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Budget Deal? Sounds Like Another Attack in the Ongoing Class War...

MoveOn reports that Congress may be close to striking a deal on the budget approving something very like H.R.1, the House Bill proposed by the pro-corporatist, anti-populist Republican majority to strip funding for most of the post-World War II programs that promote human capital development, while retaining all the tax breaks for Big Business.  Full-blown class warfare of the business-owning/managing elite vs everybody else is underway.

Here're two items noted by MoveOn on these issues:

•  a report (updated March 1, 2011) from Center on Budget and Policy Priorities, House Bill Means Fewer Children in Head STart, Less Help for Students to Attend College, Less Job Training, and Less Funding for Clean Water;
• a report from the Center for Law and Social Policy on Projected Reduction in Children Served in Head Start Based on H.R.1-Fiscal Year 2011 Continuing Resolution;

Here are some devastating results for Michigan (footnote citations to above items removed) noted in the MoveOn release:

• $76 million would be cut from federal funds for clean and safe water in Michigan.
• 6,100 Michigan children would be immediately cut from Head Start, which provides comprehensive early childhood development services for at-risk children ages zero to five.$202 million would be cut from Pell Grants, affecting all 337,000 higher education students with those grants in Michigan.
• Job training and employment services would be effectively eliminated for 8,800 dislocated workers, 139,000 low-income adults, and 19,000 youths age 14 to 21.
• $4.8 million would be cut from law enforcement assistance, taking cops off the beat.

The GOP Agenda in Michigan: corporate taxes down, individual taxes up, unions down, bureaucratic meddling up

Michigan fared like much of the rest of the country in the 2010 elections--moving to a GOP-controlled state house and legsilature.  It lost a Democratic governor and put in a pro-business GOPer, Rick Snyder (former CEO of the Gateway computer company), with majority votes in almost every county except Detroit's Wayne County.  Similar lopsided votes put the GOP in many of the Michigan seats in the House of Representatives, including re-election of rightwinger and pro-business conservative Dave Camp, who now holds an influential tax writing chairmanship, and new Tea Party favorite Dan Benichek in the Upper Peninsula, who took the seat held by Democratic representative Bart Stupack for 18 years.  Returning Democrats in the House included veteran reps like Sander Levin, John Conyers, and John Dingell, along with freshman rep. Hansen Clarke and returning freshman Gary Peters.  For 2011-12, the GOP has a firm grip on the Michigan legislature, with 26 of the 38 State Senate seats and a clear majority (61 out of 110) of the State House seats.

What can we expect on taxes from this GOP-dominated state?  Bad news, I fear.  Gov. Snyder has already shown his support for expanding the GOP control of governmental functions through support of the recently passed financial manager legislation, allowing him to replace elected local officials with his appointees who will have enormous power, including the ability to break union contracts.  This legislation is of a piece with the union-busting, anti-public employee movements in Wisconsin, Florida and Ohio,and augers ill for sustainable democracy.  As already noted in the context of the Wisconsin debacle, the aim here is to weaken state government by targeting public employees to create divisive jealousies from workers who haven't fared well under the anti-union sentiment now dominanting the private marketplace.  Instead, we should be celebrating the willingness of public servants to accept do sometimes thankless government work, often for less than they could make in the private sector.  One likely result, as public employees lose job security and the benefits that partly compensated for the higher workloads and graver responsibilities of their jobs, is that state governments will suffer and state agencies will be "captured" by the businesses they regulate.  That will be detrimental to the economies and political communities of the states.

Snyder's tax proposals--set forth in the Feb. 17, 2011 document Reforming Michigan's Tax Structure--are in line with the general trend in the GOP to reduce the tax burden on businesses and allocate it towards individuals, especially vulnerable groups such as seniors and retirees, with the (unsupported) claim that business tax "simplification" and cuts will lead to economic growth and job creation. 

• Snyder proposes significant tax cuts for businesses through the elimination of the Michigan Single Business Tax and replacement with a flat 6% tax that would only be paid by businesses that operate in corporate form.  Partnerships and other types of business would be exempt, with the only Michigan tax collected that which is paid by the individuals who own the business equity.  The net cost is expected to be about $1.8 billion.  This is huge in a state that already plans drastic cuts to higher education based on revenue shortfalls, another case where self-created deficits are being used to lay a foundation rationale for ideological spending reductions that devalue public institutions and overvalue so-called "free market" alternatives. 
• Snyder would also ultimately eliminate the film incentives that have helped develop a burgeoning southeastern Michigan film industry: critics charge that this is foolhardy, since independent studies demonstrate the effectiveness of the film incentives in bringing new industry and jobs into the state, resulting in six dollars of new expenditures in the state for every one dollar of tax incentives.  See, e.g., Dave Krieger, How we all benefit from film incentives: an industry insider weighs in, Model D Media, Mar. 1, 2011.  Krieger notes that the expanding film industry in Michigan has been particularly successful because of the generosity of the credit and the variety of locales that Michigan offers for the film industry, from gritty city to idyllic countryside.  The new business brought in by the credit has had an impact, he claims, in many ancillary areas. Drivers, electricians, caterers, hotels, sign companies, antique stores, and many other industries and professions benefit, and much of the hiring has provided new jobs for laid off auto workers and others hit hard by the recession.   Community colleges even developed training programs for movie production and opened new opportunities for unemployed workers to retrain in a new industry.
• Snyder's proposal makes up for the $1.8 billion annual loss in income from lower business taxation by increasing the tax burden on individuals--especially the middle and lower income classes because of pension taation and elimination of the Michigan earned income tax credit.  The proposal moves towards the ideologically motivated flat tax being pushed by ultra-right wing groups that want to eliminate progressive taxation.  Snyder would lower the rate to a flat 4.25%  and "broaden the base"--eliminating most of the credits and deductions that currently apply.  Public and private pensions would become taxable, reducing the income of vulnerable retirees who live on fixed incomes and cannot easily bear the increased tax burden, while simultaneously reducing the value of the benefits that have been bargained for as a substitute, in many cases, for the higher wages that would be merited for public employees.  Snyder also proposes eliminating the Michigan earned income tax credit, ostensibly saving the state about $331 million, but ultimately costing it more in services and assistance needed for the vulnerable working families that currently receive the credit.  Changes listed in the proposal include the following:
  • Earned income tax credit
  • Energy efficient home improvement credit
  • Historic preservation credit
  • Film production wage withholding credit
  • City income tax[] credit
  • Gifts: public art, radio, colleges, universities, archives, museums, libraries credit
  • Community foundations, food banks and homeless shelters credit
  • College tuition and fees credit
  • Automobile donation credit
  • Family/Individual development accounts credit R
  • enewable energy surcharge credit
  • Medical care savings accounts credit

While elimination of some of the credits may make sense, many of these are of substantial importance to middle class Michiganers--especially the credit for college tuition and fees in an era when state support for public universities is trending ever downward, or the credit for city income taxes in places like Detroit with a substantial city tax burden.  Overall, the substitution of individual taxes for the $1.8 billion in business taxes lost in the pro-business tax proposals will shift the tax burden to people much less able to bear it compared to the elite who tend to own business equity.  These changes can be expected to have a deleterious effect on Michigan's economy. 

What should be done instead?  Michigan should retain a substantial tax on businesses operating in Michigan, so that profitable businesses (including sole proprietorships and partnerships) pay their fair share to support the state benefits that they receive (roads, court systems, communications and other utilities, police and fire protection, etc.).  Instead of a reduced-rate flat income tax without reasonable deductions and credits for the kinds of major expenses that can break a family, Michiganders should push for a constitutional amendment permitting a progressive income tax and should then enact such a tax with a maximum rate around 7 or 8% applicable to those with $1 million or more of annual income.  Although eliminating some of the incentive credits for businesses and individuals may make sense, the decisions should be made after independent study of the success or failure of the incentives in achieving their objectives.  It appears that the film incentives, for example, have been extraordinarily efficient in bringing a new industry into the state to take advantage of particular assets that Michigan offers.  While retaining those incentives long-term is likely not a wise approach, it may well be reasonable to retain the credit system for a sufficient start-up period for the industry, perhaps 10 or 15 years to ensure that workers, facilities and procedures can be established strongly in the state.  Credits like the earned income tax credit are vitally important to lower-income Michigan workers:  a still recessionary economy is not the time to remove this lifeline for them.  Removing it will just cost the state more in the long run, as health care and other services must be provided to these vulnerable groups even when they cannot afford to pay.  Michigan should use the resources from the reinvigorated business tax and progressive income tax to substantially increase its funding for higher education and for special programs for disadvantaged schools, such as the schools in Detroit's inner city neighborhoods, and to continue building ways for vulnerable Michiganders to retrain for new employment opportunities.

Snyder and the Michigan GOP are proposing short-sighted tax policies that will do actual harm to Michigan.  They are relying on the same old ideologies of the GOP that protect business owners and the wealthy while pushing the tax burden (and the absence of needed services because of insufficient funding) onto the middle class and poor.  This classical "free market" ideology has a record of consistent failures.  Broad based economic growth that builds a strong middle class is best supported by progressive tax policies that provide sufficient funding for physical infrastructure and human capital development.  It looks like Michigan is going to be yet another testing ground for these failed Chicago School "free marketarian" policies.  So perhaps the best news is that the people of the state may be waking up.  See Andrew Leonard, Red vs. Blue: The Great Midwestern Backlash, Salon.com, Mar. 18, 2011 (noting that support for the newly elected GOP governors in Wisconsin, Michigan and Ohio appears to be plummeting, in part because of their harsh budget cut policies coupled with corporate-friendly tax policies). 

new poll supports gay marriage

In Congress and in state legislatures, the country seems to be on a backward slide.  Hype about the federal and state deficits is being used as a blind for a systematic attack on programs to help the vulnerable. 

It's clear that the concern about the deficit is hype, since the same legislators that cry "we're broke" are ones that are intent on giving away even more federal and state tax revenues to business interests or to the wealthy--as witness the GOP insistence that the Bush tax cuts (not really wanted by a majority of Americans when they were first passed) be "extended" for two more years for everybody, including the ultra rich. 

We aren't really broke, as E.J. Dionne pointed out in his March 13th op-ed for the Washington Post.  In fact, we are still a very rich country, and the richest among us--both individuals and businesses--are getting a bigger share of the income and assets of the country without paying a fair share to support the benefits they receive.  We are in fact a tax haven country in which most of us could well afford to pay more in taxes to support important public programs.  Our problem isn't that we are broke.  Our problem is that no one, Republican or Democrat, has the political will to take positions adverse to the power of wealth in order to do what is needed to redress the imbalance in the allocation of capital.  An improved (meaning, more progressive) estate tax and enactment of higher tax rates on upper brackets of income, together with restoration of the pre-Bush tax rates on the middle class, would put the US back on a sustainable course.  Most Americans recognize that they will need to pay more in taxes.  The difficulty is giving the legislators at the state and federal level the guts to be statesmen rather than shills bought by the most influential lobbies.

At least on one thing the American public is rapidly letting everyone know how their values and understanding of issues is changing.  That's gay marriage.  Just a short time ago, the right-wing so-called "family values" lobby seemed to be gaining traction in the US with their pogrom against rights for gay couples.  Just a short while ago, less than a third of Americans were willing to say that they supported gay marriage.  But now a new poll is out--from the Washington Post/NBC News--that shows that a majority (albeit a slim one) of Americans supports gay marriage.  See Somashekhar & Craighill, Slim Majority Back Gay Marriage, Post-NBC Poll Says, Washington Post, Mar. 18, 2011.

That, my friends, is progress.  Could it be that Congress will see fit to repeal DOMA sometime soon so that it is clear that gay couples who have made a marriage commitment can enjoy the same benefits (and suffer the same disadvantages) as other married couples?  I hope so, though I admit that the odds are with this right-wing Congress it will take some time for the country's values on either taxes (we think corporations and the wealthy should pay more) or treatment of gays (we think the laws should not discriminate against them, including tax laws like joint return filing) to be reflected in congressional legislation.

Information Reporting on foreign depositors in US banks--Florida's GOP delegation shamefully supports tax evasion facilitation

Many wealthy Americans have taken advantage of banking secrecy in other countries, particularly Switzerland, to hide their assets and income from the United States, thus avoiding paying their fair share of taxes on their riches.  That practice became somewhat harder when reports on American accountholders became available to the government and the media were filled with stories of Swiss bankers for UBS carrying diamonds in tubes of toothpaste for their wealthy US clients, in order to help them evade US income tax laws.  The government instituted a voluntary disclosure program that permitted Americans with foreign accounts to come forward, at a relatively low penalty cost compared to the charges that could be assessed against them (including potentially criminal tax fraud charges).  When that program ended after thousands had voluntarily come forward, a new program (with a 25% penalty rather than the former program's 20% penalty) was instituted and is currently ongoing.  The result of the UBS episode was a deferred prosecution and a final agreement to reveal the names of about 4500 accountholders, presumably the largest accounts and the most likely to involve fraudulent tax evasion.  At the same time, there was some progress on the attempt to get offshore banking secrecy jurisdictions to be more open and transparent and to participate more readily in tax information exchange programs, so that it would be harder for US taxpayers to evade their tax obligations by hiding their assets offshore in those jurisdictions.  All this is praiseworthy, though there is still considerable progress to be made before we can conclude that it is generally difficult for the wealthy to hide their assets from the US tax collectors.

What is perhaps even more interesting is the fact that the US is a tax haven for the wealthy of other countries.  The US is a tax haven in part because of the withholding exemption for "portfolio" interest--allowing foreigners to earn income by making deposits in our banks without taxation.  We have also not required banks to provide information reporting on that income--so that those foreigners can receive income in the US and avoid paying appropriate taxes on it back in their home countries.  This will change under a proposed regulation issued by the Treasury department in a move to make the US more forthcoming in tax information exchanges with other countries in hopes of reciprocity.  See  IRB 2011-8 regarding the new information reporting requirement under Section 6049 (REG-146097-09) (requiring information reporting for bank deposit interest payable to nonresident alien individuals).  The notice of proposed regulations includes the following explanation of the need for the change:

This extension is appropriate for several reasons. First, since the 2002 proposed regulations [which limited information reporting to accounts of nonresident aliens from a particular list of countries] were released, there is a growing global consensus regarding the importance of cooperative information exchange for tax purposes that has developed. Significant agreements have been reached on international standards for the exchange of information, including, for example, the understanding that information exchange will not be limited by bank secrecy or the absence of a domestic tax interest. Second, requiring routine reporting to the IRS of all U.S. bank deposit interest paid to any nonresident alien individual will further strengthen the United States exchange of information program, consistent with adequate provisions for reciprocity, usability, and confidentiality in respect of this information. Finally, this extension will help to improve voluntary compliance by U.S. taxpayers by making it more difficult to avoid the U.S. information reporting system (such as through false claims of foreign status).

This increase in information reporting is appropriate, if we want other countries to reciprocate and make it easier for us to catch our own tax cheats.  But the current neo-conservative GOP members of Congress seem to think tax cheating against other countries is just fine, so long as their big business buddies can make money off it.  See, e.g., this letter from the Flordia GOP delegation in the House regarding their opposition to these proposed rules: Posey leads delegation effort to stop harmful IRS regulation (website of House Republican representative William Posey).  What's the argument in favor of taking no action to ensure that US banks aren't helping foreigners evade their home taxes?  Seems to me it boils down to a narrow-minded self-interest that is willing to sacrifice global cooperation and reasonableness in favor of the profits of Florida banks.  The Florida Republican delegation claims that reporting on the assets held will lead foreign depositors to take all of the assets out of Florida's banks, and their "worry" is that there will therefore be less money available for lending to legitimate US businesses.

These arguments seem extreme to me.   First, the arguments assume that all of those foreign deposits are sitting in US banks solely for tax evasion purposes.  They disregard the many other reasons that US banks may provide a positive choice for foreign depositors, including the stability of the US system in a world of highly volatile banking pressures, especially as European banks come into question because of the debt crises in Greek, Portugal and Spain; the lack of significant volatility compared to home country banks; or the general security of US deposits compared to the threat of strongman takeover in some third world countries.  Second, we'd have to assume that there isn't a pure economic advantage in having assets in US banks compared to home country banks--whether from higher interest rates or easier transfer and liquidity provisions.  And of course, to the extent that the rationale for the deposit being held in US banks is to facilitate tax evasion, we'd have to conclude that it was reasonable for US banks to profit from helping foreigners be tax cheats in their foreign countries. 

That last argument is especially worrisome, because it can easily be turned against us to justify banking secrecy in other jurisdictions that permit US taxpayers to avoid US taxes.  Maybe that's the point for these GOP legislators--as a party beholden to the wealthy elite that has garnered most of the advantages of productivity gains over the last decades, they may well have lost their ability to comprehend the importance of tax compliance.  As they push for corporate tax breaks while insisting that the country is "broke", they are essentially arguing that they don't care about ordinary Americans.  Being against responsible measures to assure that the US banks don't act as facilitators for other countries' taxpayers to avoid their tax obligation fits well with that view.  Shame on them.

Internet sales and state sales taxes--the case of Amazon.com

[edited 3/16 to add link to website "stand with main street"]

Most people will likely have read that Amazon.com is a fierce fighter of any obligation to collect state sales taxes on its retail sales.  There's a website now devoted to debunking the various reasons Amazon.com provides for not collecting sales taxes.  See standwithmainstreet.com (offering a bundle of reasons for why Amazon's refusal to collect sales taxes don't make sense).

 In Texas, where Amazon has one of its huge warehouses, it is at battle with the state, which claims that the warehouse is sufficient nexus to require the company to collect state sales tax on its sales. Amazon's response?  It plans to dump the warehouse and dump plans for building another one.  In other states, like Illinois, legislatures are considering legislation that will require the company to collect sales tax whenever it has affiliates that run its advertising and create access points for it in the state.  Amazon says it will just dump the affiliates, and run its online sales solely through its own website.  See Kopytoff, Amazon Pressured on Sales Tax, New York Times, Mar. 13, 2011.

So what's the right answer here?  It seems to me that the Supreme Court needs to update its understanding of nexus for constitutional purposes to take into account the significant changes in the way we interact based on the new context created by a wireless world.  Physical presence once readily defined the reach of a commercial entity--if it had a store or warehouse distribution point or other physical presence in the state, it had a presence in the state; if it did not have such a site in the state, it did not have a presence in the state.  But surely that notion of physical presence should no longer underlie the constitutional reach of a state's ability to require companies to collect the state's sales tax on the companies' sales within the state.  If it does so limit enforcement, it creates a wholly artificial differentiation between companies that run actual physical stores in the state (often with online counterparts) and companies that interact with residents of the states through their online sites. And that differentiation is problematic, because it gives those companies that operate solely online an unfair advantage, in that they do not have to carry out the administrative task of collecting tax and turning it over to the state.  And since many residents in the state will not self-report the tax owed on items that they purchase online (and without the company's report the state itself would have tremendous difficulty attempting to enforce collection), residents will consider the online purchase less costly--treating the inappropriate tax savings achieved by failure to report as required (and failure of the internet company to collect the tax) as a price advantage for the online merchant and causing the in-state company to suffer a comparative loss of sales.  That results in unfair discrimination in favor of out of state companies--something that runs counter to the spirit of the commerce clause, if not actually a violation of it.

The best answer, then, would be for the Supreme Court to revisit its conclusion in the 1992 case Quill Corporation v North Dakota, which required a physical presence in order for states to mandate collection of their sales taxes by companies that make sales to their residents.  The Supreme Court should overturn that precedent and conclude that online access to a state and more than a de minimis number of internet sales to a state's residents constitute sufficient nexus to permit a state to require a commercial entity to collect sales tax at the point of sale on behalf of the state.

It is not as if that is such a complex requirement that it would be too difficult to ask companies to do.  Companies that sell over the internet have already got various kinds of procedures in place that take account of where the purchaser is located compared to where the product is stored--they charge for shipping and handling and they compute the charges for sales tax in those cases where the purchasers are residents of states in which they have a nexus.  It would be relatively simple for them to extend such calculations to include appropriate sales tax in each state. 

But will this Supreme Court recognize the error of its ways?  It's doubtful.  The majority of the court is made up of rightwingers who are exceedingly friendly to big business.  Much of the "originalism" and "traditionalism" used in that majority's interpretation of cases is relied on because it is super-friendly to big business--that is, a traditionalist approach as employed by Scalia and Thomas may tend to result in decisions that are super protective of property rights and business interests at the cost of the "little guy" who does not have large property interests at stake.  Combine that with the right's tendency to disdain the interests of government and one suspects that it will be decades before a new Supreme Court reconsiders the Quill decision and comes to the correct conclusion that physical presence is an archaic test in an age of globalization and the world-wide web.

Audit rates for the rich increasing--about time

Note to readers:  sorry for the long absence again--personal circumstances prevented my blogging for the last several weeks.  I hope that I can again resume regular blogging now, but do apologize for the absence.

The IRS recently released its 2010 Data Book, which describes the agency's activities for the 2010 FY ending September 30, 2010. 

One important part of the data revealed is a much-needed focus on the compliance of wealthy taxpayers.  IRS Commission Doug Shulman admitted in late 2009 that the agency needed to shift its focus to pay more attention to high-net-worth individuals--at least in part to reassure ordinary Americans that the rich weren't able to avoid compliance (i.e., the idea that they might be able to avoid paying taxes simply because they had lots of money and could seek out tax shelters unavailable to the rest of us).  The IRS created a group within the agency focused on "global high wealth" individuals--those with $10 million or more.  Plans for the group required increased audits as a way to call attention to the problems and for the agency to teach itself more about the ways that these high-wealth individuals maintain their wealth and receive their income.  The Data Book shows that the IRS audited 18.4% of those high-income taxpayers in FY 2010, up considerably from the rate of 10.6% the prior fiscal year.

The release describing the databooks highlights the following information--including the fact that tax revenues are down compared to prior years.

During fiscal year 2010, the IRS collected $2.3 trillion in revenue, and processed 230 million returns. More than 116 million returns, including almost 70 percent of individual income tax returns, were filed electronically. More than 119 million individual income tax return filers received a tax refund, totaling $358 billion. In fiscal year 2010, IRS spent an average of 53 cents to collect each $100 of tax revenue.

The IRS examined more than 1.5 million individual income tax returns and nearly 30,000 returns filed by corporations, excluding S corporations. The IRS provided taxpayer assistance through 305 million visits to IRS.gov and assisted more than 78 million taxpayers through its telephone helpline or at walk-in sites.

Confessions of a Climate Scientist on the U.S. Chamber of Commerce

Bill McKibben, an environmentalist at Middlebury College who co-founded 350.org to campaign for work directed against climate change, was attacked recently by Glenn Beck as being a communist.  He writes with considerable humor about what that means, in "My Life as a Communist", Washington Post,com, Mar. 1, 2011, showing how fundamental values underlying the American experiment in democracy seem to get labeled "communist" these days--ideals such as supporting equality; basing policy on facts rather than mere opinions; or understanding the ways that special interests can negatively impact policy decisions; or even stepping back to assess just whose interests are being served by proposed "solutions" to problems. 

He deals with all of those in his discussion of the negative impact of business lobbying that insists that millions of people should adapt to climate change rather than the 16 biggest companies funding the Chamber of Commerce having to adapt their business models.  That section on the Chamber of Commerce is worth reading, so I excerpt it here.

[E]arlier in the week, I'd written a widely circulated essay that attacked the U.S. Chamber of Commerce, which on its own Web site says that as "the voice of business, the Chamber's core purpose is to fight for free enterprise." And yet I scourged them - because they've spent the past few years opposing any action on climate change. Indeed, they submitted a petition to the Environmental Protection Agency arguing that it should avoid regulating carbon emissions because, in the event of global warming, "populations can acclimatize to warmer climates via a range of behavioral, physiological, and technological adaptations."

To me that sounds absurd. Instead of the 16 companies that provided more than half the chamber's budget adapting their business models to a world of safe renewable energy, they wished all people everywhere and forever to change their physiologies. But now I see that my protests can be read as a gesture of support for human solidarity, with all that implies.

I should have known better than to go after the U.S. Chamber of Commerce. After all, Mr. Beck just last year held a telethon on its behalf, encouraging listeners to send the chamber checks, and ponying up $10,000 of his own $32 million in earnings. "They are us," he'd explained - and indeed, an executive of the chamber called in to thank him.

The Chamber of Commerce spends more money than anyone else lobbying Congress. They dropped hundreds of thousands on the last state elections in Wisconsin, all of it for the side now standing up for union-busting, I mean human freedom.

Corporatism is on display here, in the way the Chamber of Commerce and Big Money like the Koch brothers work against ideas that support ordinary Americans while doing everything possible to further an agenda that favors the wealthy elite and corporate powerhouses.  If ordinary people don't wake up and take back the power to set the agenda, I fear we will be doomed to a life little removed from serfdom to the corporate elite.