ataxingmatter

Former Sen. Gramm retires from UBS

Let's see.  Gramm pushed through the Commodities modernization act in Dec 2000--the thousand pages that nobody read but that made sure that credit default swaps (CDS) stayed unregulated.   CDC then went on to form one of the pillars of the financialization of the economy--as they mushroom from a few billion in 2000 to about 70 trillion in 2007--all a castle of cards built on a foundation of sand and tangling the world's too-big-to-fail banks in a web of speculative bets and what looked like easy-money guarantees.  Then it all came tumbling down with the realization that the huge mortgage loan securitization industry and the CDOs, CDO-squared, and CDO-cubed transactions were filled mostly with hot air.

When Gramm left the Senate, he went in 2003 to UBS, a bank whose profits built on speculation and gambling with other people's money he had made much cushier with the commodities modernization act .   The proverbial swinging door swung nicely for Gramm.  He was a vice chairman and "senior adviser to investment-banking clients" and "worked with governments around the world on behalf of UBS".  Wall Street Journal, Feb. 11, 2012, at B13.  The "Who's News" note says tht Gramm "helped build the UBS Office of Public Policy in Washington."   In other words, in addition to schmoozing with bank execs and wealthy clients, Gramm was a lobbyist working his old pals in DC on behalf of the bank. 

Guess the bank must have been disappointed when he wasn't able to get them out of the mess their greedy tax evasion business got them into.   Hmmm.  That does make one wonder just how much Gramm knew about UBS's business of pushing secret accounts that the IRS couldn't trace, smuggling diamonds in toothpaste tubes, and generally doing whatever necessary to make loads of money by helping US taxpayers avoid their tax liability under US tax laws? 

PS  In a "serves it right" result, UBS reported a fourth quarter net profit decline of 76%..... 

The relation between high college tuition and low state funding of higher ed: the right's austerity agenda

As certainly everyone should be aware by now (after almost 20 Republican candidate debates and months of negative campaign ads), the GOP candidates all think that we need to prescribe an austerity budget for state and federal governments.  "Too much spending" they yell.  "Too high taxes", they scream.  "It makes our big corporations uncompetitive", they whine.  "We need to break the backs of unions so public workers are as poor as workers in private industry, but still give tax cuts to the wealthy", they assert, "so jobs can trickle down to the poor".   See, e.g., Arthur B. Laffer (yes, he of the laughingstock napkin-drawn Laffer "curve" projecting his view that cutting revenues from taxes increases revenues), "The States are leading a pro-growth rebellion," Wall St. Journal, Feb. 11-12, 2012, at A11 (lauding the move to free-rider states, where stingy workers can get the benefits from the results of collective bargaining agreements without paying for the costs of supporting the union that got those benefits from them, thus starving and "busting" the union; gloating over the fact that California didn't adequately fund its state workers' retirement plans and that the anti-tax movement will keep it from doing so now).

That's a prescription for disaster.  

Misleading Tax Rhetoric Abounds

I got the same piece of mail that my colleague and fellow blogger Jim Maule got--a disturbingly misleading rant trying to make a case for zero taxation of unearned income.  I started to write a post about it, since this is the kind of material that gets my ire up.  It is written with what appears to be an intent to confuse or mislead.  It applies vague language when that suits the writer, and fails to explain even the simplest transactions acceptably.

Maule beat me to it.  He has an excellent post on Issue 9.04 of Tax Bytes, put out by the Institute for Policy Innovation (a think tank on the right):  When Double Taxation Doesn't Exist, MauledAgain (Feb. 8, 2012).

The problem with the IPI starts with the title of the piece--"when investment earns you additional--not lower--taxes".  Right there they are conflating two things--the original amount earned that was put into the investment, creating a "tax basis" that will not be subject to tax on any disposition of the investment; and the return on the investment when it is sold (or when dividends are paid on it), creating additional "gross income" that will be subject to tax, though at the preferentially low, low rate currently applicable for capital gains.

As Maule points out, the piece seems to be written to try to make the unknowing reader think that all the proceeds of a disposition of an investment will be taxable, not just the NEW income represented by the gain --the increase in value of the investment over the original basis.

The fact that a think tank could publish this kind of tax rhetoric, with so many misleading or erroneous statements, is just one more reason that I have urged my colleagues here at Wayne Law to require all our students to take at least the basic federal income tax course.  No student will come out of that course making the mistakes the IPI made in its piece on the taxation of gains from investments.  And every lawyer ought to have that foundation, so that they don't make such foolish statements as those in the IPI piece.

Santorum's Tax Returns Out

News Sources report Santorum has released tax returns.  I'm on my way to San Diego for the ABA Tax Section meeting, so haven't had a chance to peruse.  But a tax rate of around 25-27% for 2007-2010 on income ranging from $659,000 in 2007 to more than a million in 2009 shows Santorum paid a considerably higher share of his income in taxes than did Romney (at not quite 14%).

See Exclusive: Santorum Releases 4 Years of Returns, Politico (Feb. 16, 2012) (the returns are accessible at links on the Politico website).

Santorum Tax Rate Topped 27% for Past Three Years, BusinessWeek (Feb. 16, 2012);

Levin proposed carried interest bill (HR 4016)

Sander Levin has proposed H.R. 4016, which would characterize allocation of partnership profits in respect of a "profits interest" received for services--i.e., carried interest compensation-- of investment fund managers as ordinary income subject to employment taxes rather than allowing it to be treated as a share of the profits of a partnership, often garnering capital gains treatment if the partnership has mostly capital gains items.  The technical description provides both a good brief description of the issue and the way this bill addresses it. 

 There is absolutely no reason why income earned for managing other people's money shouldn't be taxed in the same way as income earned teaching or working in a factory.  This loophole for years has unfairly enabled some of the highest-paid individuals in the country to sharply reduce their tax bills and it is time to close it once and for all.

 Partnerships that hold investments assets or real estate held for rental or investment would be covered.

Let's hope Congress does the right thing here. 

Time for Congress to end estate gimmicks

Congress really should let the estate tax go back to its pre-Bush levels.  That way, we might get some amount of tax out of these huge estates that get passed from one generation to the next and cut down somewhat on the way the top 1% is garnering all the resources.

But along the way to that result, they need to get rid of a lot of gimmicks.  Consider the Wall St. Journal's story on the Finance Committee proposal to finally end a windfall to beneficiaries of IRA accounts.  Kelly Greene, Congress Eyes New Rules for Inherited IRAs, Wall St. J., Feb. 11-12, 2012, at B9.

Today, if you inherit an IRA account or a 401(k) account, you can stretch the withdrawals over your own life expectancy, while assets continue to increase in value with tax-deferral.  If the beneficiary is a child, then the withdrawals get stretched over many decades, and the resulting tax deferral is a significant benefit that about equals no taxation. 

The proposal would instead require heirs to take out all of the money inh inherited IRAs and 401(k) accounts within 5 years.  That would allow them some ability to handle the large lump sum payout without undue taxation, but would not permit them to continue to enjoy the tax-deferral on continued accumulations.  The proposal would exempt children with special needs, beneficiaries who are within 10 years of the original account-holder's age, and spouses.  Those exemptions seem eminently reasonable--the spouse or special need child likely depended on that income during the marriage and should be able to continue receiving the benefits of the payout throughout his or her life, while the continued payout for beneficiaries of about the same age is most likely to cover an elderly sibling or parent (or same-sex spouse not otherwise recognized, regretably, by federal law).

The Journal article notes the concern that heirs will "blow through" their inheritance because of getting it in a lump sum. Or they will lose it in bankruptcy, since the money once paid out would lose the bankruptcy protection of the IRA.   

What's worrisome is that planning for large estates would still have too many gimmicks to fall back on even with that reasonable change to eliminate a windfall to young beneficiaires of 401(k) accounts.  The Journal article notes "there are still a number of ways to transfer money to your children, though they are more complicated and have costs."  It lists specifically--

• Life Insurance.  withdraw IRA assets you won't need, pay the tax now, buy life insurance, and fund a trust for the kids with the life insurance.  That removes the funds from the estate because of the exclusion for life insurance proceeds. 
• Charitable Remainder Trust.  leave the IRA to a CRT--the donor gets a tax deduction, and the beneficiaries get payments

Life insurance proceeds shouldn't be tax-free:  they should be subject to the same investment gain taxation rules to which annuities are subject.  And Congress needs to eliminate provisions like the Charitable Remainder Trust that permits a deduction even though one's heirs receive payments. Congress should do a thorough cleansing of the Code to remove all such gimmicks, including the valuation discounts that are used to claim that an asset is worth less because it is transferred into an entity where there are 'restrictions' on transferability that discount the value.

Payroll cut extender said to be "very close"

Bloomsberg.c.com announced late Tuesday that congressional leaders are "very close" to settling on a plan for extending the payroll tax deduction through 2012, without requiring an offset.  The plan would also extend the "doc fix" that prevents the rollback of doctors' reimbursements under Medicare from taking place (and apparently also the unemployment benefitsm with some term less than the current 99 weeks), by requiring offsets for those costs elsewhere.  The GOP plan for drug-testing unemployment benefit recipients has thankfully been tossed into file 13, and so has the requirement that such recipients work for a high school equivalency degree.

Revenues for the offset may come in part from higher pension contributions from higher-paid government employees.  

According to the Bloomberg piece, Camp, chair of House Ways & Means, has said that "a structure and a framework" for a deal is in place.

I must admit I don't get the Medicare doc fix.  Doctors are well paid generally, and paying them less under Medicare sounds like a good start to reducing the rentier profits that doctors make out of providing medical care.  I would prefer to see a phase down of the amounts they get reimbursed--27% is a significant cut in a one-year period, so it would make more sense to phase the cut in over at least 5 years.

Ross Douthat Excuses the Manager/Owner Class

As the Occupy WallStreet movement has revealed, the United States is a country with growing disparity between an "overclass" of elite rich who have garnered most of the gains of productivity and the vast majority of the rest, who teeter on the verge of poverty if there is an illness, a death, a job loss or any of the other normal human catastrophes that beset us.

Many of those on the right--particularly economists who follow the Chicago School "unfettered markets" theory of the way capitalism works--suggest that there's nothing that can or should be done about these problems other than relying on the unfettering of the market system that created them to resolve them.

For example, take Ross Douthat's opinion piece in the New York Times on Sunday, Can the Working Class Be Saved? (Feb. 12, 2012).  He starts with Charles Murray's conclusion (in a book reviewed earlier in the Times)  that the working class has lost its way because it no longer values fidelity, piety, industry, thrift, and personal responsibility. 

These are of course the typical right-wing approaches to explaining the problems of much of the poor, near-poor and middle class in America today.  The right sees it as their fault for not being responsible (select cheaper doctors for health care, or die), not being faithful (if women would stay married to the bums that abuse them, they'd have more financial support), or not being faithful enough (turning away from church leads to teenage sex leads to pregnancies leads to abortions--and it's all bad in the eyes of the pious right that wants to impose its views on the rest of us).

But Douthat doesn't like Murray's answer--he considers it a too radical libertarian policy proposal that is "impractical" and "divorced from political reality."  Murrary would scrap all the individualized programs that result in too much government intervention in daily lives, and instead provide  a guaranteed minimum income to all Americans.  Murray's answer has much to appeal in it--direct aid probably costs less overall, since it goes directly to the people who need it instead of to all the middlemen.  Of course, the minimum is likely too low, and it probably doesn't provide enough to ensure that those in the bottom tiers of the income distribution have a fair chance at college and improving their lives.  It probably won't work to remove government from the picture entirely--after all, the reason we need to work together in the form of government is that we cannot as individuals do so many of the things that we need to do as a community.  For example, we need state support for public education at all levels to increase, so that there are public goods available to meet the needs of everyone.

But Douthat doesn't like the left's response to Murray's arguments about the American working class either.   He says that that liberals acknowledge "the social breakdown [Murray] described may be real enough, ... , but [claim that] it’s an inevitable consequence of an economic system that Republicans have rigged to benefit the rich." 

 He treats the assertion of untruth of that statement as though it proves itself.  But of course it doesn't.  In any system, there will tend to be power elites who gradually move the system more and more to favor themselves.  If they can co-opt the underclass to serving their needs and voting against interest, they will.  That is pretty much what has happened in the US under reaganomics--tax cuts, deregulation, militarization, privatization--those policies have ultimately all greatly benefited the rich and sometimes helped but often hurt the not-rich.   That has left us with the problem of the top 1%--called attention to by the Occupy Wall Street movement--garnering productivity gains for themselves and leaving the rest of Americans in dire straits.

In particular, the privatization/deregulation combination have permitted employers to have the upper hand in their treatment of workers and supported the gradual weakening of worker unions, which offered them their best means of combatting neo-feudal workplace policies.  Once private sector worker unions were weakened, the right began its effort to decimate public sector worker bargaining rights, an effort that is accelerating today.  Much of it is achieved by using a divide and conquer strategy--tell private workers that public workers are getting overpaid on their tax dollars, even when it is either untrue (most public workers are underpaid compared to private workers) or only partly true (some public workers make more than private workers, but in those cases it is the private workers who are underpaid, as their employee rights and their share of productivity gains have diminished over the last decades, while the managers' shares of productivity gains have increased like an expanding black hole).

What is Douthat's explanation for the problem?

It was globalization, not Republicans, that killed the private-sector union and reduced the returns to blue-collar work. It’s arithmetic, not plutocracy, that’s standing between the left and its dream of a much more activist government.

That, my folks, is post hoc rationalization, at best.  Globalization as we have experienced it is indeed a part of the problem.  But Milt Friedman's adulation of unfettered markets, the brute capitalism that the right has promoted for decades, is the driving impulse of globalization as we have experienced it.  The US gave up its own environmental sovereignty in trade agreements with other countries.  The US failed to protect its workers and industries--by , for example, exacting an "exit toll" when its own corporations moved jobs outside the country.  The US policy approach to globalization was determined by the "unfettered market" approach of the Chicago School--what Naomi Klein referred to in her insightful book as "The Shock Doctrine" (which is a good description of what Grecians are undergoing now in order to satisfy Morgan Stanley, Goldman Sachs and the other big multinational banks who hold a good deal of Greece's debt).  And the US's failure to provide adequate stimulus at the worker level--through job programs and even job guarantees--is a big part of the reason that the financialization of the economy had such drastic results for ordinary Americans.  See, e.g., Pavlina Tcherneva, why the job guarantee is superior, Naked Capitalism (Feb. 12, 2012).

As to the second part of Douthat's assertion--that "it's arithmetic and not plutocracy" that is the problem?  Again, that answer overlooks the way other nations have controlled health care costs  with single provider systems where hospitals and Big Pharma lose their market-making power, and doctors are subject to a more rational pricing system.  Health care is the primary driver of the expected increase in government benefit payouts (other than the "temporary" increase from the baby boom wave). 

So a combination of governmental actions could change the numbers in Douthat's "arithmetic"--utilization of the savings from transitioning from engagement in multiple wars to a more defensive, anti-war approach; re-regulation, anti-trust actions and a narrower scope for corporate consolidations and reorgs (to prevent the need for more bailouts); beefening of our unionization rules to protect workers against the current lopsided power of employers (e.g., a card check rule and requiring employers to permit a union meeting with workers for every employer meeting that addresses unionization issues); health care reform through a public option/single payer or even single payer/single provider solution (to prevent the continuing rentier profits from health services that are exploding health care costs in the US compared to other developed nations); and adjustments to the tax system to ensure a more appropriate "ability to pay" measure than the rough brackets and systems we have now.

The tax system, in other words, cannot redress that problem in and of itself, but it can certainly be a major contributor to a remedy. 

For example, we have a relatively flat bracket system, that doesn't make a distinction between $400,000 of income and $300 million of income.  A finer-tuned bracket structure that responds to today's income levels rather than those of the 1950s would have more rate brackets and a higher top rate for those hedge and equity fund managers and CEOs who earn multiple millions, even hundreds of millions a year (some earning in half a day more than their average workers make in an entire year). 

Furthermore, although the estate tax is our only method for a "last chance" to extract some tax from the financial assets mostly held by the very rich ( and mostly passed on, unsold, to their heirs in a windfall of unearned benefits and stepped up tax basis), the current estate tax is pitiful against the mighty estates it should be taxing based on ability to pay.  The current estate rules include a too-large exemption--$10 million for a couple--that lets many large estates off the hook for any tax whatsoever.  Worse, the current estate tax rules has a flat rate that is too low--those with a family farm worth $20 million pay the same rate on the amount above the exemption as those with estates worth billions (albeit with provisions for paying that amount over up to 14 years).  Even worse, Congress hasn't acted to eliminate the many gimmicks that sophisticated tax advisers use to work around the pitiful estate tax provisions that are still included in our Code (e.g., the complete exclusion of life insurance proceeds rather than just the investment return, gimmicky trusts and phony partnership valuations to get around the estate exemption amounts, among others).

Douthat's prescription is the following:

1. lower the payroll tax burden (by paying for Social Security in "other ways" and structuring benefits so as not to create a disincentive to work--he doesn't provide specifics, but one suspects that he means privatization of Social Security)
2. build family friendly policy into planning (either through the left's favored european style family leave requirements or the right's favored method of child tax credits)
3. control immigration (favor highly skilled immigrants, disfavor low-skilled immigrants)
4. reduce incarceration rates (with "swift certain punishment" and "larger police forces")

Note that there's no mention of increasing taxes on the rich or of using the windfall from the end of the Iraq and Afghanistan wars to support work programs like the WPA that helped end the Great Depression.  While these are topics that should be discussed, there are as many questions raised by this list as are answered.  Surely we have to reduce incarceration--but swifter punishment implies loss of due process (quicker death penalty executions is a common plea from the radical right), while more police is not the answer to things like the methamphetamine criminal gangs (modernizing our drug laws to treat most drugs as legal would be a great first step, since it is the criminalization of drugs that makes the criminality  of drug lords  so profitable, as we learned during Prohibition).  Surely we should be more aware of our immigration policies' impact on US families and workers.  But immigrants actually create new jobs--the mouths have to be fed, the families have to be housed, etc.  It is not so clear that shutting the door protects US jobs but may in fact close them down.  Family friendly policy is a good idea--which is why legalization of same-sex marriage and repeal of DOMA needs to happen, so that all the different kinds of US families can have similar protections and similar assurances of long-term security, that will help them be steadier and more responsible workers and parents.  Lowering the payroll tax burden for the poor and near-poor makes sense, but increasing it for those who are better off makes sense too. 

Heatlh Care Reform and Religious Exemption--Whose Freedom Are We Talking About, Anyway?

 The Treasury, IRS, Department of Health and Human Services, and Department of Labor finalized regs Firday that exempt certain religious employers from covering contraceptive care under the Patient Protection and Affordable Care Act.    T.D. 9578 (available here now to subscibers to BNA) will be published Feb. 15 in the Federal Register and become effective April 16.

Seems like the Catholic Church wants to impose its own views on these matters of religious theology on all of the people its employees.  And they try to use the idea of religious and individual freedom to allow them to impose their views on people who may or may not share them (whether or not they are Catholic themselves).

Under Supreme Court precedent, religious Native Americans can be told they can smoke peyote because it is a regulated substance and the laws regulating that substance are "laws of general application" so they aren't discriminating towards Native Americans.  See the Wikipedia entry for Employment Division, Department of Human Resources of Oregon v. Smith, 494 U.S. 872 (1990), excerpted below.

Employment Division, Department of Human Resources of Oregon v. Smith, 494 U.S. 872 (1990), is a United States Supreme Court case that determined that the state could deny unemployment benefits to a person fired for violating a state prohibition on the use of peyote, even though the use of the drug was part of a religious ritual. Although states have the power to accommodate otherwise illegal acts done in pursuit of religious beliefs, they are not required to do so.

The Smith result was replace with a "strict scrutiny" review in the Religious Freedom Restoration Act, described here on Wikipedia.

Yet here are the Catholic Bishops claiming that even the direct accommodation provided by the Obama administration--that the church does not have to pay for contraceptive coverage, but the insurers must provide that to the church's employees who want it--isn't enough. See e.g., Newcomb, Contraceptive Compromise Doesn't Please Bishops, ABC News (Feb. 11, 2012).  And Mitch McConnell in the Senate is threatening to try to take down the contraception mandate as "just another example of government meddling."  See Flaherty, Top Republican Wants Vote on birth control mandate, AP (Feb. 12, 2012)--the flap over contraception provided the GOP what seemed like an opportune chance to pile on against the health reform act yet again: "And this is what happens when the government tries to take over health care and tries to interfere with your religious beliefs."

But individual freedom and interference with religious beliefs is one of those things that looks different depending on whose perspective you take.

The Obama administration compromise means the religious institutions don't have to provide that which they disagree with.  There is minimal or no cost to insurance companies from providing the contraceptive coverage separately to employees of such religious institutions.  In fact, it is likely that contraceptive coverage is much cheaper in the aggregate to women, government and insurance companies than having more (unwanted) pregnancies. Yet the Bishops think the Church should be exempted from the health care provision requirements --and their employees shouldn't have this option to get covered outside the church's plan--just because the church doesn't agree with it.

In part, they are relying on that statutory protection enacted after Smith--the Religious Freedom Restoration Act, under which the federal government is subject to strict scrutiny regarding laws that impose on religious freedom.

But the question here, of course, is whose freedom are we talking about? 

The freedom of individuals of various religious backgrounds to work and receive the kind of coverage that they know they need and that is compatible with their own religion? or the freedom of the institution of the church to impose its religious dogma (and the consequences thereof) on all of its employees, no matter their religious faith?  Whenever the two are not consistent--and they will not be for any woman, whether Catholic or not, who wants to use contraception and in fact believes that her faith permits her to do so or even that it requires her to do so to be able to provide appropriately for her family--then the position supporting greater religious AND individual freedom is the one that requires contraception to be covered, one way or another.

Yes, the Obama compromise is a little gimmicky--sort of like the Islamic finance arrangements which justify interest by camoflaging it in ways that make it look like some traditional accepted payments (leases, rents, etc.).  But if that helps make it possible to do what needs to be done in this modern age--provide opportunities for borrowing funds to people that need to borrow to start businesses, or opportunities for decent contraceptive health care for people who work for a church that doesn't believe in it--then by all means, use the quasi-gimmicks in order to achieve the better public good.  But don't cave to the shrill cries of the mandate amounting to religious persecution.  It's nothing of the sort.

PS the same-sex marriage issue is another one where the Catholic Church shouldn't be able to impose its views on its workers who are not teaching theology.  There, however, the Supreme Court (with a significant number of Catholic justices who might be expected to empathize with the church on these dogma questions) recently decided a case that supports a "ministerial exception" to laws that otherwise protect employees from various kinds of invidious discrimination in employment for employees of religious organizations.   Personally, I see this as a black mark against religious freedom for individuals, and another example of corporatism at work, this time in support of institutionalized views being imposed on individuals that make up the institution.   See, e.g., Music director's marriage leads to his firing from St. Gabriel Catholic Church (Feb. 12, 2012) (gay music director--who had worked in the church while having an openly gay relationship for years--suddenly fired for taking advantage of New York's new law permitting same-sex couples to marry, even though his state (South Carolina) and his employer (the Catholic Church) would not recognize the New York marriage anymore than it had recognized his earlier common law marriage).   Much like the fundamentalist protestants who accuse the government of discriminating against Christians when the government appropriately uses "happy holidays" rather than "Merry Christmas" to wish its employees well, these religious groups are seeking to have the government impose restrictions on workers that take away worker rights in the name of religious freedom for some, but with the result of limited freedoms for others.

Obama FY 2013 Budget Proposal Released Today--President's Message

The Obama administration released its FY 2013 budget proposal today.  Obama projects that the deficit will be cut by over $4 trillion over the next decade, coming within the goalpost of 3% of GDP by the end of the decade.  That includes a reduction in defense spending of almost $500 billion over the decade.  At the same time, Obama makes the case for continuing the nation's investment in non-defense research & development--including clean energy. 

The President's message (part of the budget document, see link at bottom) sets the theme of attention to the way the gains of the top 1% have coincided with aggravated problems for the majority of hard working Americans.  It notices, that is that budgetary and tax policies, combined with  deregulation and financial crisis, are moving ordinary Americans towards despair and out of the middle class.

By giving every American a fair shot, asking everyone to do their fair share, and ensuring that everyone played by the same rules, we built the great American middle class and made our country a model for the world. Today, ... for many Americans, the basic bargain at the heart of the American Dream has eroded.

Long before this recession hit, there was a widespread feeling that hard work had stopped paying off; that fewer and fewer of those who contributed to the success of our economy actually benefited from that success. Those at the very top grew wealthier while everyone else struggled with paychecks that did not keep up with the rising cost of everything from college tuition to groceries. And as a result, too many families found themselves taking on more and more debt just to keep up—often papered over by mounting credit card bills and home equity loans.

Then, in the middle of 2008, the house of cards collapsed. ... Banks had packaged too many risky loans into securities and then sold them to investors who were misled or misinformed about the risks involved. Huge bets had been made and huge bonuses had been paid out with other people’s money. ... [M]illions of hardworking Americans lost their jobs, their homes, and their basic economic security. ...

We built this Budget around the idea that our country has always done best when everyone gets a fair shot, everyone does their fair share, and everyone plays by the same rules. It rejects the “you’re on your own” economics that have led to a widening gap between the richest and poorest Americans that undermines both our belief in equal opportunity and the engine of our economic growth.

The President's message also points out something important for citizens to bear in mind as the elections hurtle towards us at the end of this year--the reason for the financial crisis and the huge deficits we face now relate to the irresponsible tax cuts of the Bush administration--all passed when everyone knew that they would result in significant deficits that would be hard to ever make up--and the military buildup underway since Reagan, in particular the huge costs of two preemptive wars undertaken by that administration.

When I took office 3 years ago, my Administration was left an annual deficit of $1.3 trillion, or 9.2 percent of GDP, and a projected 10-year deficit of more than $8 trillion. These deficits were the result of a previous 8 years of undertaking initiatives, but not paying for them—especially two large tax cuts and a new Medicare prescription drug benefit—as well as the financial crisis and recession that made the fiscal situation worse as revenue decreased and automatic Government outlays increased to counter the downturn.

The budget proposes a number of good changes. 

• Obama proposes ending "special tax breaks" for Big Oil;
• Obama wants to finally end the "carried interest" fiasco, whereby equity fund partners that make much of their money by purchasing companies, overleveraging them to pay out debt proceeds to partners, and then breaking them up and firing workers are allowed under current interpretation of the partnership rules to treat their compensation income as capital gains if that is what the partnership they are servicing has. 
• Obama proposes enacting a Buffet Rule (a type of alternative minimum tax requirement that millionaires pay at a rate at least equal to the middle class--the sentence presenting this in the President's message is badly botched); 
• Obama wants to limit certain deductions for high income taxpayers to 28%: various deductions were subject to phaseouts at higher incomes before the Bush tax cuts but were  phased out under those cuts. 
• Another good change relates to the various temporary tax provisions enacted in the Bush administration that are a significant cause of the country's current deficits.  Obama recommends allowing the temporary Bush capital gains rate decrease (from 20% to 15%) to expire as scheduled for high income taxpayers, and allowing the dividend treatment as a net capital gain, instituted first as a temporary measure in 2003 and extended several times so that it currently is set to expire at the end of this year, to expire as scheduled for high income taxpayers.  The result would be that the unearned income from dividends would once more be taxed  at the same rate as earned income from wages, a circumstance which many provisions of the corporate tax in Subchapter C--those  designed to prevent schemes that "bailout" of corporate earnings at capital gains rates rather than the expected ordinary income rates--presuppose as basic to the corporate income tax (see, e.g., the section 302 redemption analysis that considers whether the redemption is a sufficient reduction to count as an exchange or rather should be taxed as a distribution under section 301).

We can expect that the proponents of corporatism--especially the corporate coalitions fighting for preserving the benefits for the mostly higher-income shareholders such as ALEC and the U.S. Chamber of Commerce--are prepared to raise a stink about this provision and will expect the GOP members in the House and Senate to vote with them.  The obstructionist GOP is already holding a press conference and conference calls on the matter.  See this C-SPAN item.  This will be a test of whether Congress has been listening to the issues raised by the Occupy WallStreet movement across the country. 

The arguments made by the corporate coalitions don't hold water.  See various earlier posts on this matter at A Taxing Matter.  Clearly, the dividend rates until 2003 didn't prevent people from investing or prevent people from making lots of money investing.   Nor did the change in the dividend rate lead to corporations retaining more income in the US--instead, after getting one "tax holiday" in 2004, more corporations moved more money offshore in expectation of continuing the gravy train with future tax holidays.  Anything the ALEC group says has to be taken with a very large grain of salt.  Especially about how increasing the sum total of corporate and dividend taxation will drive people awy from investing and reduce corporate capital formation.  The fact is that corporate taxation is at an extraordinary low and that most sales and purchases of corporate shares take place in the secondary market, putting no cash into corporations whatsoever!

But there's a good bit not to like as well.  The President calls for "corporate tax reform"--a favorite agenda item of the radical right that will decimate any plans for reducing the deficit without overburdening the middle class if the GOP is able to move it forward.  Obama suggests that corporate tax reform should close loopholes and lower rates so that it doesn't result in increased deficits.  But any loophole closure will be undone shortly thereafter, and any lowering of rates will never be undone.  It is folly to think that the kind of base broadening/rate lowering model applicable in 1986 could work in the "greed is good/taxes are bad" poisoned climate of 2012.

Office of Management and Budget FY2013 Budget Overview

 President's Message

White House Budget Proposal Text

President Discusses Budget Proposal (at Northern Virginia Community College) (with C-SPAN video)