ataxingmatter

TAx Extenders: another reason not to "extend" the R&D credit

The IRS's LMSB division has published guidance on substantiation of R&D costs that provides one more bit of support for NOT extending the credit, which provides a dollar for dollar reduction of tax liabilities, rather than the legitimate deduction or capitalization rules that would otherwise apply.

Research Credit Claims Audit Technique Guide, LMSB-04-0508-030 (May 30, 2008) responds to what has been seen in audits--a number of companies relying on "prepackaged RC Claim studies" that provide a lot of statistical analysis but don't actually prove that the expense (such as wages) is really connected to the research activity.   Jack Cummings describes these studies as "obfuscating your lack of documentation by highlighting your mountain of unsupported data. This situation often results from putting together studies from a mathematical viewpoint, as contrasted with a legal/factual viewpoint. "  Cummings Corporate Tax Insights, Checkpoint, 081208 (available to subscribers as preview).

Congress seems to think it "has to" enact extender legislation. Personally, I'd prefer to let most of these extender provisions just disappear.  The R&D credit is a good candidate.

Liechtenstein: taking the Fifth

This month, we've learned more about the way foreign banks--namely, UBS and LGT--had utilized secret accounts to facilitate tax evasion for thouands of ultra-wealthy Americans who want to enjoy the stable legal institutions that provide a way for economic growth to take place without paying their fair share of the tax burden.  The Permanent Senate Subcommittee on Investigations has done some necessary probing of the two banks, and learned something about their clients and their methods.  It is not a pretty picture, and it is one that demands attention from Congress.

Several people who didn't testify at the first Senate hearings were expected to show up at a supplemental hearing last week.   They did so, but took the Fifth rather than testify about their offshore accounts.  See this Reuters story, July 26, 2008.   Peter Lowy, wealthy magnate of the Australian Westfield Group, didn't have anything to say.  Nor did Steven Greenfield, wealthy NY toy importer.  Levin says the Senate has the names of 147 taxpayers whose activities may shed light on its investigation of the foreign banks.  And of course there are those 19,000 UBS account holders.....

Should Congress make the Bush Tax Cuts Permanent?

Back in April, the Joint Economic Committee put out a press release and report on the Bush Tax cuts.  We are now a few months closer to the election, and seeing increasing pressure from Republicans in Congress to make the Bush tax cuts permanent.  It's worth reviewing some of the information so that people attempting to evaluate these issues can understand what it means.

Here are a few pieces of information that are worth remembering:

• The federal government has borrowed $1.6 trillion from 2001-2008 to pay for the tax cuts
  • Consequence: all Americans will have to pay for this tax-cut-related debt, reducing their after-tax income.
• One third of the benefits of the cuts go to the top 1 percent of households; one fifth of the benefits of the revenue reductions went to the top 0.3% of households that earn more than $1 million per year
  • Consequence: inequality in America is increasing, with the top 1% grabbing more of the anemic growth AND the benefits of the Bush revenue reductions; meanwhile, the bottom is stagnating
• investment and economic growth haven't equalled other growth periods
  • Consequence: with anemic growth and other policies that favor the wealthy, the vast majoriy have been hurt, not helped, by the tax cuts
• making the cuts permanent would cost $3.4 trillion just over the next decade, including borrowing costs--three times what is needed to close the Social Security funding gap!

Debunking the Reagan "free marketarian" myth and the US Deficit

The White House has released its new estimate of the budget deficit for FY 2009--a record $482 billion, amount to  about 3.3 % of GDP.  See Pear and Herzenhorn, A Deficit Forecast of $482 Billion, a Record, New York Times, July 29, 2008.  This is the largest deficit in all time in dollar amounts, but not as big as Reagan's big 1983 deficit in terms of percentage of GDP, though it doesn't yet reflect the full cost of the interminable Iraq occupation and the regime's so-called "war on terror" (which seems more like a war on constitutional liberties), the probably additional losses of tax revenues,  and the additional "stimulous package" (including again a bunch of items that won't help the neediest among us).  And this year's deficit of about $370 billion will be double the FY 2007 deficit. Id.  All to wage a privatized war that shouldn't be fought and to provide tax cuts to the wealthy that have garnered the best portion of whatever small gains our economy has made since 2001.

Reagan, of course, ushered in Milt Friedman's wacky free marketarian ideology in full swing in America. We'd already done considerable damage to thriving democracies in South America, particularly Chile and Argentina, by creating a political crisis that led to a military takeover of the government and then imposing Chicago School "disaster capitalism" that deregulated, privatized and eliminated social programs.  As a result, countries where there was broad growth benefiting all of the population became wonderful growth generators for the very small upper crust terrible stagnant economies for the vast majority of their citizens, many of whom were "disappeared" because they supported developmental economic policies that strengthened government regulation, retained government control of natural resources and related industries, and paid attention to the primary principle that the government should help the public good, not corporate profits.  Reagan provided a huge tax cut his first year, primarily to the big multinational corporations that make up the new corporatist state-corporate partnership, and then lots of tax increases from his second year on, but replacing much of the earlier taxes on the wealthy and corporate owners with payroll taxes not paid by the wealthy at all.

After 40 years of mostly Republican corporatist tax, military and general domestic policies, we have a "globalized" economy built in many ways according to the Chicago School and so-called "washington consensus" demands:  subsidies to big corporations to exploit our natural resources for their own greatest gain, lowered tax burdens for big corporations and their owners, failure to fulfill the promises made in respect of pensions and health benefits, coupled with shifting the risks to workers, shifting the burden of maintaining whatever national interests there are to workers while cutting back on the various social programs that achieved incredibly strong consensus support under the "New Deal" Keynesian policies of FDR as we realized that public schools and public utilities were best run by government in the public interest.  Globalization carries with it many myths that resemble the "trickle down" theory of economics that fostered deregulation and privatization in the first place.  The problem is that the creation of wealth accrues to the wealthy, and the vast majority of ordinary people are left to stagnate or at best receive a few dregs of the economic growth engine.  Military escapades create excuses for new privatization, that hands lucrative no-bid contracts to wealthy cronies (think Halliburton and its $20 billion and counting from Iraq or Blackwater and its "security" contracts in Iraq and New Orleands).   The vast majority are left out of the good life, and are stuck with paying for it all--through gouging prices, indecent services, flat wages (with busted union laws that give all the power to employers) and burgeoning debt burdens.

This current administration has been the worst of the four decades, because it is so open about its cavalier attitude towards the vast majority of Americans, its willingness to pervert the Constitution to benefit its cronies, its military expansionism and its blatant corporatism that elevates the large multinationals to non-dues-paying quasi-sovereigns who can impose their will on workers who have little or no defenses.  Tax policy is just one of the ways this regime has warped the rules to favor the haves over the have-nots.  Spending decisions (billions for military; peanuts for peaceful programs that fight poverty and aid the hopelessly poverty stricken) and borrowing decisions complete the picture.

The result:  the U.S. faces its highest deficit in absolute terms ever, in FY 2009, which will be made up for by borrowing even more.  The financial sitution (that has seen the federal government talk "individual responsibility" to homeowers caught with too-high mortgages with too-high interest rates after getting pushed and shoved by the banks to use more and more debt to fund a higher-than-reasonable lifestyle, while the feds bail out the big banks (and, to more extent than necessary, their high-flying shareholders)) continues to worry the banks so much that even business loans are getting harder to get, and of course ordinary Americans are paying huge rates of interest so that the banks (and their owners) can make up as much of their losses as possible.  See Peter Goodman, Worried Banks Sharply Reduce Business Loans, July 28, 2008.  The mortgage losses could easily top $1 trillion.  And of course the banks are charging very high interest for what money they do loan, even though their loans from the Fed are at very low interest.  One reason is that the securitizations by which banks offloaded their risks to smaller investors (and the economy generally) are not so easy these days: banks hold onto more loans, and therefore need to scrutinize their borrowers more fully.

Big Oil and windfall profits: It's the Economic Stupidity, Stupid

If you didn't see Frank Rich's op-ed in the New York Times on McCain's budget talk, you should.  It's the Economic Stupidity, Stupid calls it the way Frank sees it, which is refreshingly honest these days.

Economic stupidity is a trait we can't afford as a nation any longer.  We've indulged the fat-cat CEOs and the anything-goes-that-a-lobbyist-wants approach in Congress far too long.  Case in point:  Congress can't bring itself to enact a windfall profits tax, but while gas prices are soaring, Big Oil industry has hit it big and their executives have soaring pay while their shareholders are getting a lot of the profits in share buybacks (i.e., those windfall profits aren't being reinvested in getting more energy).   

The top five BigOil firms had $120 billion in PROFITS in 2007.  See Analysts split over windfall profits tax, CNN.com. Democrats in Congress have toyed with a windfall profits tax, but BIG OIL is fighting any such idea with their usual claim that they need all that moolah to "invest".

If our profits are taxed, that means we'll have less capital to invest in new production" and it could raise gas prices, John Hofmeister, president of Shell U.S., recently told CNNMoney.com.  Oil companies have been investing more in new production lately, but that argument is a little hard to swallow given the disparity between the huge amounts of money the big firms have been returning to shareholders versus the meager new oil discoveries.  Id.

Shareholder got $60 billion through share buybacks (and remember those are taxed very low--at the 15% rate compared to ordinary workers' salaries).  So those who own the energy companies are doing just fine, thank you. 

What about those who manage Big Oil?   Just look at Houston (pointed out by Brains and Egss' Perry Dorrel):  ConocoPhillip's CEO Mulva enjoyed a whopping $50 million, and the ten top-paid executives in the Houston area are all in energy companies.  See this in the Houston Chonicle online, House Executives Pay Packages Swell by over 30%, July 19, 2008.

I'm not sure a windfall profits tax is the right move, but I'd sure like to see some in-depth discussion of it within the media and in Congress, including a willingness at least to eliminate the ridiculous subsidies to Big Oil that are built into our tax system.  There is something unsavory about the kinds of profits that Big Oil is making, the kinds of money that the CEOs are taking home, the profits of the shareholders, when workers are not doing well and the gas prices have hit the ceiling.  We seem to have lost all sense of an economy that we are all in together, as we move more and more towards a have and have-not economy, in which the haves take home $50 million and yet talk about understanding ordinary Americans because they didn't grow up rich and in which the have-nots suffer from the results of a focus on growth but not opportunity, wealth but not shared well-being.

Women's Stake in the Tax System: National Women's Law Center

I've talked a lot in this blog about the way economic and budgetary decisions influence the very social fabric of our democracy.  I argue against making the Bush tax cuts permanent for many different reasons (frankly, I can't think of a single convincing argument that would cut the other way), and here is a good argument against extending the Bush tax cuts from the National Women's Law Center, Tax and Budget Issues are Women's Issues: Sacrificing Women's Priorities to Make Tax Cuts for the Wealthy Few, April 2008.  (Remember, women are still losing in the national economy.  Consider the New York Times story, Women are Now Equal as Victims of Poor Economy, July 22, 2008.  For the first time since the 60s, a period of some economic recovery saw women's participation in the work force shrinking.  And it wasn't because women decided to opt to be stay-at-homes.  It was because appropriate opportunities were not there.)

The key line from this brief report is in the first paragraph: "[F]ederal tax and budget policy since 2001 has helped the very rich grow even richer, bringing inequality to record levels while sacrificing the needs of low-income women and their families."  Id.

There are some very good graphs illustrating key points, such as the extent to which the benefits of the tax cuts go to the wealthy (the top 1% would get 31% of the benefits, while the bottom 80% would get only  one quarter of the benefit of making the cuts permanent); millionaires would get an average cut of $162,000 in 2012 if the cuts are made permanent, but one quarter of single mother families got nothing from the tax cuts in 2006.  And there's this one:  if the Bush revenue reductions are made permanent, the annual amount that costs us will exceed the combined budgets of Education, Homeland Security, Housing and Urban Development, Veterans Affairs, State, Energy, and the Environmental Protection Agency.  Meanwhile, food assistance, job training, and other programs that are terribly important to helping those in the middle and lower rungs of the economic ladder make it have been shrunk.

Surely Congress can think of better ways to plan the government's budget than through a giveaway to the wealthy and a takeaway from the vast majority of American taxpayers.

Digging a Deep Hole: AMT "patches" and Making the Bush Tax Cuts Permanent:

In response to congressional questions, the CBO has prepared a report, released July 17, 2008, detailing the "Long-Term Effects of Indexing the Alternative Minimum Tax and Extending the Tax Reductions of 2001 and 2003."  It is a grim picture of deep and unsustainable debt and deficits.  If we index the AMT and make the 2001-2003 tax cuts permanent, the deficit will rise to 39% of GDP  by 2082 and our debt would be about six times GDP in 2082.  The report notes that foreign investors might soften some of the impact, but that too has grim results.  "Over time, foreign investors would claim larger and larger shares of the nation's output, and fewer resources would be available for domestic consumption."  This deficit financing would reduce real income per capita, having such large effects that the CBO's models cannot model them well.  (The report notes reduction in per capita income by 13% by 2050 and becoming "unsustainable" and going off the charts by 2073.)   As OMB Watch reports, deficit financing like this has a "pernicious effect" on households.

The AMT was in place, of course, when the Bush administration enacted the 2001 and 2003 tax cuts, and the "creeping" of the unindexted AMT brackets, compared to the indexed regular tax brackets, was perfectly predictable.  The CBO notes that without indexing, roughly three-quarters of taxpayers would pay the AMT as a surcharge on the regular tax by 2082, yielding 18% of the income tax revenues.  What's fascinating is that the very people that voted in the 2001-2003 tax cuts knew this would happen and chose not to change the AMT to correspond to the new rates in the regular tax, because they knew the country couldn't afford it.   The 2001-2003 tax cuts already cost in the trillions, and making a parallel change in the AMT would have skyrocketed the cost.  They needed the sunset gimmick on the regular tax to keep within the huge revenue reduction target they had set as it was (even though at least a large number, especially on the Republican side, had no intention of letting the sunset take effect).  But now, those same people are saying that the AMT "fix" should be passed without paying for it--that we should not find either spending cuts or revenue offsets that will keep the AMT patch from digging the deficit hole deeper.  That's not wise fiscal planning.  That's pure political gamesmanship.

The Daily Show on Budget Deficits and Bailouts

OK, it's not tax poetry.  But if you missed this clip from mid July, you should see it now for some typical Daily Show good humor.  It's available on Stan Collender's Capital Gains and Games blog.....

WSJ: wealthy have more, pay less proportionately in taxes since 1929. Anybody surprised?

See this TaxProf posting with an excerpt from the Wall Street Journal article by Jesse Drucker, Richest Americans See Their Income Share Grow.  The tax rates for the wealthy are down, really down.  Their incomes are up, really up.  (And that's just AGI, which doesn't capture everything by any means.)  And the amount they are paying in taxes as a proportion of their incomes is low, really low.  That's bad for the vast majority of ordinary Americans whose incomes have stagnated and whose expenses make it more difficult than ever to live a decent life. 

Republicans in Congress, wake up.  There simply are not enough people in the top 1% to vote you into office.  You need to pay attention to ordinary people--i.e., at least the 80% who are not in the top quintile of the income distribution--and quit talking about estate tax repeal, capital gains tax repeal, and all those other goodies for the ultra rich.  The life of our country depends on it.

Kenneth Copeland Ministries: "No, thanks" to Sen. Grassley's Request

As readers know, Sen. Grassley has been trying to conduct an investigation of a number of megachurches whose publicity in local newstories or otherwise has suggested a possibility of misuse of tax-exempt status.  One of those churches is the Kenneth Lockwood ministry, and it has resisted requests for disclosure of information. 

The Senate committee released a report July 7, 2008.  See NonProfit Law Blog for a brief discussion. The report called KCM's response "not responsive" because it was only "partial" answers to most questions and no answers to any questions on compensation. 

Look at the press release (below) setting forth KCM's position that Grassley should ask the IRS to ask for information, instead.  Huh?  Why doesn't Congress have a right to carry out its oversight?  After all, these churches are given tax-exempt status on the understanding that they will comply with requirements for that status, and Grassley's investigation is one way of making sure that they are indeed held accountable. 

The church's release claims it is upholding its First Amendment rights.  I don't think so.  Congress has a right to ask about compensation and business-like activities that the church enters into, to determine whether the rules governing reporting of this kind of information are working appropriately.  That hasn't got any thing to do with a church's freedom of religious exercise.   Look at the second letter from Baucus and Grassley, below, noting that the Senate Finance Committee was exercising its appropriate oversight role and that the IRS rules govern enforcement actions.  Note also that the Senators have consulted legal counsel to ensure that their oversight role doesn't infringe on constitutional rights.

In fact, if you look at the April 4 news release on the same issue, the ministry says that it prefers the IRS to conduct a 90-day church tax inquiry, conducted under church-favorable rules under a provision enacted back in 1983 with considerable support of Senator Grassley, because the material on't be able to be released to the public. See below for a document providing a good summary of the church tax inquiry rules:  you'll note that such an inquiry cannot be undertaken by the IRS without a reasonable belief that the church is not entitled to tax exemption, is conducting an unrelated business or is otherwise potentially liable for tax, and there are a number of procedural restrictions and rules to expedite the process that are likely to hamper the IRS's ability to fully investigate. The IRS inquiry, in other words, is an enforcement inquiry.  The Senate's inquiry is different--it is a question of oversight and understanding and, to be clear, imposing more transparency through its investigation and report, so that the public has some basis to comment on the way the rules work. 

Thus, the church appears to be talking out of the side of its mouth--it says it is certain that the IRS would conclude that it has complied with all the rules for tax exemption after the 90-day inquiry and that no examination (a more rigorous auditing process where the IRS examines church records) would be necessary, yet it says that the IRS inquiry is the only way that it will provide whatever records are requested.   Sounds like the ministry is afraid, in other words, of what its contributors might think of some of the information.  Maybe its leaders are living too well, given the hard times for most ordinary people?  Maybe the church has not been entirely open in the way it has described its finances to the ordinary people who sustain the lifestyles of the church's founding family?  According to news stories at the beginning of the investigation, the KCM leaders enjoy use of a $20 million jet, ski vacations and exotic game hunting expeditions, an 18,000 square foot parsonage on Eagle Mountain lake with its own tennis courts and boat house (of course, all paid for by the people who contribute to the ministries or by the tax-free profits of the "related purpose" activities  of the ministries).  See this story summarizing WFAA-TV's investigations of the KCM leaders from November 8, 2007.

One can't help but speculate, in other words, that there is some fire underneath the smoke, given the church's admitted concern with "the public" finding out about its financial matters and its complete failure to respond to compensation inquiries from the oversight committee.

Whatever the real reason for the church's withholding the information requested by Baucus and Grassley, it disregards the right of the public to know that special concessions provided in the tax code are indeed serving the purpose for which they were intended.  Tax exempt organizations enjoy an enormous benefit and owe a public accounting to the taxpayers that make that possible.   

The object lesson from the Senate Finance committee's investigation is that it is time to rewrite the rules to require church's to file with the IRS when they begin in operation and to file a Form 990 just like every other tax exempt entity must do.  We probably should repeal or at least modify the church audit procedures act that treats churches with kid gloves.  The IRS should use fair procedures that don't threaten First Amendment rights for any organization, whether it is an environmental group, a poverty center, or a church, but we don't need a special rule that stacks the decks in favor of the organization's being able to hide information, as we now have.  It is simply too easy for people to claim themselves to be a church, claim property tax exemptions for their homes, and claim a minister's housing allowance for themselves, thus cheating the system and leaving ordinary taxpayers holding the burden of the revenue needs.

Here are a few items:

• a background posting on A Taxing Matter on the request for information and a followup posting on the July committee letter
• the 90-day church tax inquiry process.
• the second Senate Finance letter from Sens. Baucus and Grassley, March 11, 2008.
• the Kenneth Copeland Ministries April 4, 2008 news release (on KCM website)
• the Kenneth Copeland Ministries July 14, 2008 news release (on Bible Belt Blogger site)