ataxingmatter

CTJ's Analysis of Cain's 9-9-9 Tax Plan

Citizens for Tax Justice (CTJ) has released an analysis of Cain's Tax Plan : Herman Cain's 9-9-9 Plan (Oct. 18, 2011). 

Given the sketchy information available about the plan, CTJ makes a number of assumptions regarding exclusions and deductions.  But the analysis provides at least some help in understanding the likely distributional impact of the Cain plan.

          If presidential candidate Herman Cain’s proposed “9-9-9 tax plan” was in effect today, then the richest one percent of taxpayers would each pay $210,000 less in annual taxes on average, while the poorest 60 percent of taxpayers would each pay about $2,000 more in annual taxes on average, than they do now. Moreover, under the 9-9-9 plan, the United States government would collect about $340 billion less in revenue in 2011 alone.  Ud.

Cain's plan replaces (as an intermediary step towards a national sales tax) existing federal taxes (personal income tax, payroll tax, corporate income tax, excise tax, AMT, estate tax, and one assumes, the gift tax) with a 9% personal income tax , a 9% business tax (,and a 9% national sales tax.

As CTJ notes, Cain's personal income tax would be on gross income, minus capital gains plus charitable contributions.  It is not clear that there would be any other exemptions related to a minimal standard of living (represented in the income tax through a standard deduction and personal exemptions, as well as the Earned Income Tax Credit and the Child Care Credit).

As for Cain's business tax, CTJ notes that it apparently would apply to gross income minus purchases from other businesses (as is usual with a VAT), minus dividends paid to shareholders, and minus investments.  It would, in other words, essentially apply to wages paid.

     In other words, the nine percent “business flat tax” under Cain’s plan actually seems to be a payroll tax. Of course, such a payroll tax would affect low- and middle-income people far more than the corporate income tax it would replace.  Id.

 Not to mention the operation of this particular business tax as an incentive, whenever possible, for businesses to fire workers and use that money for other, deductible purposes.

The CTJ estimate assumes that the national sales tax would, like most European VATs, actually be on about 55% of personal consumption rather than 100%.  Clearly, the tax impact on the poorest Americans would increase if it were on a larger percentage of consumption.

Steve Rattner's "Grin and Lose It" advice to the 99%; Amity Shlaes W-style economic policy

Amity Shlaes, the director of the George W. Bush "Institute"'s "economic growth project", writes in the Wall Street Journal today (Oct. 17, 2011) about "Three Polices that Gave Us the Jobs Economy". 

Shlaes sings in praise of the 1970s-1990s economy, claiming that it was wonderful because it allowed "private capital devoted to venture capital," "underwritings of firms with a net worth of less than $5 million," and led "innovative companies" to create a "boom economy."  Further, she asserts that three corporatist policies "caused the boom": tax cuts (especially on capital gains); relaxation of pension fund investment requirements to permit riskier investments (leading to more money in venture capital funds--and of course, not mentioned by Amity in the op-ed, more losses for pensioners because of those riskier investments); and IP changes permitting university professors to own the innovations developed in the university's laboratories and with the university's (and frequently federal grant) funding (and then leave the university, establishing new startup companies in which they got rich off those ideas.

Shlaes sees all of these as positives.  I see the exaggerated role of venture capital as one of the problems in our economy, since much private equity funding works by buying (often with considerable leverage on the company being bought), firing (mostly of low-rung workers, not often of the high level executives), and reselling at great profits without having added much value.  Yes, it is useful when there is ready capital to support an important innovation.  But the capital doesn't create the innovation and much of what is supported by venture capital isn't great innovation.  (see the last paragraph quoted from Smith's discussion of Rattner, below, for her similar view on this issue.)  Letting pension fund monies be used by venture capital and private equity firms is problematic, because the pensioners bear the losses and they are depending on those funds for retirement.  Allowing university profs to get rich off of research that was funded by the university (and, almost always, considerable public funds) is not so clearly a great boon to mankind.  Those innovations funded by public monies should be available to the public without IP protection. 

Of course, Shlaes' position on these issues is really just another way to say that the mechanisms in the economy that support capital acquisition and income from capital are 'inherently' good.  That is the mantra of the right these days. 

It shouldn't be surprising to see Steve Rattner (a Wall Street insider if there ever was one, having been a Lazard M&A partner and then head of a private equity firm) praising globalization and telling ordinary workers who see no opportunities other than low-paying service jobs that "Let's Admit It: Globalization Has Losers." Sunday Review, NY Times (Oct. 15, 2011).

Rattner admits that there are "many losers" --he seems to think that workers just have to eat the s**t shoveled out by big multinational quasi-sovereign corps like GE and GM, resulting in inequitable pay (because those companies can move to other countries and pay workers less). 

By 2010, real median household income had fallen to $49,445, compared with $53,164 in 2000. While there are many culprits, from declining unionization to the changing mix of needed skills, globalization has had the greatest impact.

Note that this is only true if this country allows corporations headquartered here to shut down US jobs and hire abroad without exacting a price--such as a tax charge on moving assets/jobs out of the country.  We don't exact any price now -- in fact, we allow corporations to 'restructure' tax-free to move active businesses abroad.

Rattner thinks we should just accept that we're never gonna manufacture stuff in this country any more, and then be happy with have high-paying 'service' jobs in entertainment, IP and financial services.

Nope, sorry.  I'm not glad that all our smark kids are either trying desperately to make big money in entertainment (and all but a few failing to make even a living, much less a fortune) or financial services (where engineers go in pursuit of high bucks, without realizing that they are likely to lose their souls in the process).

Rattner doesn't want the government "lurching into the private sector".  He says that's "terrifying" and uses the single example of the Solyndra loan as proof.  (Funny, when private sector banks went bad like Countryside, and Washington Mutual and Lehmann Brothers and Bear Stearns or insider traders go rogue or corporations like Enron and WorldCom and Scrushy's health care empire go south, rightwingers say it's just a single bad apple and shouldn't be viewed as representative.  Not applying that logic to Solyndra, are they?)  So Rattner wants no "dysfunctional" government intervention, but it does want Washington to "assist the private sector" with tax incentives or "easing access to PUBLIC financing markets or "reform" of patents and "reform" of the "regulatory apparatus"!  Anyone see "socialization of losses, privatization of gains" writ in large hand on Rattner's wall?

Yves Smith over at Naked Capitalism has a good takedown of Rattner's  piece, at "Steve Rattner, Card Carrying Member of Top 1%, Tells Us We Should Lie Back and Enjoy Much Lower Wages Resulting From Globalization" (Oct. 17, 2011)

• the peak was 2007, not 2010 and was only slightly higher than the prior 1999 peak, so most of the 2000s was a lost decade for wage earners;
• the decline in income is due to the global financial crisis, not inflation;
• it isn't "free trade" that created a nation of winners, it's "managed trade" (that, I would add, favors a 'winner-take-all' outcome that puts money into the hands of people (and corporations) with money);
• American management is much more expensive than Mexican management, not just American workers--so shouldn't those wages fall too under globalization, but they haven't--in fact, US CEO pay isn't correlated with performance--failure pays; 
• location and innovation matters too, and Rattner disregards that;
• workers are just 10% or so of cost of goods--to reduce prices means reducing costs, but it doesn't have to be workers' wages that are reduced

As Smith notes

 Until the 2000s, in every economic expansion, labor got the bulk of the increase in GDP, typically over 60%, via more jobs and increased pay. Post 2000, there was an astonishing change, a shift from labor share, which fell to below 30%, and a massive increase in corporate profits. In other words, there was huge shift away from labor to capital. This has little to do with globalization and much to do with the weakened bargaining power of US workers. As much as it has become fashionable to look down on unions (and their corruption and short-sightedness hasn’t helped), having well paid blue collar workers helped the negotiating position of non-unionized white collar employees.

Rattner also conveniently fails to discuss how the rapacious tendencies of private equity firms made matters worse. An unduly candid investor described the business model in Confidence Men: pile debt on the acquisitions, and if only one of ten made it (meaning survived!) you still made a good return for investors. So many companies in Europe have gone bankrupt thanks to the tender ministrations of PE pirates that the officialdom has read them the riot act. PE firms have to register, and they cannot either buy companies or raise money in the Eurozone unless the conform to regulations, which include strict limits on leverage.

Herman Cain, funded by Koch Bros, Says "Let the Little Guys Pay Taxes (not the uber-rich)"

The New York Times' "Room for Debate" ran a 'mini-op-ed' segment on Herman Cain's 9-9-9 tax plan, called "What's So Bad About a Flat Tax?" New York Times (Oct. 14, 2011) (with the subtitle: Isn't Herman Cain's '9-9-9' plan essentially what fiscal conservatives and good government advocates have always wanted?).  Yours Truly was one of those invited to participate: others include Kotlikoff, Ulbrich, and Gale. 

I wrote, in A Plan for the Uber-Rich, that "there's a lot wrong with flat taxes" (a term used to cover both the flat rate income tax and the flat-rate national sales tax ideas).

Either type of flat tax is regressive, in that it places a high tax burden on the most vulnerable at the lower income scales, for the simple reason that most lower income people use all of their income to pay for food, clothing, shelter and other consumption whereas members of the upper class have lots of cash to spare that they are unlikely ever to consume in their lifetimes. There are additional significant flaws in those tax schemes, like unrealistic economic assumptions, difficult transition paths, rosy revenue scenarios, misleading propaganda about rates and the probability that a national sales tax that cuts deeply into lower income finances will repress consumption that fuels small businesses.

Cain's plan is even worse, since it:

• exempts capital income from taxation
• eliminates the estate tax
• imposes a flat rate on wage income with no deductions (and apparently only some exemption for the poorest of the poor in certain 'zones' defined by the national government, so that if you are poor and live with lots of other poor people, you may not have to pay as much in taxes, but if you are poor and live where there aren't enough poor people, tough luck)
• shifts the burden from rich to poor since the rich will only pay on their compensation income and some small additional portion due to consumption taxes, while the poor will pay on all of their income and all of their income again in consumption
• and continues the regressivity with some type of value-added tax that will also fall mostly on wage earners.

Added since the original positing is Dan Mitchell--conservative spokesperson for the Cato institute, who lauds the flat tax in "The Beauty of the Flat Tax" as "desirable" for its "simplicity, fairness, and transparency."  

• Actually, the national sales tax version of the 'flat tax' supported by Mitchell is anything but simple.  It results in the government taxing itself and counting the revenues as a gain.  It calculates the tax rate in a way intended to be deceptive and likely to be far too low to raise the claimed amounts of revenues.  Since it is a sales tax, we normally discuss that as a tax on top of the price, so a price of $100 and a tax at 23% means a final price including tax of $123.  But the way the national sales tax has been discussed is different:  they say a tax of 23%, but they calculate that rate by taking the ratio of the tax to the price plus tax--so the rate looks lower than it would look calculated as a ratio of tax to price!  In fact, most objective analyses of a national sales tax have suggested that the rate (as a tax to price ratio) would be at least 40% and possibly 50% or even higher, meaning that something purchased foa $100 sales price would have an added national sales tax (not taking into account local and state sales taxes) of betwen $40 and $50 or more.   And, worst of all, it will inevitably require an exemption for the poorest of the poor (if not as broad an exemption as currently permitted), thus requiring poor people to pay up front, retain all of their receipts and file a very complex return that will be a request for a refund of the tax.  It will, though, be quite simple for the uberrich--they will not have to file income taxes and then would consume only a small amount of their income (and probably even there find all kinds of ways to get around paying their fair share of that limited tax burden).  Further, part of the "simplicity" assumption about the tax is that you can get rid of any federal tax collection bureaucracy and that tax enforcement will be minimal.  Both of those assumptions are either naive or intentionally misleading:  the tax collection responsibilities will fall to the states (imposing significant costs, especially with state systems that still rely on income taxation) and the federal government will nonetheless have to retain a national enforcement system.  Most experts say the opportunities for crookedness will be as big in the sales tax system as in any other tax system. 
• What about fairness?  Well, fairness is one thing that the flat tax cannot offer.  The rich get off super cheap, and the poor pay through the nose.  Everybody pays only on what they consume (that is actually collected at the point of consumption), but the rich can choose whereas the poor consume all of their income.  Accordingly the national sales tax is highly regressive, compared to our somewhat progressive system today.  And with the elimination of the income tax and the estate tax, the role that the tax system plays in pushing against gross inequalities will be eliminated.
• Transparency is missing as well. The points about simplicity should answer that question head on.  It is not a transparent system at all, for much the same reasons that it is not a simple system.
  • Mitchell praises the "repeal of most forms of double taxation" in Cain's 9-9-9 plan.  What he is calling "double taxation" is the fact that people currently pay some tax (though too low) on income earned by capital as well as income earned by labor.  Cain repeals all taxes on income earned by capital (and taxes income earned by wages particularly hard--at about 27%, with the "income" tax on wages only, the VAT-type business tax which deducts investments but not wages, and the sales tax (on consumption, which for most wageearners is on all or most of their wage income).   But the tax on capital is NOT "more than one bite of the apple" as Mitchell asserts.  If you invest 20 and that 20 earns 5 in interest, then the 5 in interest is new money that should be subject to tax, just as 5 earned in payment for labor is new money.  The idea that any tax on income from capital is a double tax is just "free market" doubletalk to justify the elimination of taxes on the wealthy.  Although economists like to say that "only people pay taxes" and use that to justify allocating all corporate income to shareholders and then asserting that shareholders pay the corporate taxes paid on that corporate income, that is an a priori decision that ignores the reality of perpetual life, managerial renttaking, and "personhood" of corporate quasi-sovereign entities in today's "free market" globalized economy.
  • Mitchell then asserts that getting rid of deductions and "other distortions in the tax code" will mean that "people will make decisions on the basis of good economics rather than clever tax planning."  Wrong on two counts.  First, most businesspeople still do not make most decisions based on tax planning.  They want to make money in their business, and if a plan will make money, they will do that plan (even if it also means paying some taxes.  Second, some deductions are merely common sense--for example, not allowing businesses a deduction for wages will encourage layoffs in favor of capital investments/robotics, which will accelerate job reduction in the US, not create jobs.

 Today's Associated Press revelations about Cain's longtime ties to controversial Koch brothers' group key to his surging presidential bid, AP (Oct. 16, 2011) show a harmonious fit between Cain's 9-9-9 plan, Cain's various comments scorning the non rich and his links to wealthy plutocratic anti-populists like David and Charles Koch, billionaires who "bankroll right-leaning causes through their group Americans for Prosperity" Id. (The Koch-funded group would be more aptly named America Run for the Super-Rich, since it lobbies for the right's agenda of New Deal elimination and targeting of earned benefits of ordinary Americans through a campaign for zero taxation on capital, deregulation, militarization, and privatization .)

AFP tapped Cain as the public face of its “Prosperity Expansion Project,” and he traveled the country in 2005 and 2006 speaking to activists who were starting state-based AFP chapters from Wisconsin to Virginia. Through his AFP work he met Mark Block, a longtime Wisconsin Republican operative hired to lead that state’s AFP chapter in 2005 . . ..

The article notes the many people in Cain's organization now or earlier with links to AFP, including Rich Lowrie, the accountant/investment manager who serves Cain as chief economic adviser. 

And the Koch brothers have a quite clear record of wanting to abolish Social Security, all kinds of federal welfare, minimum wage laws, and similar programs intended to redress the economic imbalance that has grown in our economy since the advent of winner-take-all economics in the Reagan era.

 

 

 

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Barney Frank and the need for a risk-based bank fee

That post about the McCain-Paul environmental devastation and revenue decimation bill (somehow mistakenly given the label of a "jobs bill" by the misguided pair ) suggests the unprecedented extent to which our Congressional reps now believe they can use and abuse national resources for the benefit of crony capitalism.

At least there still seem to be some who are interested in directing their firepower at those who have caused the recession and job losses and whose activities could well cause further harm.  Barney Frank has written a letter to the so-called 'supercommittee' asking that they include  the risk-based bank fee assessible against 'too big to fail' banks as part of the deficit reduction package.  See Letter.  Given that the very existence of too big to fail banks implies that the government will again have to come to their aid, it seems entirely appropriate to have these banks pay into the Treasury to recognize the guarantee they are being provided.  Further, banks have made good profits since the crisis because of their ability to borrow money extraordinarily cheaply from the Fed, and they have nonetheless continued to demand fairly steep returns for their lending and other activities.  Having them return part of that largesse through a risk-based fee is a reasonable approach that should also help to discourage the excessive speculative risk-taking in which they engaged.

Senate Republicans' new deficit creation and environmental destruction bill (they call it a "jobs plan")

Senate Republicans must be feeling the heat of Herman Cain's insistence that he has a three-step plan to completely remodel the U.S. tax system and the report in the Oct. 13, 2011 Wall Street Journal that twice as many Americans have a favorable view of the Occupy Wall Street groups as have a negative view of them. 

The Republicans, led by John McCain, introduced their version of a jobs bill on October 13, misnamed "Jobs Through Growth Act", according to BNAs Daily Tax RealTime.   It appears, from the sketchy information provided in the McCain and Rand Paul press release, to primarily involve more  failed medicine for the economy in the form of tax cuts for the rich and removal of reasonable regulation from health care insurers and too-big-to-fail banks  and a hodgepodge of every other deregulatory idea the corporatist right has pushed for the last four decades and not yet gotten, including opening up public lands without overly pesky EPA reviews, drilling offshore without much hassle, and doing just about anything else that big corporations want to do without any regulatory agency having much power to stop it.

• It repeals the recently passed health care reform, effectively increasing the deficit by the savings that bill would have achieved and sending millions of Americans back to uninsured status while allowing medical costs to continue to escalate. 
• It calls for copying Texas cap system of "medical malpractice reform" to end "junk" lawsuits, effectively letting doctors and hospitals perform malpractice without paying reasonable restitution or penalties for doing so 
• It calls for a moratorium on new regulations until the unemployment rate drops below 7.7% (years), giving business a pass on internalizing the externalities that their enterprises pass along to society at large.
• And it requires congressional approval for any administrative regulatory action that will "cost the economy $100 million or more"
• And it expands required cost-benefit analysis to look at 'indirect' costs
• it eliminates the payment of attorneys fees for winning attorneys when they are 'repeat' suers of the federal government,
• It calls for the repeal of the Dodd-Frank financial regulation passed just last year on the grounds that a financial institution-funded study says the lost bank profits will cost US jobs, putting us back in the free-for-all casino capitalism that threw us into a tailspin in 2007-2008
• It calls for a balanced budget amendment to the Constitution
• It includes a line-item veto for spending
• It changes the tax code by
  • lowering the maximum individual tax rate to 25%, thus increasing the deficit
  • lowering the corporate tax rate to 25%, thus increasing the deficit
  • enact a territorial tax system, thus increasing the deficit

Other provisions intended to destroy protections for workers, environmental protections, and all protections for public lands, waters and air (all this under the name of "job creation"!!) include:

•  prohibiting the EPA from regulating air quality on farms (agribusinesses raise incredible dust clouds due to their huge machinery),
• giving EPA 60 days to come to a conclusion about a new mining permit and then no further action may be taken
• prohibits regulation of greenhouse gases under the Clean Air Act
• permits mineral and energy production on BLM public lands unless the bureau objects within 45 days of request
• specifically prohibits a particular new EPA regulation that Bob Gibbs doesn't like (HR 872)
• shackling the EPA by requiring that any regulation do an analysis of job impact of the regulation,
• prohibiting the NLRB from looking at the way businesses move to right-to-work states as a way to void collective bargaining agreements or working with unions to allow workers to express their desire to join unions in reasonable way (a majority of workers would like to be able to be in a union)
• prohibiting a requirement that government contracts require union labor (the GOP wants the government to assist the big corporations in  breaking unions!)
• REQUIRES offshore drilling
• facilitates drilling in the Alaskan continental shelf by "expediting" EPA air-quality permitting process
• "streamlines" leasing on public lands--e.g., wilderness areas, parks, national monuments

The territorial tax system will act, they say, as a permanent incentives for repatriation of offshored profits by multinational corporations (i.e., Google, Oracle, Microsoft, and the other Big IT and Big Pharma companies that have so easily offshored their profits through intellectual property transfers to tax haven subsidiaries).  Of course, it will also act as a permanent incentive for offshoring of jobs and profits at an even higher rate than currently.

Oh, and they claim the tax 'simplification'  won't increase the deficit because there will be offsets by eliminating loopholes or whatever.  They leave that to the Senate Finance Committee to figure out.

The balanced budget amendment is intended to enshrine the stinginess of the current GOP towards the middle and lower classes in constitutional law  to make sure that Keynesian policies that could rescue us from recessionary lows will never be able to be used.  And the line-item veto will make sure that even when there is a balanced budget (revenue increases, spending on social welfare), a GOP president will be able to kill all safety net spending anyway.

The requirement for congressional approval for regulations costing $100 million or more enshrines the status quo and hamstrings the executive's ability to enforce the laws.  With the GOP obstructionism, no further regulations would ever get through Congress.  the cost benefit analysis requirement already favors whatever the status quo is (there are ALWAYS costs to change, and the benefits are generally much harder to quantify, since they often relate to good health, sustainable lifestyle, happiness, wilderness protection, resource reservation for future, etc.). 

The elimination of attorney's fees for civic organizations suing the federal government (and winning!) ensures that the few civic organizations that remain out there to challenge the corporatist state (like the Environmental Defense Fund) will have an even costlier battle even when they are in the right and fighting for citizens who can't do it on their own.

***** depressing, isn't it?

Friday Animations: Koch Brothers

The Koch brothers Charles and David are among the wealthiest people in the country--clearly part of the super-privileged small group of uberrich who have benefited from the reaganomics of privatization, deregulation, militarization, and tax cuts (especially for the top) as they've made money from use and abuse of public resources through ranching, mining and other resource extraction and processing.  They've used that money well to ensure their continued privilege.  The current debate over the need for sacrifice of earned benefits (phrased as "entitlement reform" by the right) versus the need for a more fair share of the cost of governmental programs being borne by the rich (phrased as "class warfare" by the right) cannot be understood without looking at the influence of these billionaires on tax policy and other policy through propaganda and "think tank" efforts.

Mother Jones has been following the Koch brothers saga  for some time.  And now animator Zina Saunders pulls together an animated cartoon about the Koch brothers' corporatist agenda and its impact on the U.S.  The August 2, 2011 cartoon video is "Koch Brother Pirates Hijack the Country" (sorry--I couldn't embed directly; just click on the link and then on the forward arrow at the bottom to run the animated cartoon).

For some background on the Koch brothers, you might want to read Kate Sheppard's piece: The Koch Brothers' Vast Right-Wing Media Conspiracy, Mother Jones (Feb. 4, 2011) (noting that "they have much at stake when it comes to efforts to cut climate-changing emissions" and "have spent $31.3 million since 2005 on organizations that deny or downplay climate change").  Glenn Beck, an attendee at the Koch brothers' semiannual event for conservative propagandists and politicians, thanked Koch on air for "information" he'd used in one of his monologues on the economy.  Sheppard notes that the brothers' media presence is enormous, and little recognized by those who may hear pundits propagating their views.

The Kochs' influence over the conservative media may be obvious at such powwows. But to the general public, it's not always apparent that the pundits they read about in blogs and see on TV have a direct relationship to the company. So says Derek Cressman, regional director of state operations with Common Cause, the group that organized the protests outside the Koch Bros gates. "They don't see that connection between the pundit and the fact that it's funded by an oil company," says Cressman. "The global warming deniers aren't being candid that their funding is coming from people with an enormous financial stake in how we deal with climate change."

If you want to know more about those who go to the Koch brothers' semi-annual retreats--and how earnestly they want to keep their involvement in funding the Koch brothers' causes secret--go to Gavin Aronsen, The Koch Brothers' Million-Dollar Donor Club, Mother Jones (Sept. 6, 2011).  There's an "inside account of the Koch brothers' Vail seminar, and ...the exclusive audio."  The article lists various donors who attended the Koch event, with information about the source of their wealth and their political contributions.

There's often a "balance" attempt to note that there are billionaires on both the right (Koch brothers frequent target) and the left (George Soros is usually used) and that each funds the agenda that interests them.  But there's a considerable difference in their backgrounds and in their charitable interests:  the Koch brothers, heirs of the founder of the John Birch Society, tend to fund activities that support the continuing redistribution upwards to the uberrich, while George Soros, self-made billionaire, tends to fund projects that increase democratic participation and assist the least privileged.  Here's a timeline of these billionaires' lives: George Soros: You're No Koch Brother-Infographic , the other 98% (Feb. 16, 2011).

Google, Repatriation and Advanced Pricing Agreements: US, and France, looking into offshoring

Bloomberg reports today that the IRS is auditing Google's offshoring of profits.  See Drucker, IRS Auditing How Google Shifted Profits Offshore to Avoid Taxes, Bloomberg.com (Oct. 13, 2011).

"The agency is bringing more than typical scrutiny to how the company valued software rights and other intellectual property it licensed abroad, said the person, who requested anonymity because the audit isn’t public. The IRS has requested information from Google about its offshore deals after three acquisitions, including its $1.65 billion purchase of YouTube, the person said. The transfer overseas of these kinds of rights rights has enabled Google to attribute earnings to foreign units that pay lower taxes .

***

Google, owner of the world’s most popular search engine, has cut its worldwide tax bill by about $1 billion a year using a pair of strategies called the “Double Irish” and “Dutch Sandwich,” which move profits through units in Ireland, the Netherlands and Bermuda. Google reported an effective tax rate of 18.8 percent in the second quarter, less than half the average combined U.S. and state statutory rate of 39.2 percent. " Id.

After being alerted to Google's use of income shifting through media attention to the issue, France is also reviewing Google's income shifting between its French and Irish subsidiaries, according to the Bloomberg article.

This audit, however, takes place against the backdrop of a 2003 "advance pricing agreement"--essentially, a contract between a taxpayer and the IRS that "settles" the tax treatment of a transaction that the taxpayer expects to undertake. 

The IRS has already approved a major part of Google’s strategy. In 2006, the agency signed off on a 2003 intracompany transaction that moved foreign rights to its search technology to an Irish subsidiary managed in Bermuda called Google Ireland Holdings. That deal -- known as a “buy in” in tax parlance -- meant subsequent profit overseas based on those copyrights has been attributed to foreign subsidiaries rather than to Google in the U.S. where the technology was developed.  The IRS approval came in an accord known as an advance pricing agreement. Id.

In my view, advance pricing agreements --a recent introduction in the 'tax compliance' toolkit--are problematic in a democratic tax system.  Only taxpayers with considerable dollars at stake can engage in the process, which allows them to "fix" in advance what their tax obligations are regarding particular business plans.  The potential for agency capture, always present, is enhanced in this setting.  Tax administrators are less adept at foreseeing likely ancillary consequences of a particular decision than the taxpayer itself and, worse, they may be "captured" by their proximity to the taxpayer and lack expertise or in-depth understanding of the issues sufficient to challenge the taxpayer's assumptions.  The decision made ahead of time is likely based on sketchier information than an after-the-fact audit.  Further, those negotiating such agreements may be less inclined to take an strong position vis a vis the taxpayer than those involved in enforcement and litigation decisions later in time would be.  While changes in administration likely affect the government's commitment to, and interest in, both enforcement decisions and advanced pricing agreement decisions, one would expect that an administration that had made a point of being "business-friendly"  would be more likely to enter into taxpayer-favorable advanced pricing agreements whereas one that had a more guarded view of business might be more interested in strong enforcement.

It's worth noting that the big IT and pharmaceutical companies that find it easiest to shift income offshore due to their intellectual property patents are also the ones pushing hardest for a so-called "repatriation tax holiday" on those offshore earnings.  They've kept billions offshore and now want to be able to dole it out in executive bonuses and shareholder buybacks little tax.  They often have the profits go to offshore tax haven countries, so this is income that has very little foreign tax paid on it either.  As I've noted in earlier posts on repatriation (check the category index or just scroll back over the last few months), executives bonuses due to lower tax bills just adds to the outsize compensation those executives receive, while shareholder buybacks just diversifies their portfolios with little likelihood of expansionary impact on the US economy (especially if the diversification results in purchases of emerging market instruments instead of domestic ones).

Indignez-Vous: Stephane Hessel's Plea for Citizen Engagement

Watching the diverse groups engaged in the Occupy Wall Street protests and seeing the range of issues around which the movements in Manhattan and other cities are galvanizing, one cannot but be reminded of the bestselling little French pamphlet now translated into English:  Time for Outrage (indignez-Vous)!, Stephane Hessel, Quartet Books, 2010 (with foreword by Charles Glass).  We purchased the little pamphlet about a month ago, but my attention was called back to it when the 94-year-old Hessel was interviewed on the PBS NewsHour on Tuesday night (Oct. 11).  (You can catch the interview on an i-tunes podcast, available at this link; video and transcript on the PBS website, here.)

Hessel was born in Germany but emigrated with his family to France in 1924 (at age 7).  Germany, of course, invaded France in 1940 and Hessel was in the French army during the Battle of France.  He escaped from a POW camp, taking 6 months to reach London, where he joined de Gaulle's resistance movement.  He parachuted into France in 1944 to work with the Resistance there.  He was captured and tortured (waterboarded) before managing to switch identities with a dead prisoner and then escape on the way to Bergen-Belsen.  After the war, he was a diplomat and writer, working with Eleanor Roosevelt on the Universal Declaration of Human Rights and with the Association for Training in Africa and Madagascar, among other things.   He has been active in the Collegium International and the Commission Nationale Consultative des droits de l'Homme (a post-war French government organization created to ensure the protection of human rights).  (This biographical sketch is based on the forward to the pamphlet written by Charles Glass and on the wikipedia entry for Hessel).

Hessel, in other words, has the creds to talk to us about the importance of human rights and the role of governments in ensuring their protection.  And he says that became his mission--"the need to give a sense to my life by defending the values that the Nazis had scorned."  Id. at 

As Glass says in the foreword,

"[The pamphlet] answered a public need for a voice to articulate popular resentment of ruling-class ruthlessness, police brutality, stark income disparities, banking and political corruption and victimisation of the poor and the immigrant."  Id. at 10.

In the text, Hessel proclaims his luck in being able to draw on his experience with the Resistance.  The wartime National Council of the Resistance's Programme (set forth on March 15, 1944) made clear that ending the reign of the Nazis was only the first stage towards establishing "a true social and economic democracy."  Franklin Delano Roosevelt enunciated the "Four Freedoms" for which the allies were fighting--freedom of expression, freedom of religion, freedom from fear, and freedom from want. And so Hessel says:

"We need these principles and values more than ever today.  It is up to us, to all of us together, to ensure that our society remains one to be proud of: not this society of undocumented workers and deportations, of being suspicious of immigrants; not this society where our retirement pensions and other gains in social security are being called into question; not this society where the media is in the hands of the rich.  These are all things that we would refuse to countenance if we were the true heirs of the National Council of the Resistance."  Id. at 19-20.

Today's Occupy Wall Street movement may have uncertain goals and disparate interests.  But likely all would agree that it is important to rise up in indignity in response to the erosion of those values and freedoms that underlay our involvement in World War II--especially the freedom from want that was the cornerstone of Roosevelt's New Deal legislation. 

There is much to protest--from the so-called "Patriot Act" to the Bush wars of choice in Iraq and Afghanistan, from Obama's decision that a President can take out an American citizen without any due process of law to the Congress's plan to decimate the earned benefits programs that are so important for the middle and lower classes while continuing or even enhancing (zero taxation being proposed by those on the right) the largesse of extremely preferential taxation for the capital gains that form 63% of the income of the top 1% of the country.   There is widespread indignity in response to the rampant banking speculation that socializes losses while privatizing gains, the political corruption that leads Congress to pay more attention to the organized and well-funded lobbyists of Big Money while ignoring the clear wishes of a majority of the citizens it represents, the ruthlessness of the corporate and wealthy elite in constantly cutting jobs in order to secure ever more riches for the upper crust, and the use of the meme of "personal responsibility" to suggest that it is just fine to leave the poor, the vulnerable, the elderly, the sick to fend for themselves. 

Keeping silent merely affirms what our elected government officials are doing, which is to follow the guidance of the wealthiest people and the biggest banks and multinational corporations in permitting the erosion of those human rights that inspired us in World War II.  We can  pay for the infrastructure and social programs that are needed--we merely have to have the will to do it.    The way we set our tax policy, the way we pay for Social Security, whether we move to a single payer, Medicare-for-all system that will permit us to meet the basic health care needs of our society while tamping down costs through negotiating from a position of power--all of these things will determine whether we allow these fought-for goals to fall by the wayside or once more stand for the rights listed in the Universal Declaration.

Occupy Wall Street Rationale--protest against greed? industrial harm (Koch brothers, again)?

 Various commentators on the Occupy Wall Street movement have suggested that they are just a bunch of failures taking up people's time. 

Herman Cain scorned such protestors and their ilk with the comment that essentially said that if you don't have a job and you aren't rich, it's your fault.  This is just another iteration of the right's 'personal responsibility' meme and the implied corollary that "everybody that has gotten rich has done so based on merit".  Clearly both of those memes serve to justify the way the upper crust has skyrocketed in its share of the income increases from productivity gains, while ordinary Americans' incomes stagnate.  As several recent books have pointed out, however, the rich haven't contributed corresponding value. 

Other, more sympathetic commentators say that they will go nowhere until they 'get organized', develop a set of goals to accomplish, and work more directly on that (many suggesting that this can only succeed if it is directed specifically at some part of the Federal government).

Below is a comment I left on an Angry Bear October 5  'open thread' about this question regarding the Occupy Wall Street movement.  I invite your comments here or on the AB thread.

One of the real and lasting scars from the reaganomics revolution coupled with the friedmania for purportedly "free" markets (which of course do not in reality exist) is the reinforcement the two have given to the "rugged individualist" myth that underlies much of the current American cult of greed.  Very few of us can make it entirely on our own; very few of us get where we do purely through our own efforts; very many of us are waylaid by social-cultural disadvantages (discrimination, abuse, neglect) that make it extraordinarily difficult to climb out of whatever social status life has cast us in.   One despicable result of the rugged individualist myth is the have-mores use of "personal responsibility" (tied to property ownership--so that those who have are assumed to be responsible and those who have not are assumed to be irresponsible).  It has driven us towards less community spirit, less cooperation and even more 'what's in it for me'-ism.  The OWS movement seems to reflect, in spite of its lack of a single set of demands or even a single underlying goal, a sense that the trend towards selfishness-- most ably represented by the financial industry's socialization of losses/privatization of gains and continued wealth accrual from speculation in ways that increase economic instability for most of us-- is a genuine problem of our society.

And, if you want more visually stimulating motivation in support of such protests, perhaps this video from BraveNewFilms about the harm caused by the Koch brothers' industrial waste will inspire you.

 

Senators Levin and Isakson: millionaire surtax vs corporate repatriation subsidy

The PBS News Hour last night interviewed Senators Levin and Isakson on the jobs bill (video and transcript available here).

Isakson was first off.  He sounded like a right wing sound bite machine: we're overregulating businesses so we need a "time out" on regulation.  And we need to pass a repatriation tax holiday so businesses can get the money they need to invest and create jobs.

Levin was asked what he thought about that.  He didn't even comment on the repatriation sound-bite--after all, he has a report just out that investigates the idea of repatriation and concludes it was a losing proposition.   See  Repatriating Offshore Funds: 2004 Tax Windfall for Select Multinationals, Permanent Committee on Investigations Majority Staff Report, Senate (Oct. 11, 2011) (listing a series of findings showing that repatriation failed to accomplish its goals).**

But Levin did respond to the "it's regulations and taxes that are killing job creation" GOP mantra.  A recent poll of small business owners showed that small business owners aren't worried about regulations or taxes.  They just need customers.   So you can help things out by helping small businesses and helping people become customers. 

Makes sense, doesn't it?  It's certainly an argument made here on ataxingmatter many times: the way to create customers is to stop the collapse of the American middle class with programs like infrastructure projects.

Woodruff then asked Isakson what he had to say to that.  His response--yeah, well, the vote we have tonight is the pay-for--a surtax on millionaires.  And there are 392,000 small businesses that a surtax on millionaires is going to hurt.

So now Woodruff asks Levin what about this argument that the surtax is gonna hurt small businesses.

Levin set the facts straight on his colleague's claim that a surtax on millionaires would hurt all those small businesses.  He said quite clearly that the facts show that only a very small percentage of small business owners earn the million that would put them in the group subject to the surtax.  So the issue is taxing millionaires, whose share of the income has skyrocketed in the last few years compared to the middle class, which has stagnated.  The surtax would mainly hit the overpaid CEOs of big corporations, etc.

Funny, Judy Woodruff (an undergraduate classmate of mine back at Duke, by the way) didn't blink an eye.  You'd think the next question to Isakson would be--given the fact that only a tiny proportion of small businesses would be subject to the millionaire surtax, Senator, a fact that has been pointed out numerous times, why do you insist on claiming that it would hurt all small businesses.  But she didn't.  The PBS station is worried about appearing "balanced" and that means you can't call a fact a fact and point out that a presenter is stating something that isn't supported in the facts.  You let an interviewee do it, if they can get it in, but you let the other side get by with continuing to repeat its fact-less sound bites. 

So Senator Isakson's response was:

[Senator Levin's] response to that question just proves this is all about political messaging and really doesn't have anything to do with purpose, because if they really cared about small business, they would exempt limited liability corporations, S-corporations and sole proprietorships from the application of this tax. Then they'd only be taxing millionaires. But they're going after small business as well.\

 Now, folks, that's a ridiculous response.  (Woodruff didn't say that, but I will.)  It's ridiculous because Levin gave the facts--small businesses don't complain about regulations, most small businesses don't make millions and wouldn't be subject to the surtax.  And Isakson had the gall to call that factual response "political messaging" , even while Isakson continued with his GOP soundbite political message campaign of implying that small businesses need to be protected from the millionaires surtax! 

Note also that Isakson suggested that tif there had to be a surtax, it should exempt LLCs, S corporations and sole proprietorships.  He offered no justification whatsoever for that terribly broad exemption (other than the proffered "it'll hurt small businesses that Levin already soundly defeated).  If you're making millions from your business, you are successful enough to pay the tax.  If you are not, you won't have to pay the tax.  If you exempt LLCs (mostly operated as partnerships) and S corporations and sole proprietorships, you are exempting a lot more than small businesses!  Those include hedge and private equity funds (some managers of which make hundreds of millions a year), real estate partnerships, huge businesses operating as sole proprietorships, and  people like John Edwards who make millions through their S corporations etc. etc. etc.  If you couple that with the zero taxation on capital gains that most on the right are pushing for, that'd likely mean that the CEOs of multinational corporations would be the ONLY millionaires and gazillionaires that the tax would hit! 

 But did Judy follow up along those lines?  Nope.  Instead she asked Isakson whether the country doesn't need stimulus rather than cutting at this fragile time for the economy.

His response was to deliver the right wing political message yet again: 

1.  the right's response to the fact that the last stimulus made a huge difference--a claim that it didn't solve tthe problem permanently (with the implication that we might as well not have done it).  Says Isakson (paraphrasing):  Last bill paid teachers, but once the bill is gone, there's no money to pay them.  (Implication--the stimulus was useless.  I doubt that the teachers whose jobs were saved for a few years would agree or the students who were saved from overcrowded classrooms or the lack of a music program.)

2.  the right's response to the need to enact a stimulus rather than cutting--we've got a debt problem and a debt crisis.   Isakson says "we're at the breaking point on leverage" so he wants to "inspire the private sector to reinvest in our country and reinvest in businesses."   (of course, this overlooks the fact that the "debt crisis" was caused by right-wing obstructionism. or that the US Treasury can borrow now at the cheapest rate we can expect to see forever once this crisis ends--we should borrow cheap while we can, spend it on infrastructure and job creation.  It also roundly ignores the historic pattern that businesses won't invest in US business when (a) we allow them to expatriate assets to create businesses abroad without taxing them on the built in gains in those assets, (b) we allow them to fire workers with ease because we've so weakened our labor laws that workers find it almost impossible to form unions and have any negotiating power with their bosses and (c) we continue to give businesses tax breaks for mergers and consolidations that create multinational super businesses that have no loyalty to the country  (Jeff Immelt said as much in the previous night's NewsHour broadcast).

_______

 **The report lists the findings as follows:

1. U.S. Jobs Lost Rather Than Gained; 2. Research and Development Expenditures Did Not Accelerate;  3. Stock Repurchases Increased After Repatriation; 4. Executive Compensation Increased After Repatriation; 5. Only A Narrow Sector of Multinationals Benefited; 6. Most Repatriated Funds Flowed from Tax Havens; 7. Offshore Funds Increased After 2004 Repatriation; 8. More than $2 Trillion in Cash Assets Now Held by U.S. Corporations ; 9. Repatriation is a Failed Tax Policy