ataxingmatter

Schwab's Brute Market Capitalism Prescription is worse than a placebo

Charles Schwab has an opinion piece in the Wall Street Journal on his views on what will and won't work to create jobs. See Every Job Requires an Entrepreneur, Wall St. Journal, Sept, 27, 2011, at A15.

I. What won't work, according to Schwab

Responding to President Obama's Sept. 8 jobs speech, Schwab  agrees with Obama that "our recovery will be driven not by Washington, but by our businesses and our workers."  But that's about as far as the agreement goes.  He runs through a laundry list of things that he says "cannot" work (listed below in the unconnected order in which he has them in the piece):

• government spending
• increased taxes
• "artificial" stimulation of the economy
• government regulation
• "shaming the successful"
• redistributing income
• raising taxes on Americans earning more than $1 million a year.

Let's unpack some of this.

Re "shaming the successful"    This is one thing on his list that is put there just to draw the attention and loyalty of the right-wingers.  Nobody suggests that we should "shame the successful".  If anything, our cultural and government policies tend too far towards the opposite.  We praise the successful and treat them like mini-gods, allowing the CEO to benefit from the intellectual property developments of a genius in their lab who gets almost nothing.  We salute the Kathy Giffords, even when it is someone else in their enterprise that made their success possible (think cheap labor in sweatshops that made clothing manufacturers successful).   We toast the Donald Trumps for their "success"--even when it includes numerous failures that have been made less painful by various provisions of the law (think of bankruptcies made more palatable to trump--but not to his creditors--by his ability to "require" hundreds of thousands in monthly income to "maintain" the luxurious lifestyle to which he was accustomed).  We even make celebrities out of assholes who drive our country to ruin--think of the heads of any investment bank dealing in subprime mortgages.   In fact, most everybody makes a practice of applauding the successful, urging that they be followed as role-models, giving them awards, and slipping them nice big loopholes in the state and federal tax codes. 

(Of course, not shaming the successful does not mean that we cannot ask them to bear more of the tax burden in light of their extraordinary success.  More on that later.)

Re "artificially" stimulating the economy:  There's another item that is worded the way it is to set up an a priori conclusion along the lines desired by the author--that little phrase about "artificial" stimulation of the economy.  That (together with the first item about government spending) is an attack on Keynesian policies for dealing with the kinds of tough lingering recessions that we are experiencing today.  Folks, if your heart isn't working, then the docs in the ER are going to apply "artificial" stimulation to get it going again.  When workers are being dumped by businesses while managers make even vaster amounts than before, when large private enterprises are hoarding resources (the trillion and a half of corporate cash sitting uninvested, both here and abroad) and when the financial industry is hoarding its resources (banks reluctant to lend to small businesses, even ones that have shown themselves to be successful), then it is clear that the economic heart isn't working. Government spending functions like those heart shocks in a stagnant economy--the right amount (i.e., enough to be stimulative for long enough) can shock the economic heart into action again and get it moving.  Failure to do it leads to prolonged economic decline, like the Great Depression.

Re Redistributing income:  Redistributing income is merely a description of what any system of taxation does, in every case except in that probably nonexistent equilibrium scenario where each dollar of tax a person pays results in a dollar of benefit to that same person.  The question is only what direction the redistribution goes--does the tax system shore up the financially vulnerable by redistributing towards equality or does it pad the couches of the already financially comfortable by redistributing upwards? 

The problem is that our social system as a whole has been redistributing upwards for the past forty years.  Some examples would include the following: 

• erosion of worker rights and bargaining power, resulting in more and more powerful management that unfairly garners more and more of the productivity gains for managers and owners
  • Also relevant here is the battering of workers' pension plans which corporate enterprises consistently underfunded, while managers' lucrative severance and pension rights mushroomed; all occuring at the same time as there is an escalated attack on publicly funded social welfare programs that provide a critical backstop to what little ordinary workers can set aside during good times
• erosion of voter rights as states become more adept at gerrymandering to ensure the re-election of the status quo
  • This is especially galling when it would be relatively simple to mandate use of a single computerized districting approach nationwide, ensuring a fair system
• constant expansion of statutory provisions (including tax) that benefit particular industries and their wealthy owner/managers (Big Oil, Big Pharma, Big Medicine, Big Banks), from so-called tort reforms that limit remedies for those seriously harmed by corporate malfeasance to tax expenditures that have provided permanent long-term subsidies to established and monopolistic industries (percentage depletion, R&D credit, active financing exception; tax-free reorganization provisions, especially ones that permit offshoring of business activity) rather than using the code judiciously to support the development of promising new industries

In short, much of our current system exists to maintain the status quo of the class distribution in society.  Capitalism will always bend in that direction, since financial resources create political power, which supports capitalist capture and setting the rules to support those in power.  Thus, a strong capitalistic system will favor capital (and the holders of capital) and disfavor labor.  It requires some government intervention to create some socialist counterbalances, such as the social safety net programs of Social Security and Medicare, to temper capitalism's push for unilateral advantage to capitalists. 

Our tax system similarly currently favors capital throughout--from the preferential rate for capital gains, to the net capital gain treatment of corporate dividends, to the favorable netting of certain kinds of business gains under section 1231 (yielding preferentially taxed capital gains when there are net gains and higher valued ordinary deductions when there are net losses) to the barely felt pinch of the estate tax (especially with the recent revisions raising exemptions and lowering rates, but also especially because of the ridiculous gambits with discounts and trusts and other run-arounds that could easily be removed legislatively).  With the 1986 reforms, Congress acted to eliminate, finally, the preferential rate for capital gains, but it took lobbyists only a few short years to get the preferential rate reinstated. the Clinton "reforms" lowered the rate, and the Bush reforms lowered it even more (to zero in some cases), with the preference extended to corporate dividends. 

The result is that the wealthy who own most of the corporate assets enjoy a very favored tax status for their income (as well as favored status in most other aspects of their lives), and the United States is one of the most unequal nations on earth--with the many problems and heartaches that go with that inequality.  See Richard Wilkinson & Kate Pickett, The Spirit Level:  Why Greater Equality Makes Societies Stronger, Bloomsbury Press, NY (2009) (surveying extensive studies on the impact of inequality on societies to conclude that it is inequality, even more than the level of income, that causes measurable harm to all income levels in a society--mental health, poverty, physical health, life expectancy, obesity, educational performance, teen births, violence, imprisonment and social mobility).

Re increasing taxes, and taxing millionaires more.  Schwab of course echoes the Tea Party line that all increases in taxes--even on millionaires who have made out like bandits in the four decades since Reagan--would be inherently bad.  The right doesn't even deem it necessary to provide an explanation for why they think this.  Ryan laments that higher taxes (actually hitting only a tiny portion of small business owners) would kill job creation, even though there's no empirical association of lowering taxes with creating jobs.  Schwab just lets all that built-up anti-tax lobbying speak for itself.

But all of the above provides ample reason for reforming the tax code so that it eliminates these extraordinarily favorable tax privileges that the wealthy and the huge multinational corporations currently enjoy--both by eliminating loopholes in corporate taxation (and especially by restricting their ability to grow ever larger through tax-free restructurings or to move assets offshore without paying tax on built-in appreciation) and in the personal provisions that give such benefit to wealthy taxpayers (exclusions of types of income; deductions and credits, etc.), and by increasing the rates of taxation, at least on the upper class in the income distribution (the top 20%).  Those at the very top have contributed no more but gotten all of the productivity gains, leaving ordinary Americans hurting.  It is only fair to ask them to pay more in taxes, to pay forward some of the huge benefits they have received.

And there are a number of other tax increases that we should consider--such as the financial transaction tax that is moving forward in the EU this week.  See, e.g., Phillipe Douze-Blazy, To Ease the Crisis, Tax Financial Transactions, New York Times (Sept. 28, 2011); Stephen Castle, Europe Readies Plan for Tax on Financial Transactions, New York Times, B5 (Sept. 29, 2011); Alessandro Torello, EU Details Its Plan to Tax Trades, Wall St. Journal (Sept. 29, 2011); Greg McKenna, The Bots of FX, Naked Capitalism (Sept. 29, 2011) (article and comments considering the potential beneficial effect of discouraging high frequency trades).

II.  So what's his prescription?

Schwab says the following: (i) businesses are started by entrepreneurs, (ii) Entreprenurial activity requires investment, and (iii) investment requires "confidence" and "certainty"--"Today's uncertainty on these issues--stemming from a barrage of new complex regulations and legislation--is a roadblock to investment." ... And he urges leaders in both political parties to "review every piece of existing legislation and regulation with a claer eye to what impact it will have on business and growth."

In other words, Schwab opines that if only government would quit doing what government is supposed to do--regulate businesses to protect consumers, protect the environment, ensure that businesses pay for their true costs rather than leaving costs as "externalities" that we suffer from--and ONLY pay attention to what business wants (and the kind of "growth" that results from that), then businesses would create jobs. 

That's wrong on three scores.

First, experience with such "laissez faire" government shows that what results from market capitalism without restraint is monopoly and stagnation and lack of innovation.  It is in fact important to have government as a partner in the economy (representing the people's desires that they cannot implement singlehandedly), else brute capitalism will take over and the overwhelming majority of ordinary people will lose out.  George Bush's reign was one in which a good bit of the "free marketarian" ideology was followed, and it had a LOUSY job creation record.

Second, businesses aren't not investing in ways that create jobs because of "uncertainty" about taxes or regulations or stimulus programs.  The uncertainty has been around since humans engaged in market transactions--how much will the sovereign exact from this transaction; what requirements on place, manner of undertaking the transaction will there be, who else will need to benefit???  That uncertainty is just one of the risks that every business considers, and not one of the major risks like counterparty risk, commodity pricing risks, natural disaster risks, consumer dissatisfaction risk, etc.  On the contrary, those things have in fact created jobs, from businesses that remove asbestos to construction workers building schools. 

Third, the kind of growth that results from government's dereliction of its duty to the people, in the interest of creating the kind of market capitalism growth that has rocketed the upper-class into the ultra rich zones while leaving the middle classes collapsing into the poverty strick, is not what servesthe people.  The people are served by creating a sustainable economy in which decent livelihoods can be had by all, not by creating a kind of restricted growth zone based on market cap applicable only to rich managers and owners. 

Suggesting that "proposed laws and regulations should be put to a simple test [of asking] what will this do to encourage businesses and entrepreneurs to invest?" leaves out most of what government should be doing vis a vis the economy--protecting its citizens from the vagaries of the economic marketplace and ensuring that the markets operate for the good of society.

Friday Animations: Telnaes--If Social Security Were Privatized (Wash. Post), and Jeff Madrick's reminder on the importance of Social Security

Ann Telnaes, Washington Post editorial animator, posted on September 22 the following take on the right's drive to privatize Social Security.

  

 

Privatization is, of course, not the only harmful treatment of Social Security being pushed by the right these days.  There's an awful lot of rhetoric about needing to cut Social Security benefits.  These arguments are mostly framed in terms of "entitlements" that are causing our budget deficit.  In fact, hwever, Social Security benefits are EARNED benefits, and the Social Security system is NOT a current cause of the budget deficits.  Further, the Social Security system (and the related Medicare and Medicaid programs) have been instrumental in keeping elderly Americans out of poverty.

Jeff Madrick reminds us not to take the fact that Social Security has been enormously successful at accomplishing its purpose as a reason to decimate Social Security and no longer accomplish that important purpose, in "Beware the Wrong Lessons from Poverty and Income Data," at TripleCrisis (hat tip Mark Thoma, the Economist's View)--summed up in the introductory statement that "The young are sinking into poverty faster than the elderly because the social safety net is working and the economy isn’t."  A few excerpts follow, but read the full post at the link above.

The poverty data released by the Census Bureau last week may well be the straw that broke the camel’s back — the camel being those deliberately blind people who can’t seem to acknowledge that most Americans are doing poorly. Average Americans should not be the ones who have to shoulder the burden of balancing the budget, even if it needed balancing soon.

***

Even more deplorable, the young in America have been hit hardest. Economists at Northeastern University have been showing for years how low wages are for those in their twenties, if they can find a job at all. Now they calculate that 37 percent of young families with children live in poverty — more than one in three. It was one in five when Bush came to office.

But the reason I am writing this is not merely that it gives the “New Obama” some fuel — that is, the Obama who now insists on raising taxes and has resisted some of the worst ideas for cutting Social Security and Medicare, like raising the eligibility age. What concerns me is that some in the media are highlighting the fact that the elderly have taken a far smaller hit than the rest. Is this going to be the new argument for reducing Social Security and Medicare benefits?

The truth is much the opposite: These findings are an argument for a stronger safety net. The reason the elderly are not doing as poorly is precisely because of Social Security, Medicare, and Medicaid. The reason the other groups are losing ground is that the economy has failed to create jobs for more than 10 years and didn’t do that well in the preceding 20 years.

 

Ratings Agencies, the financial crisis, and tax.....

As many are aware, the ratings agencies play an outsize role in financial markets.  Their analysis of a debt issuance has much to do with whether the sponsor can sell it--if it is rated very high (triple A, for example), investors assume it is extraordinarily unlikely that there will be a default loss.  On the contrary, if it is rated with junk bond status, investors understand they are taking a significant risk of default and will look for high payouts early in the game in order to make the risk palatable. 

In the booming securitization business that was a central factor in the 2007-8 financial crisis and the Great Recession that is its aftermath, rating agency determinations on mortgage-backed securities and collateralized debt obligations--especially on the ones that were resecuritizations of prior securitization tranches like "re-REMICs" and "CDOs-squared" such as the Delphinus 2007-1 CDO (see pitchbook link at bottom)--had a great deal to do with the ability of sponsors to cram low-quality debt into securitization vehicles and sell it off to buyers unaware of the significant risk they were taking on.

Rating agency determinations play a huge role, as well, in the tax treatment of financial instruments.  IN the past, tax practitioners considered that rating agencies had done "deep" due diligence and were well aware of the quality of the collateral backing a debt issuance, the reasonably expected future cash flows of the entity issuing the debt, and the equity structure underlying and supporting the debt.  Accordingly, if you asked a tax practitioner in one of the firms doing a good bit of capital market work what they generally looked at to determine whether a financial instrument labeled debt was indeed to be treated as "debt in substance" for tax purposes, that practitioner would likely point to the credit rating as one of the primary factors, along with the amount of capital  in the entity and the terms of the debt--in particular the interest rate.  (The latter is significant for several reasons.  For example, if it is a rate that varies based on enterprise success or a rate that is extraordinarily high compared to market rate for similar debt, then the return looks more like the kind of return one expects on equity.)

So one of the questions frequently asked by those outside Wall Street is--why are rating agencies still flying high, without suffering any obvious repercussions from their so-wrong ratings determinations on so many securitization interests filled with "toxic" debt like subprime mortgage loans? 

Rating agencies claim as a defense that their ratings are 'mere' opinions that qualify for First Amendment protection--i.e., somewhat like car salesmen who are allowed to engage in ads filled with obvious sales puffery without redress from the buyer/victim that falls for the puffery.   There hasn't been a good test of that First Amendment defense in the context of the financial crisis and the securitization juggernaut fueled by high ratings of questionable debt pools filled with subprime loans.  But it may yet be coming.

Yves Smith explores the meaning of the SEC's Wells notice to Standard & Poors regarding their rating of a 2007 Magnetar CDO called Delphinius, in Is the SEC Finally Taking Serious Aim at the Ratings Agencies?, Naked Capitalism, Sept. 27, 2011.  The Delphinus CDO at issue here has a pitchbook showing asset makeup (page 11) of only 20% "prime" residential mortgage-backed securities (RMBS), but 48% of "mid-prime" RMBS, 20% subprime RMBS and 7% CDO-squared securities (often the dregs unsalable from prior securitizations); but a ratings expectation that  80% of its securities would be listed as AAA/Aaa notes and an additional 8% listed as AA/a2 notes.  (See pitchbook link, below)  The catch for S&P in this instance may be that they had actual knowledge that this particular securitization was crappy at the time that they issued their stellar rating opinion on most of the tranches.  As pointed out in the Naked Capitalism post: the tripe-A rating was given in August but S&P started downgrading them before the end of the year; emails found by Senator Levin's investigatory panel indicated that S&P knew at least some of the securities backing the deal weren't of the type supposed to be put in it under the deal documents (which was already fairly low quality, as indicated above); and S&P had already downgraded 600 subordinated MBS bonds based on subprime loans in July of that year right before it rated this deal, which was one of the last CDOs before the bubble burst.

For other commentary on this issue, see:

David Dayen, SEC Puts Standard and Poor's on Notice for Civil Charges on 2007 MBS, Firedoglake, Sept. 27, 2011 (reminding us that Magnetar is "the hedge fund which famolusly created bad securities and then bet against them to make money" and quoting Pro Publica's excerpt from last year's Senate investigation).

Marian Wang, In a First, SEC Warns Rating Agency It May Bring Financial Crisis Lawsuit, ProPublica.org, Sept. 26, 2011 (including the Delphinus CDO 2007-1 Pitchbook). 

Some odds and ends regarding the pirchbook:  The pitchbook --developed in 2007--shows a "lifetime impairment rate by asset type" graph that uses data through 2005 for securities issued from 1993-2004, a period that likely fails to capture the known information about the rapid deterioration of these kinds of deals at the time.  Another interesting tidbit from the deal pitchbook--the collateral manager (Delaware Investments, a member of the Lincoln Financial Group (primarily an insurance group of firms) shows its 'fixed income assets under management' on page 24, consisting of about one-third structured products made up of CDOs, CMBS, ABS, mortgage loans (24.5%) and MBS (43.2%), for which it also provides the "quality rating" (except fot the mortgage loans) showing that 74.9% have a rating agency rating of triple-A.  So the rating agency influences the buyer both through the direct rating of the securitization tranches and through the rating of the products held by the asset manager (as an indirect indication of the quality of that manager).  It also brags about the 10 CDOs with assets of about $6 billion that it launched since 2000 (page 26), including a synthetic municipal bond CDO and four synthetic corporate CDOs, and its "long term commitment to the CDO business" and assurance that it operates "in the best interests of investors in our CDOs" to "deliver[] CDO products of the best possible quality to investors" with "a large number of experienced investment professionals" managing the ABS and CDOs, at least one of whom is described as having "deep insight on the economy, consumer credit, and housing market".  It mentions that several of its investment professionals are real quants--the head of the derivatives trading desk and leader in synthetic credit trading activities whose "quantitative research skills in synthetic structured products and CMBS are highly beneficial"; the specialist in synthetic CDOs who "specializes in analyzing complicated financial instruments using quantitative analysis"; and another quant who "has written a book on ABA and MBS."  The pitchbook also reminds one of a car salesman's sales puffery, doesn't it...

Is Ryan's Worry about taxing job creators worthy of focus?

Paul Ryan--Republican from Wisconsin, radical right in perspectives, and chair of the House Budget Committee--is marching in lockstep with the radical right minority that is holding the majority of the US hostage in pursuit of its dream of decimating the federal government's human capital and safety net programs.  In a September 18 appearance on Fox News (hat tip to OmbWatch, below), Ryan made that clear in objecting to Obama's jobs proposal by claiming that any tax increase that would hit the wealthiest small businesspeople would be a sure-fire way to undo job creation.

The other thing, in the tax side is permanent tax increases on job creators doesn't work to grow the economy. It's actually fueling the uncertainty that is hurting job growth right now. And don't forget the fact that most small businesses file taxes as individuals. So, when you are raising these top tax rates, you're raising taxes on these job creators where more than half of Americans get their jobs from in this country.

OMB Watch's Craig Jennings  has some very good graphs and a sharp analysis of the lack of facts behind Ryan's pretextual 'I care about jobs'  objection to taxing wealthy small business owners, at What Happens When We Tax the "Job Creators", OMBWatch.org (Sept. 22, 2011).  

In essence, OMBWatch points out that

1) very few small business owners make enough to be in the top two income brackets (only about 2 percent). 

Aside:  Isn't it more likely that the "job engines" in our society are tose genuine entrepreneurs that are starting businesses with a few employees and making some money for themselves but not enough to be in those top income brackets?

2) For those who are in that rarified group making more than $300,000 in take-home profits, a tax increase of about $5000 more a year wouldn't be enought to change their minds on hiring decisions.  They hire if they think they can expand their business and make more, and don't refuse to hire just because they make $295,000 in after-tax income in a year instead of $300,000. 

3) Empirical data support the conclusion stated in point (2).  There is no statistically relevant relationship between changes in top marginal income tax rates (13 of them since 1945) and following year decreases or increases in employment.  Employment increases sometimes and decreases other times when rates go down; employment increases sometimes and decreases other times when rates go up.  A graph of changes in the top marginal income tax rates against changes in private sector jobs between 1945 and 2010 shows no correlation--top rates go mostly down, and average monthly private sector job growth varies up and down without correlation. (See chart below, from OMBWatch 9/22/11)

Return Preparer Guidance supplemented

Back in September 2010, the IRS issued final regulations under section 6109 requiring those who prepare tax returns to have a "preparer tax identification number" (PTIN).  Only attorneys, CPAs, enrolled agents and registered tax return preparers were initially eligible for a PTIN, but Notice 2011-6 created two exceptions under Reg. 1.6109-2(h) permitting two additional groups to obtain PTINs and prepare tax returns, if all applicable compliance and suitability checks were satisfactorily completed.  These included certain individuals that are supervised by PTIN attorneys, CPAs, and enrolled agents/actuaries who sign the return prepared by the supervisee as well as a transition rule covering those who certify that they do not prepare types of returns covered by the PTIN rules (the initial PTIN requirement applies only to individual tax returns).

In July 2011, the Treasury and IRS also amended the rules governing practice before the IRS in 31 CFR Part 10(commonly referred to as "Circular 230") to add provisions related to the new registered tax return preparer requirement.  Those rules broaden the definition of "practice before the IRS" to include preparing a return for compensation, and broaden the types of practitioners covered by the rules to include registered tax return preparers, requiring them to pass a competency exam and comply with any other established requirements.

The IRS released additional guidance for the new return preparer rules on Tuesday, Sept. 27, 2011:  (i)  IR-2011-96, in which it provided additional information about the renewal process for PTINs (preparer tax identification numbers), testing procedures, and CLE requirements; (ii) Notice 2011-80, providing guidance about renewal of PTINs; and (iii) a notice of proposed rulemaking, REG-116284-11, in which it set out new user fee requirements for the competency test and fingerprinting (where applicable): the amounts in the proposed regs are $27 and $33, respectively, plus any third-party vendor charges.

 Provisional PTINs are currently being issued to enable people to prepare tax returns during the transition to the full program in which competency testing will take place.  That provisional PTIN process will continue through at least April 18, 2012.  Generally, those who currently have provisional PTINs will have to pass a "suitability check" for issuance of a permanent PTIN, which will include fingerprinting to enable a search of the FBI database for those who reside or are employed in the US. (The IRS is still considering possible additional requirements as part of the suitability check.)

Notice 2011-80 indicates that PTINs must be renewed each calendar year during the last quarter (between October 15 and December 31) using the online application or paper FORM W-12.  The renewal fee for 2012 is $64.25.  The competency examination requirement will apply for renewing PTINs for 2013 and later years. 

 

Disaster Aid Disaster Averted, barely

Once again, Republicans intent on obstructing the normal operation of the federal government unless they can extract cuts to programs they don't like (in the name of deficit reduction) applied the combination of House recalcitrance and Senate anti-majoritarian filibuster to threaten a government shutdown and siderail needed funding for emergency assistance to ordinary Americans until they could get at least some of their objectives.   A compromise that will get money to FEMA and keep the government funded for a spell has been reached.

 

The AMT: why we should retain it with minor reforms to protect the true middle class

A commenter on an earlier thread complained about the Alternative Minimum Tax (AMT), saying it should be abolished.  He seemed somewhat misinformed, suggesting that the alternative to the AMT is better enforcement.It seems that it might be timely to remind readers about the purpose of the AMT, its advantages as well as its flaws, and the way that reform could reasonably be undertaken to better accomplish its purposes.  The following is an edited excerpt of my response to that reader on this issue.

The  purpose of the AMT is to limit the advantage from aggregating deductions and exclusions and other provisions that are of particular benefit to those with high incomes. 

For background, readers may want to read my extensive article on the AMT, available on SSRN at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=726362. Or you can skim through the more accessible (and less dense) series of blogposts on the AMT based on the ideas and information in the article, titled "What Should Congress Do about the AMT?:

Part 1, available at http://ataxingmatter.blogs.com/tax/2005/08/what_should_con.html,

Part 2, available at http://ataxingmatter.blogs.com/tax/2005/08/what_should_con_1.html;

Part 3, available at http://ataxingmatter.blogs.com/tax/2005/08/what_should_con_2.html;

Part 4, available at http://ataxingmatter.blogs.com/tax/2005/10/this_is_the_fou.html;

Part 5, available at http://ataxingmatter.blogs.com/tax/2005/11/what_should_con.html; and

Part 6, available at http://ataxingmatter.blogs.com/tax/2005/11/what_should_con_1.html.

The AMT operates (admittedly imperfectly) to reduce the tremendous advantage that the highest-income Americans in the top 20% of the income distribution enjoy from the many deductions, exclusions and outright subsidies built into the tax Code. Many of those deductions and exclusions make some sense if provided to those who otherwise would pay too high a rate of tax---i.e., the personal exemption, the medical expense deduction--or if the intent of a transaction would be somewhat undone by taxation--i.e., the gift exclusion. But many of them don't make much sense at all (e.g., the charitable contribution deduction at face value rather than at investment amount; the mortgage interest deduction) and certainly don't make sense as a regressive item that provides the greatest benefit to the highest income recipients. The AMT operates to reduce that unmerited advantage by measuring (again, imperfectly) the cumulative effect of preferences that reduce taxes.  As tax policy, it has the disadvantage of adding complication and creating some confusion, but the clear advantage of providing another way of ensuring that those with high incomes pay some tax.

Congress should quit its annual extension of stupid giveaways like the R&D credit, and it should quit its senseless annual extension of the AMT "patch". Instead, it should reform the AMT along the lines that I suggested in the article and series of postings--by treating the capital gains preferential rate as an AMT preference item (which was done earlier in our more sensible history), by indexing the AMT exemption amount to inflation at an amount that would correspond, in the context of the AMT, to similar protection offered by the regular tax for those in the bottom 60% of the income distribution. The latter step would prevent the problem of the AMT reaching ever lower into the income distribution and thus protect the middle class, while permitting the AMT to operate as it should on the top two income quintiles.

On Baucus's Support for the R&D Credit

Max Baucus resides soundly to the right of center on tax policy.  He hasn't been willing to set aside the prejudices that grow within the Beltway favoring the high-income elite through tax subsidies for their particular kind of income, and so he has actually fought FOR (rather than against) reductions in estate taxes, reductions in capital gains taxes, reductions in taxes on multinational corporations, and other tax provisions extraordinarily favorable to the manager-owner "uber" class of the rich and superrich.

Given that background, it is not surprising that Baucus is pushing his own pro-wealth agenda in coordination with the right-wing Congressional fringe's ideological economic terrorism on deficit reduction (translate--benefit reduction for the middle class and poor; subsidy extension for the upper class and extraordinarily wealthy).  So today, Bloomberg reports his stand at a Finance Committee hearing in support of the Baucus-Hatch bill to expand the credit for research and experimentation and make it permanent.  Richard Rubin, Baucus Seeks Permanent Research Tax Credit to End 'Yo-Yo', Bloomberg.net (Sept. 20, 2011).

 Baucus thinks we need to expand and make permanent this provision that is a particularly generous benefit for industries that are already paying low tax and rolling in cash (and often offshoring jobs), such as information technology companies  and Big Pharma, because the credit "has been like a yo-yo, up and down, up and down."   

The problems with the credit's supposedly acting as an incentive to domestic research are manifold.  Research takes place over a period of years, not within a few months.  Companies that need to do research to stay on the innovation edge and therefore stay competitive will do that research whether or not there is a credit--they would always get a deduction for the expenses of the research, so the credit is merely 'icing on the cake' giving a tax subsidy to businesses that happen to be more research intensive for research that they would do anyway.  Except that the credit is available for much of what is really 'tweaking around the edges', not genuine research that advances the innovation ball.  Much of that kind of basic research has been done at universities where academics are somewhat freer to explore ideas because they are interesting rather than because there is quick money waiting around a nearby bend.  (I say somewhat freer because as the federal government and states get stingier with higher education funding for public universities, academics are pressed more and more to do "bespoke" applied research that gets corporate dollars to the campus and is rewarded most if it translates quickly to industry profits.)  Furthermore, the credit has often been approved after the fact--when it couldn't possibly incentivize more research in the United States or elsewhere: in those cases, it serves as one more cog in the corporatist machine that provides extra low federal income tax rates to US multinationals and does essentially nothing to create more jobs in the US.  Moreover, the R&D credit is a typical subsidy-generated catch-22:  by favoring those industries that can most easily fudge research or claim something 'new' that is merely a slight deviation from existing items in order to extend intangible property rights like copyrights and patents, the R&D credit ultimately favors development of the very kind of property that is most easily offshored to subsidiaires in order to reduce companies' US taxation (while retaining actual ownership of the intellectual property and of the funds it generates).   Finally, there's little research to show the effectiveness of the R&D credit in increasing the amount of research or creating more research jobs:   I suspect if you compared federal direct spending on basic university research to the indirect tax expenditure for the R&D credit, you'd find that direct spending on basic research was multiple times more effective in funding the creation of new ideas and the creation of new US jobs (including many research assistants).

Right wing rhetoric about how capitalism is based on 'free markets' bites the dust when there is a chance for a government subsidy via a tax expenditure provision like the R&D credit, doesn't it.  Baucus should quit catering to his wealthy donor/Big Business base and start acting like a real statesman on tax policy.

 

Doggett on taxing millionaires

We are a very rich nation.  It is scandalous that we have an increase in children in poverty.  It is lamentable that so many Americans have been convinced that America will not stand by its promises to them on Medicare and Social Security.  It is unforgiveable that big multinational enterprises that enjoy very low taxes in the U.S. are sitting on cash treasuries and not hiring while demanding even further tax reductions in the form of a "repatriation holiday".

Lloyd Doggett, Democrat from Texas, is right on raising taxes on America's millionaires and billionaires (the so-called "Buffett Rule") rather than asking for reductions in our social safety nets like Medicare and Social Security.  Here's a key statement distributed by his staff.

“Together, our nation can live within our means without crushing educational opportunities and undermining retirement and healthcare security.  Instead, we should ask large corporations and wealthy individuals, who have benefited the most from America’s success, to contribute a little more and give up a few tax loopholes in order to expand opportunity to more Americans.”

Right-wing Blogger Peter Pappas' Problematic Post About Tax Lies

Peter Pappas is not a left-leaning blogger.  His "tax lawyer blog" tends to serve as a booster for the right-wing rants about how the rich are paying more taxes than the poor (as though that's any surprise--the rich are the ones with the staggeringly large incomes and the uber-rich are the ones garnering the gains from productivity, while the rest of us stagnate or decline).  He also tends to engage in ad hominem attacks on left-wing bloggers--yours truly being a frequent honoree.

Here's the most recent one--a rant that left wing bloggers complain about the misleading tax rhetoric of the right and "never" complain about the misleading tax rhetoric of the left.    Pappas, Tax Lies Some Left Wing Bloggers Ignore, Sept. 13, 2011.

Let's unpack this.  Bernie Sanders, in Congress, makes a speech and in it he states that Exxon Mobil didn't pay any taxes on its $19 billion in income.  Pappas thinks I should have complained about how this rhetoric was misrepresenting the facts and misleading the public, since the company didn't pay any federal income taxes but did pay a piddling amount of other (state, local, excise) taxes.  But Sanders' next sentence in the blurb that Pappas excerpts mentions the company's $157 million refund from the IRS:  that sentence fairly clearly sets the context as a discussion of what the companies pay in federal income taxes, don't you think?  Yeah, Sanders should have spoken perfectly articulately and made absolutely clear that he was talking about federal income taxes. After all, Exxon did pay a piddling sum in overall taxes on their $19 billion of income (they claim $500 million on $19 billion, which is about 2.5%, counting all state, local and excise taxes).   But that de minimis error of lack of specificity or ambiguity is very very small potatoes compared to what the right-wing rhetoric chain does.

Pappas gives a link to his earlier post, which shows a 'guide' that Sanders' office prepared about corporate freeloaders.  Note that the first item in that guide states the following: " Exxon Mobil's 2009 profits totaled $19 billion but according to the company's SEC filing it received a $156 million rebate from the IRS PLUS it didn't pay any federal taxes." 

However, Pappas doesn't give a link to the particular speech that he's quoting, which always makes me think that there is something in the speech that he doesn't like because he knows it is telling about the state of America today.  By not giving a link (or any other direct information about the speech), Pappas avoids providing any context.  What was the context of the speech?  Sanders was addressing the question of whether Congress should extend yet again the Bush tax cuts for the wealthiest Americans.  (Now I didn't say "federal income tax cuts passed in the Bush administration" but I believe all you readers know that when we talk about the Bush tax cuts we are talking about federal income taxes, don't you?)

Instead, Pappas just links to Politifact.com--a reader might think it is just a link to the website home page, since he doesn't provide the title in the link, but it is actually a link to PoliltiFact's "rating" of the statement about Exxon Mobil in Sanders speech on the Bush tax cut extension decision.  if you pursue that link you find a link to the Nov. 30, 2010 Sanders speech (which I've also linked here).  Here are a few excerpts from that speech:

It is very clear to anyone who spends 2 minutes studying the issue that the people on top are doing extraordinarily well at the same time as the middle class is collapsing and poverty is increasing.  ***

If you can believe this, since between 1980 and 2005, 80 percent of all new income created in this country went to the top 1 percent--80 percent of all new income. That is why people are wondering and asking: What is going on in my life? How come I am working longer hours for lower wages? ***

After we bailed them out, those [Wall Street] CEOs today are now earning more money than they did before the bailout. And while the middle class of this country collapses and the rich become much richer, the United States now has by far the most unequal distribution of income and wealth of any major country on Earth. ***

In the midst of all of this growing income and wealth inequality in this country, we are now faced with the issue of what we do with the Bush tax cuts of 2001 and 2003. And if you can believe it, we have people here--many of my Republican colleagues--who tell us: Oh, I am so concerned about our recordbreaking deficit. I am terribly concerned about a $13.7 trillion national debt. I am terribly concerned about the debt we are going to be leaving to our kids and our grandchildren. But wait a minute. It is very important that we give, over a 10-year period, $700 billion in tax breaks to the top 2 percent. ***

[in the penultimate paragraph, Sanders referred to the oil companies and their demand for even more tax breaks--(federal income tax breaks, I'm sure he meant to say).  That's where the quoted sentences discussed by Pappas are embedded.]

These people want to cut back on the powers of the EPA and the Department of Energy so that ExxonMobil can remain the most profitable corporation in world history while oil and coal companies continue to pollute our air and our water. Last year, ExxonMobil made $19 billion in profit. Guess what. They paid zero in taxes. They got a $156 million refund from the IRS. I guess that is not good enough. We have to give the oil companies even more tax breaks

All in all, Pappas' chagrin at the "misleading" nature of Sanders' talk seems manufactured.  Anybody reading the speech would have been quite clear that this was a discussion of federal income taxes.

And let's put Pappas' choice of doing this posting (and claiming that I in particular am somehow derelict in my duty as a blogger for not pointing out the "lie" in Bernie Sanders' speech) in context.  Let's look, for example, at one of the "related posts" on Pappas' own blog.   Pappas, 51% of Americans Pay Zero Tax; Share of Government Funded by the Rich Increases, May 9, 2011.   Now, of course you all know that the title by itself is an outright lie.  It is very hard for any American who buys various items necessary for existence (gas, food, clothing, necessaries, an occasional splurge) to manage not to pay any state or local sales taxes, and of course many states have income taxes as well and even poor Americans who have jobs will also pay payroll taxes (for Social Security and Medicare).  It simply isn't true that  51% of Americans pay "zero tax".  Now, in the body of the  post itself, Pappas does state that the 51% figure is a number in a congressional study suggesting the percentage of Americans that owe no federal income tax in 2009.   Does that make up for the headline?  It's an attention grabber--and a terribly misleading one.

I doubt if anyone thinks that anybody who talks frequently about tax gets it right all the time--we are human, after all, and we make mistakes.  But there is a big difference between an ambiguity that is clarified by context and the type of misleading tax rhetoric that the right indulges in regularly in order to push a corporatist and pro-elite, anti-tax, anti-government agenda.  You know those false claims about taxation-- that poor people don't pay taxes and they really "need" to so that they will have some "skin in the game", that family businesses and farms are lost due to the estate tax (no, there's only anecdotal evidence about some very few being slightly impacted and none about "loss" due to the piddling estate tax), or that capital gains preferential rates for stock sales reward investment in corporations (no--they primarily reward gains from secondary trades between investors), or that Social Security is insolvent (no, it is not ), or that the investor-class merits preferentially low taxes because they are the job-creation engine of America (no--jobs are created by entrepreneurs and by mom-and-pop business and by big corporations, not the secondary market investors in those corporations and certainly not by the private equity funds that routinely buy so that they can fire), or that the active financing exception to subpart F is merited because big banks otherwise would be taxed to death (no--it is merely a way to give a special subsidy to foreign banking operations that results in very low tax rates for such financial institutions), and on and on.....  Most Americans are so ill-informed that they do not understand that the "taxable income" that may be reported by the elite is already a figure far removed from (and generally much less than) the economic income of that same elite--because of the exclusion for muni-bond interest, the tax preferences for retirement income and the elite's access to incredibly generous benefits even while those of the vast majorithy of Americans are being reduced, etc.  Nor do they understand that many of the deductions that the middle class also enjoys --for example, the mortgage interest deduction--give special benefits to the elite.

There is a reason that vast numbers of Americans are misinformed about tax matters, the role of the debt ceiling, the solvency of Social Security, the relative distribution of incomes, the relative rates of taxation, and the share of government funding paid by major corporations and similar points.  It is due to a conscious campaign by the radical right to discredit government and protect the elite from taxation.  And as we saw in the recent manufactured 'debt ceiling crisis', the radical right today is wililng to commit economic terrorism in order to get its way and protect the elite at all costs.