ataxingmatter

CBO study on the Budget Deficit

At the request of House Speaker Pelosi and Budget Chair Spratt, the CBO completed a study on the budgetary impact of three policy scenarios--a baseline (all temporary provisions expire and there's no AMT patch); a first alternative (the stimulus bill is taken into account, all temporary tax cut provisions are extended, and the AMT gets patched); second alternative (same as the baseline, except troops at war gradually pull down from 190,000 in 2009 to 75,000 in 2013), and third alternative (same as second, except provisions of the 2001 tax cut affecting upper-income taxpayers would expire and the estate tax would remain in the diminished 2009 form). 

As noted, the CBO baseline projection assumes that current laws remain in place and that the major tax cut bills passed during the Bush administration  (the ironically named "Economic Growth and Tax Relief Reconciliation Act of 2001" (EGTRRA) and "Jobs and Growth Tax Relief Reconciliation Act of 2003" (JGTRRA)) will expire at the end of 2010.   The scenario is inherently rosy--those temporary provisions reducing taxes expire, and the AMT patch that has been added annually to reduce taxes that would otherwise be collected is not assumed to be enacted.  Funding for the wars holds steady at just what has already been approved for 2009, growing each year at specified inflation rates.  Funding under Medicare for physicians goes down as it is supposed to rather than having the provisions waived so doctors can continue to receive high fees. The baseline result? A 2009 deficit of $1.2 trillion and a deficit of $3.1 trillion through the decade.

Under the first alternative, CBO estimates the impact of leaving all the Bush cuts in place, and continuing to patch the AMT to leave those cuts in place.  The war costs for 2008 are projected to repeat through the decade (adjusted for inflation), and nondiscretionary spending stays the same (adjusted for inflation)  Instead of the full decline in doctors payments under Medicare, it is assumed that physicians' fees will increase by 1% annually.   The result would be another $218 billion added to the 2009 deficit, and another $8.4 trillion for the ten year period (on top of the amount under the baseline).

Under the second alternative, the cost of keeping troops in Iraq and Afghanistan, even at slightly reduced levels projected by gradually reducing from 190,000 to 75,000 in 1913 is about the same as keeping the Bush tax cuts in place--$218 billion additional 2009 deficit and $7 trillion more deficit over the ten year period.  That fits with the analysis many have given of the source of the deficits before the crisis in the Bush tax cuts and the Bush wars of choice.

The third alternative reduces the deficit for the 10 year period to $5.6 trillion.  Better, but not where it ought to be.

Congress needs to look closely at these projections.  They suggest that more far-reaching changes to undo the Bush mess will be necessary.  Reversing the preferential rates for capital gains would be a good step that could be accomplished within the AMT, along with a permanent "fix" to the exemption amount to protect ordinary taxpayers--those couples making $150,000 or less.  Letting the estate tax go back to its 2001 levels should be considered--or at least limiting the exemption to $2 million and retaining the 55% rate and perhaps inaugurating a progressive rate structure for the estate tax.  Removing some of the many "entitlement" expenditures favoring the oil and gas industry and other corporate  recipients should also be on the docket.

economic stimulus: prognosis for recovery?

As the credit crunch deepened into a crisis, AIG was found to have huge losses that required infusion of billions of government financing to keep it afloat and a counterparty to the many deals it had entered into, Lehmann was allowed to go under, and even giant Citi became the brunt of insolvency rumors, solutions that seemed good one day seemed half-hearted and ill-thought-out the next.  Eventually, an economic stimulus bill was passed, but as so often the case in Washington these days, the bits and pieces stuck in the bill to get it through a philosophically divided Congress raise questions about its efficacy, and the bank bailout remains a puzzle seeking a solution, as the government appears to go on the line for what could be billions or trillions of losses that should be borne by the shareholders who made the investments and the managers/owners who took the risksl.

Ben Bernanke appeared before the Senate Banking, Housing and Urban Affairs Committee Tuesday and acknowledged that a recovery is at least months, and maybe years, away, as we attempt to recover from a recession that could get worse before it starts getting better. See Fed Chief Says Recovery May Wait Until 2010 or Later, NY Times, Feb. 24, 2009.  He apparently assuaged some investors' anxieties by arguing that the government should just nurse banks back to helath and not nationalize them. 

But that doesn't do much to assuage ordinary Americans' anxiety that we will be left holding the stick for all those losses long into the future, while the share holders and managers continue to enjoy their huge gains from the speculative risktaking that put us in this position.  Consumer prices and home values continue to plunge, and jobs are being lost daily as GDP declines.  Ordinary Americans continue to be repulsed by the havoc wreaked by the greed of the big banks.

I, for one, am not convinced by the "neighbor smoking in bed whose house catches afire" analogy  (see id.) to whether we should let banks' shareholders suffer their losses.  We can save the banking system without putting all our assets at risk to let the smoker continue puffing away in his luxury condo.  We can do that by letting the shareholders have the toxic assets, and making a "good bank" out of the good assets, or by taking over--after all, if the government had to come in or the bank would have defaulted, the shareholders only have an interest in the insolvent institution, meaning that the creditors including the government are the real owners now) and setting new terms for the management while we restructure and resell the banks to new owners.

I am equally unconvinced about the US plan to refinance mortgages to the tune of $275 billion.  It's not new interest rates, but lower principal amounts that underwater families need.  That could best be done--fairly--through modifications in bankruptcy, as I have long argued.  The banks don't want that, because then they will KNOW what those toxic assets are worth.  But that's the right answer, and it's high time we made it possible.  Eric Posner on Volokh Conspiracy agrees, at this link.  Most of the arguments made by opponents of mortgage modification in bankruptcy (see, e.g., Randy Barnett on Volokh Conspiracy, at this link) just don't hold water.  Various bills have been introduced already in this session of Congress that would permit bankruptcy modifications.  It's amazing that the banks apparently have the clout to keep this legislation from getting passed, when it is so central to helping to solve the current economic crisis.  See, e.g., H.R. 200, Helping Families Save Their Homes in Bankruptcy Act of 2009 (and links there to other proposed legislation).

Tax Exempt Hospitals--the American Hospital Association response to the IRS study

Last week, I reported on the government study of tax exempt hospitals, which looked at community benefit and executive compensation, and asked whether hospitals merit tax exempt status, at this link.  The conclusions on community benefit were not very impressive--a few hospitals do a bulk of the benefiting, but all of the hospitals take advantage of the tax exemption.  And all of the executives are quite highly paid, a trend in tax exempts that is not a very nice one to see. 

Not surprisingly, the American Hospital Association has responded to the IRS report with a press release that, as John Colombo over on Nonprofit Law Prof Blog notes, "defends nonprofit hospitals from any unsavory light cast by the report" while "not highlight[ing] the ridiculus practice of hospitals reporting the amount of uncompensated care and other community benefits by the difference between standard charges and costs" and  a few other not so savory items. 

The lead statement in the press release is the following:

Today's IRS report reaffirms that hospitals of all types are providing a healthy mix of care and services to the communities they serve.  While the report has its limitations, it highlights how hospitals across the country are meeting their mission of caring for communities.

My reaction upon reading that lead-in statement was, basically, "yeah, sure".  As Colombo noted, the report highlights how little hospitals really do in terms of community benefit, and notes (to an extent that I did not discuss in my earlier report) the ways in which many hospitals try to overreport community benefit by counting their foregoine expected profits (which could be outrageously inflated) rather than any real loss from providing services.  They get their costs, they just don't always make a profit off a transaction.  More than that, the report makes one ask whether most tax-exempt hospitals have any right at all to claim an exemption--it begs for proof, that is, that hospitals are, indeed, "meeting their mission" rather than just making profits.  Even if the executive compensation currently paid satisfies the IRS rather exec-friendly rules, it is actually outrageously high for nonprofits. 

Somewhere, someday, this ability of corporations,--whether taxpayers or exempt--to rip off taxpayers and underpay their typical workers--the orderlies and nurses, the clerks in the back offices and the receptionists up front-- in order to pay outlandishly large salaries to the people at the top of the iceberg who benefit from the corporatist approach or in order not to provide the kind of free care to the underinsured that is expected of "charity" hospitals, has to stop.

Dean Baker, Free Market Myth, in Boston Review (Jan/Feb 2009)  (hat tip to Angry Bear) is certainly worth reading.  Baker looks at the tendency of both liberals and conservatives to talk about the financial collapse as a failure of regulation, but notes that "blaming regulation is misleading" since the real failure is one of public policy.

Baker uses patent and copyright law as a way into the issue.  We give extraordinary protection to patent and copyright holders, and use the enforcement power of the state to stop infringers.  Yet , he says,this protection tends actually to assist in the establishment of monopolies that actually slow rather than speed helpful innovations.

The list of extroardinay government measures that have been developed to enhance copyright protection is lengthy.  Remarkably, these measures are never described as forms of government regulation.  Theya re treated as enforcement measures necessary to protect copyright.  However, just as patents are not the only way to encourage innovation, a government-granted monopoly with extensive rules and heavy-handed enforcement is not the only way to promote creativity.

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A final example of excessive government regulation, never discussed as such, is the bankruptcy-reform bill that passed Congress in 2005.  This bill substantially strengthened the conditions imposed on people seeking bankruptcy protection, makin such protection a much less attractive option.  ...The liberal argument [against the bill] relied on sympathy for the people seeking bankruptcy. ... The conservative argument [in favor of the bill] relied on individual responsibility. ...

[This] obscured the real issue that the bill addressed: to what lengths should the tovernment go to collect unpaid bills?  The party seeking the aid of the government in this story is the creditor, not the debtor.  Under the preexisting bankruptcy law, creditors could law claim to most of the debtors' assets and in some cases place liens on future earnings.  The new law hugely expanded the creditors' claims on future earnings.  This means that the government will be far more involved in bill collection in the future than it has been in the past....

The individual-responsibility line could have been applied just as validly to the creditors.... Part of being a successful business involves knowing under what circumstances to extend credit.  No one forced busiensses to extned credit to the people who subsequently declared bankruptcy.  They exercised bad judgment. ... Why should the government step in to help businesses that fail to assess credit risk.  The ideological battle around the bill was a distraction.  It was an effort to get the government more actively involved in helping the banks.  It's that simple.

Baker then turns back to the financial collapse, and notes that regulations designed to protect the public and ensure the stability of the financial system were considerably weakened.  But "the key regulation that remained in place was the "too big to fail" doctrine.  Essentially, the banks and other financial institutions took enormous risks with an implicit guarantee that their creditors could count on the protection of the U.S. government if things went badly."  Given the lax treatment of leverage and the deregulation of derivatives like the $70 trillion credit default swap market, the "too big to fail" doctrine "essentially gave the banks a license to wage with taxpayers' money."

Bill Gates, Baker says, got filthy rich because the government set up rules that permitted him to have a monopoly on the operating system of most computers in the world.  Investment bankers got rich because the government sheltered them under "too big to fail" while letting their speculative activities go unscrutinized.  Doctors are well-to-do- compared to factory workers, because our professional licensing rules protect their jobs from cheap competition, but don't protect auto and textile workers' jobs.

So we shouldn't really be talking about more or less regulation, Baker says.  Nobody wants an unregulated market, but different groups want government's actions to help different sets of people.  "We are all just talking about whom the regulation is designed to benefit."  Addressing that issue up front--does this legislation benefit the haves or does this legislation protect the have-nots--is terribly important. 

Banks--what should we do about them?

As the nation's economic situation continues to worsen, it seems that more economists and others are coming to the conclusion that the federal government needs to enact a measure more similar to the Resolution Trust Corporation resolution of the Savings & Loan crisis than to the Bush Administration's TARP program.  The difficulty, of course, is that the "toxic waste" held by the banks is extraordinarily difficult to value--in terms of recognizing just how much will be recognized on the assets over the long term.  The banks don't want to recognize the losses they think they have on their balance sheets, because they might be insolvent, or awfully close to it, and it would be very hard to argue for US government bailouts of their managers and shareholders.  But the government shouldn't pay more than fair market value to buy assets, because it amounts to letting the bank owners and managers privatize their gains from speculating in easy credit provision and socialize their losses.

Geithner gave a speech on the tenth about the new "financial stabilization plan".  Geithner's attempt to come out with a "new" solution wasn't very well received by the markets or by ordinary Americans.  See Andrew Leonard, Geithner fails to deliver; market swoons, Salon.com, Feb. 10, 2009 (noting that it is too late to reassure by claiming to be "exploring a range of different structures"). Sending more  money banks' way--up to $2 trillion, maybe-- without even requiring the banks to lend any money out, seems like throwing good money after bad, "coddling the banks" (or rather their shareholders and high paid executives)  as Maureen Dowd said in her "Trillion Dollar Baby"  op-ed on Feb. 11, 2009.  The blogosphere seems to agree--see, e.g., Geithner Bank Bailout Plan: Fiasco, Naked Capitalism, Feb. 10, 2009, which provides the following up-front assessment:

The problem is that a significant portion of the very biggest banks are insolvent.  And on top of that, most of them have very large capital markets operations which have been the nexus of credit intermediation.  ... The SEC never was very interested in bonds, and the Fed took a hands-off, 'let a thousand flowers bloom' approach to risk management, derivatives and what was called innovation.  Author and market observer Martin Mayer warned "a lot of what is called innovative is simply a way to find new technology to do that which was forbidden with the old technology."

But the history of major banking crises, unambiguously shows that insolvent financial institutions need to be resolved.  There are variations on the theme: the government can take them over and recapitalize them, clean them up and re-sell them, a la Sweden; you can wipe out equity investors and bondholders; you can try new twists, like various good bank proposals that have surfaced lately (making new entities out of the deposits and good assets and leaving the dreck with the existing bond and shareholders).

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Inviting investors in with you on the buy side does not address the issue of the pricing gap, unless the deal with the investors is intended to help obfuscate the overpayment to the banks.

The answer is either (i) bifurcating problem banks into "bad banks" that leave the toxic waste in the hands of the shareholders and "good banks" that can be sold to new investors or (ii) nationalization that permits the government simply to take over the banks from shareholders , selling off the bad assets over time, and then selling the banks back to investors when the toxic waste is no longer on the balance sheets at the inflated figures causing all the distrust.  Either way, the current shareholders need to take the losses.

Temporary bank nationalization, as Paul Krugman noted in last Monday's op-ed pages, is "mov[ing] from the fringe to mainstream acceptance, with even Republicans like Senator Lindsey Graham conceding that it may be necessary."  Krugman, Decade at Bernie's, New York Times, Feb. 16, 2009.   Leonard, in the Salon article noted above, states the following:

 "Banks are insolvent because they are sitting on trillions of dollars of assets that the market is assigning a very low value to.  If the Treasury Department cannot figure out a way to make that problem go away, the only feasible alternative is nationalization of the failing banks and their wholesale, government-mediated restructuring."

The Times editorial today suggested the same--rescue measures so far have not turned banks around so a takeover that wipes oout bank shareholders and puts the government in control of a large part of the financial syste "is the least bad solution to a truly desperate situation."  The Government and the Banks, New York Times Editorial, Feb. 22, 2009.

Sarah Palin's tax returns: Part III

Last October (in the "before the election" time that now seems long ago and far away), ataxingmatter considered the many questions raised by Sarah Palin's limited release of tax returns for 2006 and 2007. See Sarah Palin's Tax Returns Part II, Oct. 7, 2008.  As noted in that post, her returns for 2007 showed income of about $128 thoughsand, but did not include either the per diem payments from the State of Alaska or any travel reimbursements for her husband or her children.  The Palins took deductions for Todd Palin's fishing and snowmobile racing, both of which were claimed as businesses rather than hobbies.  (Losses are not deductible in excess of income for hobbies, under section 83). 

The returns got lots of attention, as did those of other prominent candidates for election.  There are lots of links through which you can trace the issues on the posting.  I concluded that there were  key tax issues that could not be answered fully solely by considering the information as released: Sarah Palin's per diems for days spent in Wasila; Todd Palin's cash reimbursements for travel (some with the governor and some on his own); the Palin children's cash reimbursements for travel, such as to Todd Palin's Iron Dog race; and Todd Palin's snowmobile racing activity losses.  The issue that seemed the most likely to cause Sarah Palin problems was the per diem.  After examining the State's per diem policy and reviewing federal "travel while away from home" rules, I concluded that the per diem amounts would be excluded only if Juneau was her tax home AND the days in Wasila were required for her to conduct state business necessary to be done in Anchorage.

It appears that the many tax bloggers who wrote about this issue were on target.  The State of Alaska has now determined that its prior treatment of the Palin per diems was in error. See Demer, Palin owes tax on per diem, state says, Anchorage Daily News, Feb. 17, 2009 (hat tip to Bethany Ansorge); Alaska: Palin owes per Diem Tax, New York Times (AP), Feb. 19, 2009.  Though not many specifics are provided, we do know that the Governor continued to charge the state for meals and incidentals when she spent time in Wasila as late as December 2008.

Congresspeople Seek Budget Consideration of Large Corporations' Use of Offshore Tax Havens to Avoid US Taxes

Senator Carl Levin (D-Mi) and several representatives--Rosa DeLauro (D-Ct), Lloyd Doggett (D-Tx) and Sander Levin (D-Mi)-- have written Peter Orszag, Obama's OMB Director, asking the Obama Administration to include in the FY 2010 budget proposal measures from the Stop Tax Haven Abuse Act (HR 2136, S 681 in the last Congressional session).  See Letter to Orszag, Feb. 20, 2009. They want to stop--or at least limit--the ability of large publicly traded corporations to use island tax shelters to avoid paying approximately $100 billion in US taxes.  This issue has become even more salient in the context of the TARP funding which has been handed out to financial institutions, many of which have subsidiaries in tax haven or financial privacy jurisdictions.  See the earlier ataxingmatter posting on the GAO report on the use of tax havens by US multinationals and federal contractors, here.

The letter notes the group's "deep concern with the continued practice by most of the United States' largest publicly traded companies--including many federal contractors and recipients of financial bailout funds--of using offshore tax havens or financial privacy jurisdictions to avoid paying U.S. taxes" and urges the Obama Administration "to consider proposals for shutting down offshore tax abuses" in crafting the 2010 budget.  Citing the GAO report's conclusion that "83 of the 100 largest publicly traded U.S. corporations, based on 2007 revenue, reported having subsidiaries in tax havens or financial privacy jursidctions," the letter  noted that 4 of those 83 had more than 100 apiece, with one having as many as 427 such subsidiaries. 

The group found the receipt of TARP funds by these offshore tax avoiders particularly galling.

Even more outrageous is the fact that a number of these firms are receiving funding through the Treasury Department's Troubled Asset Relief Program (TARP).  ...Morgan Stanley has 158 subsidiaries in the Cayman Islands, while Citigroup has 90 and Bank of America has 59.  [The three banks have received a total of $100 billion in the TARP funds.]...[T]he fact that hard working American taxpayers who play by the rules are providing funds to companies using tax haven subsidiaries that may help them dodge payment of their fair share of taxes is simply unacceptable. 

Right on, Senator Levin and friends.  It's high time that Congress got serious about preventing multinationals from using tax haven jurisdictions to avoid taxes that rightfully should be paid on their income.

Mark-to-Market under section 475 and "fair value" measurement--a couple forever?

Treasury regulations finalized under the Bush Administration provided a mark-to-market safe harbor for broker-dealers who mark their holdings to market under section 475.  The safe harbor essentially allows the banks to use the financial accounting measures as their measures for tax purpose.

I wrote a lengthy (ok--too lengthy) commentary on the issue before the regulations were finalized, tracing the history of tax accounting rules and some fundamental principles that underlay the overall tax system.  See Book-Tax Conformity and the Corporate Tax Shelter Debate: Assessing the Proposed Section 475 Mark-to-Market Safe Harbor, 24 Virginia Tax Review 301 (2004).  I pointed out that accounting scandals have shown that large corporations use complex financial products and transactions to puff or hid income, making it imperative to do an in-depth assessment of any plan to use financial accounting for tax purposes.  From examining a history of various proposals for conforming financial accounting (book) and tax accountting, I concluded that two concerns are paramount--whether conformity will enhance or reduce the structural coherence of the tax system and whether it supports the self-assessment principle that underlies our "voluntary" compliance scheme without unduly increasing the potential for manipulation of income determinations.  I concluded that the regulatory safe harbor conforming tax to financial accounting fell far short of normative requirements. "The case for conformity in this context rests almost entirely on lessening dealers' compliance burdens by eliminating the need for separate tax valuations."  That simply isn't a strong enough basis--given modern electronic devices for computations and storage--to permit the use of financial accounting rules for marking to market.

This credit crisis has certainly caused us to realize that the financial accounting standards for "fair value" are not yet what they need to be to deal with even the financial issues, much less the tax issues.  The Financial Accounting Standards Board continues to refine its fair value guidance, in the midst of intense lobbying from various perspectives about the ways that it should deal with market disruptions.  A key problem with fair value accounting for financial statement purposes --and perhaps even more worrisome for taxable income purposes--is the "lack of comparability resulting from the use of different measurement attributes." (Staff Position, below)  The FASB staff thinks increasing frequency and transparency of disclosures will help, since that will lead to "robust" discussions.  Of course, such robust discussions are not what is needed for tax purposes--uniformity among taxpayers is much more important.

There are a number of other questions that are relevant.  Are the prices for which one can sell a suspect asset during a market disruption the "fair value" of the asset?  Or should some other yardstick be used during such periods? How should investments in hedge funds and private equity funds be valued? How do we know when a transaction is distressed?  For the latest from FASB on possible additional guidance connected to fair value accounting (and other issues involving going concerns and subsequent events treatment) under consideration, see the following links:

• press release on the new fair value project (Feb. 18, 2009)
• Proposed FASB Staff Position No. FAS 107-b and APB 28-a (Mar. 2, 2009 deadline for comments)
• the proposed FASB standard on going concern
• text of the exposure draft on subsequent events

As FASB considers further developments, it is clear that having pegged a tax value to the accounting value means that accountants will be determining the answer to the "what is taxable income" question.  It may be necessary for Congress or Treasury to step in and modify the conformity rule, depending on the ultimate conclusions that FASB reaches about the proper way to value assets.  Perhaps that's just another reason that we should never have pegged taxation to financial accounting values, which have different purposes.

Links Worth Noting

My tax prof colleague Ted Seto has a sobering analysis of "The End of Supply Side Economics", over at his new blog, Understanding Tax.  Readers of ataxingmatter may well note a similarity to some of the issues frequently raised here--i.e., the long-term changes in our fiscal and economic policies under Reagan's marketarian "supply side" or "trickle down" theory and the fact that those changes have had some dire results.  Ted's post focuses on the way U.S. borrowing is financed, something that is becoming soberingly worrisome as we borrow trillions to beef up spindly banks or jump start the economy (not to mention--pay for our grossly overweight military and defense budget). 

Senator Charles Grassley has asked some important questions of Treasury Secretary Tim Geithner.  See his Feb. 12, 2009 letter on the federal mortgage modification plan that may use a considerable amount of the remaining TARP funds.

Coberly, on Angry Bear, posts some much needed reminders on the fake "crisis" in Social Security, No Crisis in Sight, Feb. 19, 2009.  And in related postings, rdan at Angry Bear probes the right's new push against "entitlements", Peterson is non-partisan?? and Fiscal Conservatives Begin Push Over Entitlements.

Mark Thoma's Economist's View has a lengthy analysis of the current housing discussion.  Obama's Housing Plan, Feb. 18, 2009.

Donald Boyd has produced an analysis of the state of states after the economic stimulus money runs out:  What Will Happen to State Budgets When the Money Runs Out?, The Rockefeller Institute of Government , Feb. 19, 2009.  Boyd notes that state revenues tend to take several years to recover after a recession.  While the states will undoubtedly benefit from the $150 billion stimulus through 2011, they will likely nonetheless face a significant fiscal gap--around 4% to 6% of general expenditures--in 2011-12 if they do not  take steps while the stimulus is available to "spread out baseline spending cuts and/or tax increases they will need to make".

Economic Stimulus--women and families

For readers interested in an assessment of the way that the economic stimulus bill will impact women, you might want to look at the National Women's Law Center's article, How the American Recovery and Reinvestment Act Addresses Women's Needs, Feb. 13, 2009.  Noting the pain for "women and families already struggling to make ends meet, the NWLC article focuses on several measures in the stimulus legislation that addresses their needs:

• child care and early education
• unemployment insurance
• child support
• health care
• assistance for low-income households
• education and job training
• job opportunities for women and
• tax benefits for individuals and families.