money.

Even some Republicans had to hold their noses to vote for that one.  BNA Daily Tax Report Apr. 10, 2008 at G-10 notes the following:

"What we have here is the housing industry receiving a $17 billion tax break structured just for them," said Senate Budget Committee ranking member Judd Gregg (R-N.H.). "They made huge profits a few years ago and now they're losing money because they overbuilt and made loans they shouldn't have made and we're going to give them back the money they paid in taxes when times were good. It's ludicrous."

The Senate bill, in an amendment adopted today by an 88-8 vote, would also extend the current renewable energy tax credits for another year (for property put in service by 12/31/09).  It also extends the residential tax credit for energy efficient equipment bought by home owners, such as a solar water heater. 

Note that none of those items does a thing to help homeowners who are losing their homes because the value is less than the mortgage and/or the interest rate on their adjustable rate mortgage (ARM)is skyrocketing.  That's 8000 American families a day thrown into foreclosure who are getting no help at all from the Senate's proposed revenue reductions of billions of dollars.  See Lori Montgomery, Senate Passes Housing Bill (April 10, 2008).

Even the items that do have something to do with homeowners don't make much sense and aren't any kind of lifeline for the families struggling to stay in their homes that the Senate should be concerned about.  There's a $7000 credit for buyers of foreclosed property and a $1000 deduction for property tax payments for nonitemizers. The credit merely provides a government-financed windfall for someone who was going to buy anyway! $7000 isn't enough to make you buy, but it's a nice little gift from the government if you are buying anyway.  So the government is helping people who don't need help rather than helping people who do. 

The deduction for property tax payments is already covered by the standard deduction--if people who pay property taxes had enough to exceed the standard deduction, they'd already be itemizing and deducting instead of using the standard deduction.  The Senate is just effectively increasing the standard deduction for homeowners, but not for anybody else.  Again, this tax break is not targeted appropriately.  The people who are being foreclosed out of their homes aren't going to find that enough to do any good; and for the rest who aren't in financial trouble who do use it, it is a wasteful further subsidy to homeowners (in addition to the gigantic mortgage interest deduction) that renters don't get.  Renters, by the way, tend to be lower income. 

The Senate claims progress--the Washington Post article calls it "breaking the logjam".  But folks, a bill that does all the wrong things and none of the right ones isn't progress.  If anything, it's going a step backwards.  The Republicans defeated the one provision that was certainly the most important to be included in any package claiming to be a "foreclosure prevention assistance act"--allowing homeowners who are in bankruptcy court to have the court modify their loans to something that can be paid off, keeping them in their homes.  That simple provision would have put mortgage loans on a par with the loans the wealthy take out on their yachts.  Judges are adept at figuring out what is reasonable to modify in bankruptcy. So why do Republicans object to that?  Because the mortgage brokers and banks don't want their lucrative business of securitizing mortgage loans to be jeopardized.  Now, that lucrative business is what created the crisis to start with.  It is not something we should be protecting, but something we should be regulating.

The only provision in here that really makes sense is the grants to states to permit states to purchase foreclosure properties.  That provisions, about $4 billion, is a useful provision that will help states to cope with the mushrooming effects of foreclosures on neighborhoods.

Is the House doing any better?  Well, at least the House Ways and Means Committee recognizes the NOL carryback boondoggle for the wasteful giveaway to business owners and shareholders that it is.  That tax break was not included in the House version of the bill passed out of committee yesterday (4/9/08).  The Ways and Means bill offers a $7500 credit to first-time homebuyers--I suppose that is better than the credit in the Senate bill, but it doesn't really make sense either.  If it''s not enough to lead somebody to purchase who was not planning to do so anyway, why give away the tax dollars at all?

White House Micromanaged Torture

WARNING:  This is not a tax matters posting.  I simply cannot say nothing about this.

ABC has aired a disturbing story.  It turns out, as many of us suspected, that torture has clearly been White House policy during this Administration.  Dan Froomkin reports, in White House Torture Advisers, Washington Post, Apr. 10, 2008.

"Top Bush aides, including Vice President Cheney, micromanaged the torture of terrorist suspects from the White House basement. ...

ABC's writers state that "Highly placed sources said a handful of top advisers signed off on how the CIA would interrogate top al Qaeda suspects -- whether they would be slapped, pushed, deprived of sleep or subjected to simulated drowning, called waterboarding...."   "As the national security adviser, Rice chaired the meetings, which took place in the White House Situation Room."

These people knew they were committing torture.  So they had their Justice Department enablers--John Yoo and Jay Bybee--fabricate a "golden shield"--a memo with tortured reasoning to justify torture on the President's say-so, making the CIA (they hoped) invulnerable to prosecution for their crimes, even though torture violates both domestic law and international treaties.

This, folks, is the sad state of America today.  These people treat the victims of Katrina with disdain, the voluntary army with callousness, and the people they merely suspect (often on poorly understood or even fabricated evidence) as being terrorists with illegal torture like "controlled drowing" (i.e., waterboarding).  I am ashamed to have my country run by the likes of Cheney, Bush, Rice and the rest of their crowd of thugs.

Maryland's Bravery

These days, if you say anything that can be interpreted as increasing taxes on anybody, the tax sloganeers--who spend their time making the world safe for tax cuts for millionaires--will be on top of it in a minute, claiming that the sky will fall down.  Why will the sky fall?  Because without tax cuts, there won't be any economic growth to lift all boats..... 

Well, what they say is usually--"tax increases! Yikes!  That means entrepreneurers will have to pay more" .  (And, of course, they also seem to think all wealthy people are entreprenuers and the vast majority of us are just worker drones, so remember to translate that word "entrepreneur" as  "wealthy people" in the case of these tax rip-off sloganeers.)  And then they add "that means no economic growth, which will hurt all you little guys too"  (as though they cared.....).

But the facts over time have been quite different.  The US has actually done quite well in terms of better standards of living for everyone in times of  high marginal tax rates.  Look at the three post-war decades before Reagan.  Then look at the following three decades that we might call the Reagan era--when the "greed is good", "starve the (government) beast" and "tax cuts for the wealthy" mentality took over.  The elite have enjoyed the tax cuts and the vast majority (David Cay Johnston's term for 90% of American taxpayers) haven't done so well. 

So it is encouraging to see that some states are beginning to realize that they need to have enough resources to meet the real needs of their people, and they can actually acquire those resources by progressive tax policies rather than blunt instruments like sales taxes or services taxes that often are regressive in nature.  Maryland's governor Martin O'Malley signed SB 48 on April 8.  That law repeals a 6% sales tax on computer services that was slated to take effect July 1.  It replaces it with a three-year income tax surcharge on high income taxpayers.  Those with income ABOVE $1 MILLION will pay 6.25% instead of 5.5%.  The state expects to raise about $110 million annually.   

My home state of Michigan should think about changing its rules and doing something similar.  A progressive income tax, with high rates at the top for those earning $500,000 and especially for those earning a million or more, makes sense.

The U.S. as a net debtor nation

The United States used to be a wealthy nation that assisted other nations because it felt that it had an obligation to return some of the riches it enjoyed to less developed countries around the world. That's the story I grew up with.   Today's reality is different.  The United States is now a debtor nation. with more than 50% of its government debt held by foreigners who have been lending while we've been spending.  That's the story that today's children will have to make sense of, as they grow up and realize that their horizons may well be limited by the burden of enormous debt.

There is another way to think about the US that is covered in a recent update of a Congressional Research Service report--the net investment status for the US, which compares how much Americans have invested abroad (a little more than $12 trillion, using historical cost) with how much foreigners have invested in this country (almost $15 trillion, using historical cost). That report is available here. In this comparison, the US is also a "net debtor nation."   

What should every American know from this report?  I'd pick the following:

• Foreign-owned U.S.Treasury securities went down from more than $643 billion in 2005 to $594.2 billion in 2006.  Does this mean that our appetite for more and more debt is not favorably regarded by foreign investors, who aren't as thrilled to hold U.S. Treasuries now as they were?
• Foreign ownership of U.S. currency increased slightly, from $351.7 billion to $364.3 billiion from 2005 to 2006;
• From the 1920s to the 1980s, the US was a "net investment creditor" (the US was investing in and owning foreign assets); but since 1980, the US has become a "net investment debtor" (foreigners are investing in and owning US assets), with that "net negative" having grown to about 21% of gross domestic product, "marking a substantial increase in the net investment debt position over the previous decade"  (it has not been lower than 15% at any point during the Bush Administration)
• Official ownership of US assets is small compared to private ownership (about 16% of the total foreign investment in US assets); nonetheless, foreign "official" acquisitions of U.S. Treasury securities are sometimes used by foreign governments to affect the foreign exchange price of the dollar;
• Some economists have expressed concern about the switch to net debtor status, since the US will now be paying out to foreigners more income that will mostly be repatriated to foreign countries than it will be bringing into the country from foreign investments.  That "net outflow of income payments acts as a drag on the U.S. economy";
• The U.S. paid $131 billion to foreign holders of U.S. government securities in 2006, up 30% from the amount paid in 2005;
• Some analysts are also concerned about the amount of foreign ownership of U.S. financial wealth--"foreign investors now own nearly 50% of total U.S. Federal debt and more than half of the outstanding publicly traded U.S. Treasury securities.  Some observers argue that such investments could spur an economic crisis in this country should foreign investors decide to pull their money out of the investments, whether for economic or political reasons.”

That last point may be especially worrisome, given the current financial crisis in the US and the way it has affected investors around the globe. 

Privatization and Taxes: Burke and McCouch on Tax Sloganeering; the New York Times on Local Economies

One of the arguments that the "supply-siders" use in their campaign to get the vast majority of ordinary Americans to support tax provisions that favor the super-elite is that privatization of services that the government has provided in the past will lead to greater competition and therefore reduced prices and better services, all at a lower tax cost.  Privatization and tax cuts, in other words, go together in this crazy "shrink the beast" ideology. 

The idea that tax cuts that favor the elite make sense has been shown to be empircally false, and based on ideological propaganda and sound bites, by quite a few different researchers.  Another new article worth reading on this issue is one by Burke and McCouch, Turning Slogans into Tax Policy, available on SSRN.  The authors examine the Bush Administration's estate tax cut in 2001 and dividend rate cut in 2003.  Both were made possible by sunsetting gimmicks--gimmicks because there was no intent, as explicitly acknowledged by the proponents of the provisions, to let the cuts be temporary, even though they were legislated as temporary provisions because of the huge cost of making them permanent.  Both were enacted under broad puffery statements about their worthiness that were unrelated to the realities of the provisions.  Family famers and small businesses are not lost because of the estate tax; very very few estates in the country are even subject to the estate tax; most items in an estate that is subject to the tax have never been taxed under the income tax because 56% of the wealthiest estates is comprised of stock, which is held onto in life and passed to heirs with a step-up in basis. The slogans about "double taxation" and "increasing dividend payouts" had little to do with the dividend cut, since most of the biggest corporations no longer pay any corporate tax at all, and with 0% and 15% rates, corporate dividends are actually undertaxed compared to the vast majority of Americans' working wages. 

Burke and McCouch conclude that "the Administration used dubious economic claims and populist rhetoric to promote tax cuts without considering revenue costs or distributional effects."  I'd add that the populist rhetoric was intentionally misleading--the Administration talked about averages when it knew that the vast majority of Americans were not near the averages that apply when you take the enormous wealth of the top 1% into account.  The  Administration, that is, passed the 2001-2003 tax cuts expressly to benefit the super-elite to which it was beholden and of which it was a part, with a cavalier attitude, a bit like VP Cheney's recent "Sooo?" about Americans' opposition to the war (see YouTube coverage here) towards the disastrous impact of the tax cuts (and concomitant debt increases) on the vast majority of Americans or the economy overall, and thus was quite willing to use misleading slogans and known inaccuracies in describing its programs in order to "sell" them to the American people.

The idea that privatization improves the services that government should provide--and can provide--cost effectively because it is a public good that should not be subject to the vagaries of the markets--has been discussed by quite a few as well.  It's relevant now, when the result of eight years of the Bush Administration's attempt to cut taxes for the super-elite while privatizing everything American, from the Army to the IRS, has led to increased cost of government, decaying infrastructure, and a debt burden that will take generations to repay through higher taxes on the vast majority of us.  Here are two stories from the New York Times series on local economies that add the human touch to the harms of this kind of privatization that lets corporate heads and their politician friends in office make millions while the real workers suffer:   Deirdre McNamer, How Big Sky Went Dark (about the debacle caused by privatization of Montana's public power company) and, Lee Smith, In North Carolina, Really Outsider Art (about the debacle caused by the privatization of North Carolina's mental health services).  The following is an excerpt from the latter story.

Local mental health services used to be provided by federal, state and local governments. The reform plan put the counties out of business and forced them to hire for-profit “providers” that offered sometimes specious “community support” services for exorbitant prices. Costs more than doubled, to $1.5 billion a year. Only 5 percent of the money went to intensive outpatient therapy. As a result, our mental hospitals are overwhelmed, while prisons and homeless shelters are filling up with people who have persistent mental disorders.

Peter Kramer, a local social worker, has served Hillsborough’s mental health program for 20 years. The day his program switched from state support to private contractors in July 2006, he says, “A mother called up and said her son was hearing voices, but there was no doctor there to refer her to.” His clinic is due to close entirely. “People are calling us in tears saying things like, ‘What’s going to happen to me? I’ve had my doctor for 17 years, what can I do without him?’

edited for typos 4/10/08

Democratic Leadership Council tax exemption case

The District Court ruled against the IRS on its withdrawal of 501(c)(4) tax exempt status from the Democratic Leadership Council.  You can read the court case on BNA at this link.  The Council was formed (by then-governor Bill Clinton) in 1985 and granted tax-exempt status under section 501(c)(4), which applies to "social welfare" organizations.  The organization claimed that it had an agenda of social betterment, pushing a "third way" that was based on "growing the economy" and "helping ordinary people benefit from that growth" rather than on redistribution.  It intended to develop that agenda through town meetings, public- affairs conferences, and other new fora that would engage the people in this "New Democrat" vision, but it would not intervene in political campaigns.  The IRS revoked the status in 2002, under the Bush Administration, claiming that the Council had provided private benefit to Democratic officials in 1997-1999. 

The court ruled that the IRS violated its own regulations by retroactively revoking the organization's tax-exempt status.  This is a narrow ruling, based on the fact that the Treasury's own regulations permit retroactive revocation of status only if the organization "omitted or misstated a material fact, or operated in a manner materially different from that represented".  The court said that "the IRS’s revocation of exempt status makes no mention of restrictions on its ability to revoke exempt status retroactively; [and]  the revocation relied on the DLC’s originally disclosed connections to the Democratic Party to conclude that DLC rendered an impermissible level of private benefit."

CEO Pay and Taxes: Top 200 for 2007

This blog has noted the continuing problem of increasing CEO pay, increased corporate risktaking, especially among financial institutions, that affects the entire economy, increased control of democratic processes by corporations and their super-wealthy shareholders (de-regulation under the Bush Administration being a prime example), and the ultimately destructive impact of these concentrations of wealth on sustainable democracy, when ordinary people--the "vast majority", in David Cay Johnston's terms in Free Lunch (review coming soon here)--are not in the few thousand at the very top 1% who have hugely benefitted from the last 8 years' economic growth.  Instead, most Americans have suffered stagnation in wages and inflation in living expenses and their dream of someday being rich themselves has taken a backseat to the reality of economic struggles and worries about the future burdened by the $9 trillion in US government debt that has funded an ill considered war and various welfare entitlements for the super-elite, from too low taxes on their passive investment income to outright giveaways.

Today's New York Times has a superb graphic on CEO compensation.  It has information about the pay of CEOs at the top 200 corporations, whether that pay was increased or decreased (and by what percentage), the overall wealth of each CEO, and the relative change in the economic wellbeing of the corporation the CEO ran during that same period (measured by stock price).  It's available at this link.  In many cases, corporations that did poorly for their shareholders either gave their CEOs significant raises anyway or cut their CEO pay by a smaller percentage than the value of the corporation was cut.  Ken Chenault at American Express, for example, got a 95% pay increase (total comp of more than $50 million last year) while the company's stock price fell 13%. 

That, folks, is the elite taking care of their own, as boards of directors (made up often of fellow CEOs) vote pay packages that they want for themselves, supported by compensation specialists that constantly move the average up by suggesting that every company should be in the top third of the country (like that famous town in Minnesota where the children are all above average).  The CEOs have joined the private hedge fund and equity fund managers (see this link on Blackstone Chief's $350 million 2007 pay) and the few families with huge corporate wealth as the new super-elite.  Not a few of them make more in half a day than many corporateworkers make in an entire year.  This super-elite walks the halls of Congress--in person or through their many hired lobbyists--writing the laws and the regulations to suit themselves. 

Should we look to these statistics as one of the factors in the current housing crisis?  It appears it adds another factor to the mix. Remember that just last week, the Republicans in the Senate (and a few right-wing Democrats and oddities like Joe Lieberman whose hawk views have overtaken whatever fiscal and compassionate sense he used to have) defeated (by 2  votes) the cloture vote that would have allowed the Senate to include a bankruptcy provision for home mortgage loans in its housing bill.  That provision is the most sensible, least moral-hazard-prone provision that the Congress could adopt to deal with the housing crisis.  It could only apply to those who are clearly in severe financial trouble.  And bankruptcy research by Elizabeth Warren at Harvard suggests that the kind of financial trouble that leads Americans into bankruptcy is a severe medical crisis or job crisis--or, rather, a combination of several severe crises that breaks the back of the person trying to manage it all. 

Instead, the most expensive provision the Senate adopted is more welfare entitlements for builders, at the behest of the influential construction lobby.  The entitlement is in the form of carrybacks of NOLs four years instead of 2, allowing builders to reap immediate tax refunds from taxes paid (already too low) on their stupendous profits prior to the housing meltdown.  Those tax refunds are likely to go right into the pockets of the home building company's owners and CEOs:  I predict they won't do a thing to help construction workers keep jobs or even much for the economy in general.  For example, even though the company has been hit hard in the housing slump, Toll Bros. voted its CEO an even larger bonus package .  See this NY Times story (Mar. 13, 2008) (noting the bonus can be as much as $25 million, and can be paid for overhead cost cuts, gross revenues, cash flows, even when there are no profits!).  Although the company was still managing to turn a profit in 2007 though hit hard with the housing slump, see this link about its 2007 slump, it could end up with losses in 2008 and be one of those firms eligible for the extra long carryback to get refunds of taxes paid on its huge profits four years ago. See this Feb. 27, 2008 story about Toll Bros. swinging to a first-quarter loss in 2008.

The bankrupcty provision isn't the only one that the Congress should adopt to deal with the widespread community impact of the housing crisis.  But it is certainly one that all of us should be able to support.  There is no moral hazard in the bankruptcy provision, as there is in providing a tax refund to home builders who over-speculated in building what they thought were going to be lucrative new housing units. 

So why didn't the Senate adopt it?  Because the financial institutions and mortgage brokers--that's the gang that got us into this mess with risky mortgage products, speculation with credit default swaps, and too-high-interest-rate loans that made great commissions for brokers even if it caused financial jeopardy for borrowers-- don't want them to. Both of the Senate's actions--the wasteful NOL carryback provisions for the big home builders and the failure of the mortgage loan bankruptcy modification provision--are examples of undue corporate power at work, created in part by these enormous and unreasonable pay packages to CEOs while ordinary workers lose ground.