ataxingmatter

Tax Tidbits: links worth following

[edited Mar.11, 2009 to correct failed link]

There are a few good links to be followed on issues that relate to the many complex concerns about the economy, taxation and political decisions relevant to both of the former items. 

Salon, for example, has an article by Andrew Leonard on the bad economics of stopping gay marriage, since Focus on the Family, which devoted considerable resources to support the California ban in the recent election, is now laying off workers.  As readers know, I find the attempt to ban gay marriage ridiculous.  It is founded in the same discriminatory motives that banned miscegenation until the Supreme Court finally ruled in Loving against racial marriage discrimination.  Fundamentalists argue that gay marriage threatens straight marriage, which is utter nonsense--if anything, it strengthens it because it makes marriage itself that much more important to couples, whether straight or gay. And the "bad economics" of stopping gay marriage means a lot more than just the impact on the Focus on the Family organization.  The bad economics applies as well to thinking about the care and nurturing of children that gay couples adopt:  policies that discourage stable gay couples and discourage gay couples' adoption of children result in unadopted children who live less stable lives at state expense, which requires, guess what, more taxes at a time when states across the nation are scrounging for dollars because of the recession.  That's really bad economics, when those children could be in good families.

Then there's Steven Greenhouse's op-ed in the New York times on November 16 (Sunday)--will the safety net catch the economy's casualties?  As we face a deep recession for the first time since Reagan first took office, we face it as a "far different place" after four decades of Reaganomics--deregulation, privatization, tax cuts for the wealthy, military buildups and scaled back social protections (from  Reagan's increases in payroll taxes to Clinton's welfare "reform" to Bush's stingy treatment of the S-CHIP program).  Greenhouse quotes Hacker's comment that "some of the core elements of the social safety net have eroded" and cites the Center for American Progress and National Employment Law Project report (Helping the Jobless Helps Us All) issued on the 14th on the importance of expanding unemployment insurance.  The lesson here isn't very different from the lesson about denying the opportunity for a stable legal marriage to gay couples and their children--"the deterioration of the safety net will not only mean more pain and poverty for millions of families, but a longer recession."  A society that takes care of the wealthy and lets everybody else fend for themselves is not one any of us should want to be a part of.  We're all worse off when some of us suffer needlessly.

Thankfully, Congress has not yet given up on realizing that the core problem that needs to be dealt with in connection with the collapse of the speculative housing bubble is the fate of ordinary Americans.  Millions of homeowners are in danger of losing their homes.  The bailout can't be used just to shore up the big banks that caused the problem in the first place by loosening credit standards and attempting to securitize the risk away.  See Brian Knowlton and John Cushman Jr., Lawmakers Renew Call for More Help for Homeowners, NY Times, Nov. 18, 2008.  The discussion doesn't go far enough, though.  Congress should pass a law permitting modification of mortgages on primary residences in bankruptcy.  It's disgraceful that the Republicans prevented that as a part of the bailout provisions.  Now that the election has demonstrated that the majority of Americans want real change, Congress should provide that change by enacting this legislation that will make a real difference in the foreclosure rate.  And the bailout--modify its terms to require: no dividends, no bonuses, no acquisitions using bailout funds, more lending.

And here's an older tidbit from Wisconsin Truth Watch--one of several posts expounding (as I admittedly do sometimes) on the problems of privatization versus the value of tax-supported government services.  Always nice to see sites that recognize that taxes are like the dues we pay to any organization to have the organization perform its key functions.

Ohle Indictment for "HOMER" Shelter Promotion

The Department of Justice announced Friday  yet another indictment in the tax shelter schemes aimed at helping the U.S.'s super-wealthy class avoid taxes on big gains by generating artificial losses.  John Ohle, the head of the "innovative strategies group" at the Chicago branch of a "national bank" (Bank One, now owned by JPMorgan Chase) was indicted in the Southern District of New York in connection with the promotion of the "HOMER" tax shelter.  (HOMER is the acronym for Hedge Option Monetization of Economic Remainder, the descriptive title of the shelter.)  According to the press release and indictment, the bank group sold HOMER to 36 wealthy clients in 2001, leading to $430 million in artificial losses to be used against real income.  Ohle is charged with conspiring with lawyers at the now defunct Jenkens & Gilchrist law firm to market the shelter, for fees of 6% of the desired tax loss, as well as working with several buddies to gin up referral fees and filing false tax returns in respect of the income.  Ohle could get a lot of jail time and pay big fines (up to 38 years and $2 million).

For coverage, see the following:

MarketWatch, Nov. 15, 2008 (note in the comments section the typical libertarian line that "taxation is theft"; this meme has been repeated often by right wing think tanks funded by corporatist interests, and is ludicrous except for the fact that so many seem to buy into it without realizing that taxation is a necessary concommitant of living in a civilized society, just as shared rules about noise or roadways or any of the myriad other ways that civilized peoples give up some measure of individual leeway in order to gain the huge benefits of cooperative effort.).

WGSO.com, Nov. 15, 2008 (noting that William Bradley, the Louisiana attorney already facing bribery charges in the state, was indicted with Ohle in the tax shelter scheme).

ChicagoBreakingNews.com, Nov. 14, 2008.

Mikulski Proposal for Auto Company Assistance

Barbara Mikulski, Democrat from Maryland, has hopped on the bandwagon of doing something for the big US auto companies that are struggling with cash flows, in part due to the overall economic stagnation and in part due to their own shortsightedness in developing energy-efficient cars worthy of the new century.

As with so many proposals these days, Mikulski's involves the tax code and the addition of yet another "tax expenditure" item.

In general, interest on personal debt (as compared to investment debt or business debt)  is not deductible.  There is a gigantic exception for interest on mortgage loans--the "acquisition indebtedness" and "home equity indebtedness" exceptions under section 163(h)(3).  As many tax experts have said, those interest deductions favor high income taxpayers, because they are generally in the minority of taxpayers who itemize deductions, they are otherwise likely to be taxed at a high marginal rate (thus getting the greatest benefit from ordinary deductions), and they are more likely to have expensive homes with significant mortgages that permit them to get the maximum benefit from the mortgage interest deduction (which can amount to a deduction for interest on loans up to $1.1 million). 

Mikulski proposes adding another exception, for interest on auto loans.  See Auto Ownership Tax Assistance Amendment.  The interest would be deductible above the line, so that even those taxpayers who do not itemize (about 70% of taxpayers) would be able to benefit from the deduction.  It would be limited at high income levels ($250,000 for joint returns, $125,000 for singles).

Is this a good idea?  it depends on your views on several issues.

First, should we be enacting help for the auto companies?  In a world where taxpayers are expending $700 billion to help financial institutions, with very few strings attached--and where the Treasury is going overboard not to enforce the law in order to provide even more help to the big financial institutions--it is hard to draw a line to avoid helping the auto companies.  Why?  Because they directly employ millions of Americans, and related industries employ tens of millions of Americans.  If the US auto manufacturing industry is shut down, it would be a severe blow that would likely prolong the recession.  At the same time, the auto industry has long neglected to make changes that were needed.  It continued to develop and sell over-the-top SUVs and Hummers long after it was clear that these vehicles were environmental disasters--guzzlers of precious and limited oil resources and outputters of ozone-gobbling, earth-warming gasses. The industry could have turned itself around 30 years ago, but it rested on its laurels. 

Of course, much the same is true of the financial institutions that are now feeding more and more greedily at the public trough (now fudning their own money-making acquisitions rather than to provide needed credit to individuals or businesses) while continuing to pay dividends to shareholders, exorbitant deferred compensation to executives and enjoy resorts to carry on business.  The banks have grabbed enormous profits while doing almost nothing of real benefit to the American standard of living.  Banks pay piddling interest and charge usurious rates on credit cards, while continuing to entice vulnerable Americans to buy more and more on credit--a continuing legacy of the "Reagan revolution" of "trickle-down" economics that managed a massive transfer of income to the wealthiest households through steep cuts in tax rates and the building of a growth economy that primarily benefitted those same wealthy households through a push to consumerism funded by readily available debt with few consumer safeguards.  For a view that the transfer of wealth was the intended result of the loosening of credit (that is the primary cause of today's financial crisis and taxpayer bailout of these same firms), see this 2003 blog posting, Trickle-Down Economics was a Trojan Horse (part of a progressive discussion about the economics of the war in Iraq).

Second, should we be helping auto companies indirectly through a tax expenditure item?  Tax expenditures are complicating provisions, which in itself is a problem as the Code grows ever more complex.  Tax expenditures, by their nature, undo a coherent structure in the Code.  The coherent structure is the lack of a deduction for personal interest.  The exception for home mortgage interest has long been decried as wasteful, unfair, and ill targeted, a factor in the housing boom that led to the housing bust, and a factor in the continuing growing inequality among Americans that prevents all from sharing in broad-based economic growth.  Furthermore, each new expenditure, no matter how temporary when initiated, generates an audience that will push to maintain it for the foreseeable future.  Congress can reap over and over again a constituent-satisfying moment of renewing the expenditure, giving Congress an incentive both (i) to make the tax expenditure temporary (so that it can reap election year rewards for extending it)  and (ii) to extend it (even if the original economic arguments for its extension are no longer viable).  We haven't been able to get rid of the home mortgage interest deduction, even though everyone knows it is unfair and wasteful.  The auto loan interest deduction would likely follow a similar trajectory.

Although the tax expenditure is at least somewhat targeted to a real need--the auto companies are in dire straits, and there are a number of low-income Americans who truly need cars to get to work and can't afford to buy one--it is doubtful that it will really accomplish its objective.  The tax expenditure is unlikely to be sufficient to help the auto companies, because it will be too little/too late.  The number of new buyers because of the interest deduction would seem to be limited--people who are in the lower-income brackets and have lost a job or are worried about losing a job will likely find the cost of the car too much, the ability to get credit too limited, and the benefit of the deduction too minimal to tip the scale to the "buy" decision.  (And, of course, all buyers will get the interest deduction, even if they weren't "incentivized" by it to purchase the car.) The amount of money coming to the auto companies from those sales would therefore also appear to be limited and insufficient to counter the fact that the auto companies are burning through cash at a very fast rate.   It therefore seems doubtful that the tax expenditure will accomplish the objective of both saving the auto companies and saving the people who really need to buy a car but can't afford one, while the negatives of tax expenditures will certainly accompany this one. 

Baucus's Health Care Proposal

Max Baucus has released information about his health care proposal, which would include additional tax subsidies for health care.  It is available on the Finance Commitee website: Call to Action: Health Care Reform 2009 (Nov. 12, 2008).  In an introductory comment, Baucus reminds Americans that he held a number of hearings on health care as well as a day-long summit in mid-2008 on the issue and offers the "white paper" as his vision of an approach to our long-term health care financing issue.

The problem is an obvious one. 

[Americans] recognize that the status quo of high costs, unacceptable numbers of the uninsured and underinsured Americans, and far less than optimal quality and value is unsustainable and intolerable. And, notably, the nation’s economists concur that system reform is not only necessary to rationalize our health care system, but to sustain our economy, our ability to compete internationally and, over the long haul, to deal with our long-term fiscal challenges.

The system Baucus proposes relies heavily (too heavily, in my view) on obligatory private health insurance, with various incentives to employers to provide such insurance and some government backstop for employers who cannot.

[T]he Call to Action has three equally important legs: (1) a policy that ensures meaningful coverage and care to all Americans; (2) an insistence that any such expansion be coupled with an emphasis on higher quality, greater value, and — over time — less costly care; and (3) an absolute commitment to weed out waste, eliminate overpayments, and design a sustainable financing system that works for taxpayers as well as for the nation’s recipients and providers of health care.

Baucus's plan calls for an insurance exchange in which those who cannot afford coverage receive a government subsidy of the premium to be paid to participating insurers, which would also include a public plan option similar to Medicare.  It would also expand Medicaid to all below the poverty level and allow seniors 55 and over to buy into Medicare, and provide additional funding for the State Children's Health Insurance Program (S-CHIPS) and Native American health insurance coverage. Importantly, Baucus proposes to address the current problem of overpayments to private insurers in the Medicare Advantage program, the program developed under the Bush administration that amounts to another federal subsidy for private insurers. Finally, insurance through employers would be encouraged, with employers who were unable to provide coverage required to contribute to a fund to provide coverage for the uninsured.

I suspect that a better system would, in the long run, replace private insurance with single-payer, single provider government program---essentially, expanding medicare to cover everyone.  Maybe the "exchange", with the supplemental programs Baucus is suggesting, can serve as a way to transition out of private insurance and towards an appropriate "universal Medicare" model.

Responsibility of Elites for Administrative Abuses

As we prepare for a new administration in the White House, it is worthwhile to consider in what ways things "went wrong" under Bush and what we should learn from that for the future. 

Under Bush, the US engaged in a series of practices that were both harmful to the country and harmful to individuals.  Included in that list are the many domestic policies that furthered a corporatist, freemarketarian view over individual liberties and policies helpful to everyday Americans--deregulatory actions and disregard of science at the EPA and the FDA, looking the other way as speculation in the financial markets became rampant, tax provisions that led to growing inequality--as well as the many foreign policies that revealed moral decay at the center--torture, the ability of the President to declare anyone, even US residents, "enemy combatants" and to whisk them away to military detention that denies them their constitutional rights, unilateral preemptive war, privatization of core government functions such as security and military activities.

Glenn Greenwald, over at Salon, suggests that the blame rests not only with the Bush cronies within the Bush administration, but also with those educated elites, especially lawyers, who helped legitimate those fringe policies by offering legal defenses.  See Orin Kerr and the Responsibility of Elites for the Last Eight Years, Salon.com, Nov. 9, 2008.  That's a challenge to all of us who analyse and consider and share our thoughts with others, whether in purely academic settings (journals, law reviews, symposia) or in more open media (i.e., blogs like this one). 

What Bush and his defenders did was subvert the law to the cause of the neoliberal imperialistic agenda--by openly vowing not to enforce the law as enacted, but openly claiming a right to disregard the law, by treating the "unitary presidency" as above the law, all law, when security is at stake (which, ultimately, it always is). 

What progressives must do is take care that we do not grab those same powers (Obama steps into a context of unprecedented presidential power) just because they might be used for good rather than for the wrong-headed policies pursued over the last eight years.  Nor can we legitimize progressive ideas with sloppy argument and flagrant disregard of authority as done by John Yoo and others arguing for a right to torture, apparently so long as it wasn't outright premeditated murder.  We must take care that we work to evolve a more progressive society that reflects contemporary values in its legal institutions by building on the law, not by destroying the legal institutions that are essential to a democratic government.  Food for thought, at the least.

Newsflash: UBS executive Weil charged in tax evasion scheme

UBS executive Raoul Weil was indicted by a federal grand jury on November 6 for conspiring to defraud the U.S. from 2002 to 2007, earning $200 million in annual revenue for the bank while helping thousands of wealthy Americans evade an estimated $300 million a year in US taxes by hiding their assets from the Internal Revenue Service.  Weil faces up to five years and $250,000 in fines--a piddling sanction for such a serious allegation, especially since the Swiss do not tend to extradite their citizens to face criminal charges abroad.  The case is U.S. v. Weil, 08-60322, U.S. District Court for the Southern District of Florida.  The Department of Justice press release is available here, and indictment is available on BNA at this link.

This is not a case of a bank inadvertently assisting with tax evasion.  The Times article (see below) notes  that the Times reviewed letters making it clear that senior executives knew at least three years ago about the problem.  Furthermore, the bank apparently actively marketed its comparative advantages in tax evasion services, claiming "that UBS had 'better lobbying possibilities in the United States' and 'would not be pressured' to disclose clients' identities."

For reporting, see:

Ryan Donmoyer and Carlyn Kolker, UBS Executive Weil Charged in U.S. Tax Conspiracy, Bloomberg.com, Nov. 12, 2008.

Martha Brannigan, Fort Lauderdale Jury Indicts UBS Official in Tax Scheme, Miami Herald, Nov. 12, 2008

Curt Anderson (AP), Exec with Swiss Bank UBS Indicted in Tax Probe, KansasCity Star, Nov 12, 2008

Jason Ryan, UBS Exec indicated in Tax Evasion Probe, ABC News, Nov. 12, 2008

Lynn Brownley, Swiss Bank Executive Indicted in US Inquiry, NY Times, Nov. 12, 2008

More on the Bailout: Paulson Says Shifting Focus

[Updated to include various links and further information]

Treasury Secretary Paulson has announced his plans to shift focus on the use of the $700 billion in bailout funds authorized by Congress from purchase of troubled mortgage-backed assets to assisting non-bank institutions and "explor[ing] ways to reduce the risk of foreclosure."  Economist's View, Uncovering the TARP, Nov. 12, 2008 (providing a substantical excerpt of Paulson's statement).  See also Associated Press, Paulson Says Treasury is Shifting Focus of Bailout, NY Times, Nov. 12, 2008.  

It is not clear what is ultimately intended in this shift of focus--in particular, why are they still just "exploring ways to reduce the risk of foreclosure" while actually lending to banks.  They are still "exploring" and "considering" and "working to design and evaluate a number of proposals to induce further modifications" rather than acting.   And other reports today indicate a likely decision not to go along with the FDIC plan.  See Edmund Andrews, White House Scales Back a Mortgage Relief Plan, NY Times, Nov. 12, 2008.  To aid families and mitigate the economic crisis, we need a significant program that reaches broadly to orovide real assistance to a substantial percentage of households threatened with foreclosure and it needs to happen very soon.

We are left with a sketchy idea of the other remedies proposed.  It is clearly a decision NOT to use the TARP funds as initially projected primarily to purchase toxic waste assets from banks' balance sheets, but to expand the group of institutions eligible for taxpayer bailout funding.  Given the mention of credit card companies, one presumes that means at the least organizations like American Express (a credit card company), which is seeking more than $3 billion, will be approved.  See AmEx Said to Request $3.5 Billion in Taxpayer Aid, Wall St. Journal, Nov. 12, 2008.  It's not clear whether it means Paulson has reconsidered his view that the bailout should not be extended to major other industries that are desperate for operating cash (GM comes to mind).

What is worrisome from the sketchy statement in the Times is the emphasis on using the federal funding perhaps as a "matching" fund to get private investors back into the market. 

"We are carefully evaluating programs which would further leverage the impact of a TARP investment by attracting private capital, potentially through matching investments. In developing a potential matching program, we will also consider capital needs of non-bank financial institutions not eligible for the current capital program." (See Economist's View excerpt).

Is Paulson considering using funds to finance hedge funds or private equity or other kinds of joint ventures?  Just what does he have in mind?  

Equally vague is the statement about securitizations and using TARP funds to back triple-A assets as a way of getting credit to consumers and supporting renewed financing of mortgages through mortgage-backed lending. 

"While this securitization effort is targeted at consumer financing, the program we are evaluating may also be used to support new commercial and residential mortgage-backed securities lending." (See Economist's View Excerpt)

One has to wonder if it is wise to use taxpayer financing to ensure that banks will once again be intentionally cut off from the customers to which they lend through a revived securitization process.  At the least, one would wish for an accompaniment of better regulation of securitizations and the credit-rating agencies, to prevent the speculative bubbles that caused the problems with these securitizations before.

My unease with this comes from the lack of genuine accountability for the TARP program and the fact that Paulson is basically a free marketarian who "grew up" in the heady financial speculation world of Goldman Sachs and appears to be no fan of the kinds of deep changes that are needed, including a return to real bank and insurance company regulation, control over the "too big to fail" scope of do-everything financial institutions, and coordinated regulation of the most speculative engines of systemic risk--derivatives and hedge and private equity funds.  See, e.g., Megan Barnett, Hedge Funds Get a Pass, Portfolio.com, Mar. 2008. 

Under Paulson's plan, there were already too few strings attached to the bailout funds (permitting dividends to shareholders paid with taxpayer money, resort conferences of AIG executives, too high executive pay, and too-good-to-be-true deals for bailout recipitents).  See, e.g., Naked Capitalism's post describing the sweetening bailout of AIG, with Goldman as the winner, Goldman Big Winner IN Government's Revised Bailout of AIG, Nov. 12, 2008.  Under Paulson, the focus had already shifted to permit bailout funds to be used by healthy banks to acquire other banks (not necessarily weaker banks) and thus further consolidate the financial system. The focus on acquisitions was furthered by the Treasury's concommitant notice (without authority, in my view, much like Bush's "signing statements" that he will not enforce selected portions of laws he signs) that it would not enforce the anti-abuse provisions governing use of acquired NOLS under section 382(l) for banks. The funding and the advantageous Treasury decision on nonenforcement of NOL abuse provisions resulted in significant benefits to Wells Fargo in its purchase of Wachovia and to PNC Financial in its acquisition of National City Corp.  This acquisition use means that taxpayer funds that have already been given out to banks (and foregone tax revenues, in the NOL nonenforcement situation) may simply serve as a cheap financing for wealthy investors to gain control of more vulnerable or smaller financial institutions.  

Various members of Congress were concerned that Paulson and his group of Bush agency heads were not wisely applying the law to accomplish the two-fold objective that brought about the legislation--freeing up credit to ease the economic crisis and helping homeowners avoid foreclosures.  See John Dunbar, Shifting Focus of $700B Bailout Stirs Concern, AP Oct. 26, 2008.  And, of course, the possibility of misdirected uses of taxpayer bailout funding had originally prompted me to suggest that Congress should create a powerful oversight board that provided Congress real input into the decisions on use of the TARP funds and did not leave the decisions entirely to executives appointed by the Bush Administration. 

Now Paulson's new statements suggest yet another way that the taxpayer funding may permit wealthy investors to leverage their money to gain control of non-financial institutions.  Is the bailout--enacted to loosen the credit markets--turning out to be just another way of permitting the "haves" to exploit the system for their own benefit?  Or instead, is Paulson's statement simply an acknowledgment that the economic crisis is much bigger than "just" the credit freeze and the sudden stinginess of lending institutions, so that government action will be needed to invest in key industries beyond financial institutions, including perhaps the auto industry and others?  Again, a more powerful oversight board, one that would permit Congress and even nongovernmental organizations to weigh in on the wisdom of these decisions, would give me more confidence for the long term.

Speaking of confidence, it appears that the gyrations in the Treasury's plans for easing the economic crisis are themselves cause for concern on Wall Street.  Today, the stock market closed down again, and  part of the reason appears to be investors' concern that Paulson's approach is too ad hoc to address the economic woes in a telling way.

Sam Stovall, chief investment strategist at Standard & Poor’s Equity Research, described Mr. Paulson’s approach as “ad hoc,” and said that investors, hungry for a steady, deliberate recovery plan, were not happy. Jack Healy, Dow Down 411 on Investor Worries, NY Times, Nov. 12, 2008.

More on the Bailout: Treasury's "Override" of Enacted Law

Just before Halloween, I discussed the several Treasury notices overriding enacted law governing the ability of acquiring corporations to use "net unrealized built-in losses" of acquired corporations.  See More on the Bailout: Schumer Probes Treasury Handling.  Notice 2008-83 suspends the rule in section 382 that disallows use of a net unrealized built-in loss, without citing to authority.  Although some in Congress seem disturbed by this action (Grassley called it astonishing), it is not clear that this hitherto rather weak Congress will stand up and take action to block Treasury's rewriting of the law. 

These points are clear in Amit Paley's report about the Treasury override of Congress, by which conservatives got something they couldn't get through legitimate action in Congress, in the Washington Post today. 

When they found out, some legislators were furious. Some congressional staff members have privately concluded that the notice was illegal. But they have worried that saying so publicly could unravel several recent bank mergers made possible by the change and send the economy into an even deeper tailspin.  ...  Lawmakers are now looking at whether the new notice was introduced to benefit specific banks, as well as whether it inappropriately accelerated bank takeovers. 

***

Andrew C. DeSouza, a Treasury spokesman, said the administration had the legal authority to issue the notice as part of its power to interpret the tax code and provide legal guidance to companies. He described the Sept. 30 notice, which allows some banks to keep more money by lowering their taxes, as a way to help financial institutions during a time of economic crisis.  Amit Paley, A Quiet Windfall for U.S. Banks, Washington Post, Nov. 10, 2008.

Furthermore, the Notice is striking for more than just an usurpation of authority.  It is extraordinarily costly (perhaps as much as $140 billion of foregone revenue) and selectively favorable to "healthy" banks that acquire banks with losses, a measure that Paulson had said he wants to encourage through the use of bailout funds but which has not been vetted by Congress and was not intended to be a result of the bailout funds.  As Citizens for Tax Justice noted in their November 7 release on this issue, "the new rules give an artificial competitive advantage to banks that can afford to expand now by effectively offering a tax break for acquiring other banks." Furthermore, as CTJ points out, the new rules will also be costly for state governments.  Since most states follow the federal tax law (with adjustments), federal tax cuts result in state tax cuts.  At a time when state budgets are suffering, from New York to California, this blow by the Treasury may be the straw that broke the camel's back.  States that tax financial institutions' profits may become unwitting and unwilling funders of aggressive consolidation of banking companies.

Obama's Challenge: Taxes, War and More (Andrew Sullivan)

This is a second posting in a series dealing with the challenges that face the incoming Obama Administration.  Although I strongly disagree with Andrew Sullivan's prescription for fiscal responsibility ("entitlement" elimination--ie, reducing benefits for the middle and lower classes, but never paying attention to the much larger "entitlements" built into the tax code for wealthy investors; flat taxes--ie, progressive taxation with a zero exemption, but so unreasonably low a rate and so few distinctions that the rich get incredibly richer without fairly shouldering the burden), his eloquent articulation of the bankruptcy of the Bush-Cheney administration's decimation of American constitutional protections would be hard to beat. 

A significant challenge for Obama, and something that I suspect every supporter hopes he makes the highest priority item on his agenda, is to restore to the American people and in America's actions throughout the domestic and foreign spheres the constitutional freedoms that have been abrogated by the criminal occupants of the White House. 

Here are a few excerpts.  Read the rest (just disregard the tax preferences).

[T]he core event of the last eight years [is] the collapse of constitutional order and the rule of law[,]fomented in a mixture of hubris and laziness by the president himself. It is now indisputable that the president and vice-president of the United States engineered a de facto coup against the constitution after 9/11, declaring themselves above any law, any treaty, and any basic moral norm in their misguided mission to rid the world of evil.

***

They declared [the executive] power to be unlimited; they asserted also that it was as permanent as the emergency they declared; they claimed their dictatorial powers were inherent in the presidency itself, and above any legal constraints; they ordered their own lawyers to provide retroactive and laughable legal immunity for their crimes; they by-passed all the usual and necessary checks within the executive branch to ensure prudence and legality and self-doubt in the conduct of a war; they asserted that emergency war powers applied to the territory of the United States itself; they claimed the right to seize anyone - anyone, citizen or not - they deemed an "enemy combatant," to hold them indefinitely with no due process and to torture them until they became incoherent, broken, brutalized shells of human beings, if they survived at all. They did this to the guilty and they did this to the innocent. But they also had no way of reliably knowing which was which and who was who. Never before in wartime has the precious, sacred inheritance of free people been treated with such contempt by the leaders of the democratic West.

Obama, therefore, must erase every remnant of this humiliating defeat of the Cnstitution from the federal government. 

His interaction with other governments must reflect this nation's fundamental abhorrence of imperialism and war, by treating war as a last resort and diplomacy as the primary tool of foreign policy.

His actions on Guantanamo must reinstate the Geneva Conventions and the rights of prisoners. 

• Nevermore should flimsy legal arguments like those advanced by Jay Bybee and John Yoo be allowed to pervert Constitutional protections and international norms. 
• We must never again allow our government to permit torture or murder in our names. 
• We must never permit our national security efforts to become so corrupted by the infantile desire to please a corrupt administration that the intelligence derived cannot be trusted.

His actions on domestic surveillance must reinstate the boundary between foreign wars (military involvement) and domestic criminal prosecutions (domestic law enforcement)

•  Nevermore should a U.S. citizen be seized and held by that citizen's own government without the fundamental habeas corpus, due process and equal protection rights guaranteed by the Constitution. 

His appointees must be ardent supporters of the fundamental importance of the Constitutional checks and balances that prevent presidencies from becoming dictatorships or executive offices from becoming tools to enrich the coffers of influential supporters. 

• His appointees to the Supreme Court must enforce the separation of powers and checks and balances provided by the Constitution, reflecting a progressive understanding of the tyranny of presidential refusal to enforce the law and the misery of presidential usurpation of legislative and judicial authority.
• His appointees to executive positions must be willing participants in a transparent administration that reduces the power of corporatism, cronyism and corruption by making public their interactions with everyone--a schedule of all appointments and phone calls of all political appointees in every agency of the federal government should be posted on the official website of that agency in a timely fashion, for the perusal of the public that official represents.

Obama's Challenge: Obama Should Synchronize the Tax and Welfare Systems (Jonathan Forman)

I have invited several of my colleagues to join me on ataxingmatter in considering how Obama might best meet the challenges--particularly in economic and tax policy--that will face him upon assuming the presidency.  The following is the first of these guest bloggings, a posting by Jonathan Barry Forman, Alfred P. Murrah Professor of Law University of Oklahoma College of Law, and author of Making America Work.

I’m hoping that the Obama Administration will be able to synchronize our tax and welfare systems. We should adopt policies that increase the economic rewards for low-income workers and reduce their effective marginal tax rates.

First, we should reform the tax system. In order to have low tax rates, the tax system must have a broad base. We should repeal as many special-interest tax breaks as possible, including, for example, the preferences for dividends and capital gains. At the same time, we should reduce the taxes imposed on earned income. At present, the combination of income taxes, Social Security payroll taxes, and the phase out of the earned income tax credit often results in extraordinarily high tax rates on earned income, and the highest rates are imposed on single parents earning around $30,000 a year. If it were up to me, I would combine the income and Social Security taxes into a single income tax system—with a broad base and low rates.

Second, we should reform the welfare system. Right now, something like 85 separate federal programs provide income-tested welfare benefits. To keep costs down, virtually every one of those programs phases benefits out as family income increases. Unfortunately, those phase-outs combine with income and Social Security taxes to impose confiscatory tax rates on many recipients. The current welfare system also has financial penalties that can discourage marriage.

The best solution would be to replace the current tax system and most of the current welfare system with a comprehensive tax and transfer system. The general idea is to “cash out” as many welfare programs as possible and use that money to help pay for refundable tax credits. This new, comprehensive tax and transfer system could have just two tax rates—say, 20 percent on the first $50,000 of income and 35 percent on income over $50,000—and it should have a few refundable tax credits.

First, we should replace personal exemptions, standard deductions, child tax credits, and most of the current welfare system with a universal, $2,000-per-person refundable tax credit. Under this approach, a single parent with two children would receive $6,000 a year in personal tax credits, and a married couple with two children would receive $8,000 a year.

Second, we should replace the current, family-based earned income tax credit with a $2,000 per worker credit, computed as 20 percent of the first $10,000 of earned income. (Along these lines, Obama has already suggested that we adopt a refundable “Making Work Pay Credit” of 6.2 percent of the first $8,100 of earned income.) The current earned income credit provides up to $4,824 a year for families but no more than $438 a year for childless workers. Pertinent here, the United States has the highest incarceration rate in the world—496 adults per 100,000 in 2006. And the number of people behind bars has increased from ½ million in 1980 to 2.3 million today. Almost 90 percent of those in prison or jail are men, and almost 56 percent are under the age of 35. A $2,000 per worker credit would help encourage those hapless young men to choose honest work over lives of crime.

Third, we should adopt Obama’s proposal to make the child and dependent care credit refundable, and we should expand the credit so that it reimburses low-income workers for up to 80 percent of their child care expenses. Child care can easily cost more than $100 a week per child, but government agencies provide child care assistance to less than 15 percent of low-income families, and the current non-refundable child and dependent care credit provides almost no help.

Fourth, we should adopt Obama’s proposal to expand the Hope education tax credit into a refundable credit of 100 percent of the first $4,000 of college expenses.

Fifth, we should adopt Obama’s proposal to make the saver’s tax credit refundable and change it to a 50 percent match of the first $1,000 of contributions.

Sixth, we should replace the current exclusion for employer-provided health care coverage with a refundable health care tax credit. The current exclusion costs the Treasury more than $100 billion a year, but it is poorly targeted. Some 47 million Americans lack health care, and most of them are working. We should cap the current health care exclusion and gradually replace it with a refundable health care tax credit (not unlike the one that Senator John McCain suggested). Of course, these refundable tax credits should be paid out on a monthly basis. Each individual would present something like the current IRS Form W-4, Employee’s Withholding Allowance Certificate, to her employer—or to a bank. Employees would then receive advance payment of their credits from their employers in the form of reduced withholding, while other beneficiaries would have their payments directly deposited into their bank accounts.

This new, integrated tax and transfer system would be simpler than the current system. It would encourage low-skilled workers to enter and remain in the workforce. It would minimize marriage penalties. And it would help ensure that low-income families actually get their benefits. Temporary Assistance to Needy Families (TANF) currently reaches just 52 percent of eligible families, and food stamps reaches just 62 percent. On the other hand, the earned income tax credit reaches 86 percent of eligible households, and it does so without any welfare stigma or loss of privacy. In short, we should replace the current system with a comprehensive tax and transfer system—with large personal tax credits, large worker credits, and low tax rates on earned income.

Jonathan Forman

[email protected]

http://www.law.ou.edu/faculty/forman.shtml