I've covered my reservations about Jack Lew in prior posts. Most notably, I view him as too eager to accommodate Wall Street and the GOP demands for cuts to benefits of safety-net programs, rather than standing firm. As many have pointed out, Social Security would be perfectly fine if we removed the cap so that people were paying the tax on most of their income, rather than allowing millionaires to pay on what amounts to a de minimis amount of their income. Medicare is a good program that is better at holding costs down than our overly costly privatized health care system. On Medicare, what we need is real measures to address the rent-seeking behavior of hospitals (including so-called "non-profits") and doctors and insurance companies, not reductions to benefits.
Bernie Sanders seems to agree with me. As the Times story reports, he noted Lew's affinity with Wall Street as a real negative.
“We need a secretary of the Treasury who does not come from Wall Street but is prepared to stand up to the enormous power of Wall Street,” Mr. Sanders said from the Senate floor. “Do I believe that Jack Lew is that person? No, I do not.”
[edited to add reference to Bair op-ed 3:22 pm 022713]
Back when William Proxmire was a senator and the Senate sometimes actually tried to deal with facts rather than convenient or mythological fictions, Proximre created something he called The Golden Fleece Award to highlight instances of wasteful government spending.
Now, let it be said early on that waste is rather like beauty--its recognition rests in the eye of the beholder. The Tea Party neocons see waste in most funding for science, whereas most intellectuals, academics and others see that as investment in the future--especially exploratory, speculative science testing the fringes of theory--which serves the public good. Similarly, most of the "deficit hawk" crowd see waste in government safety net programs, or programs that might (if the conditions now were to last for 75 years) create a large obligation in the future, but don't see waste in military expenditures or 100 years of subsidies for multinational giants like Big Oil and Big Pharma. Furthermore, the "starve the beast" crowd want to maintain most of the programs that give the plutocracy a powerful edge in the socio-economic world that tax so directly influences, while wanting to eliminate or substantially reduce most of the programs that barely offer some opportunity to the peasants whose productivity is usually the source of the economic gains of the plutocrats.
ASIDE: remember that the deficit hawk crowd overlaps a good deal with the "starve the beast" crowd, which overlaps as well with the "starve the poor" crowd. The deficit hawk crowd thinks deficits are awful when Democratic programs create them (but generally didn't squawk at the upwardly redistributionist tax cut programs of the Bush years, or the constantly creeping upwards military-industrial subsidies, etc.). The "starve the beast" crowd thinks most government programs that serve the public good rather than paving the way for the rich to get richer are bad. And the "starve the poor" crowd condemn all except the most meager social justice and safety net programs on the grounds that they are paternalistic and keep "the 47%" from exercising personal responsibility. Generally speaking, all of the above tend to disfavor downwardly redistributionist programs as "socialism" but favor upwardly redistributionist programs as "investments in the future" or "just plain fair" or "job creating" or traditional (and on and on).
That said, pointing out programs on which considerable money is spent without a showing of likelihood of success at a reasonably beneficial goal is often worthwhile.
The Golden Fleece awards have been carried forward by Taxpayers for Common Sense, a 501(c)(3) organization that protrays itself as a "non-partisan budget watchdog serving as an independent voice for American taxpayers [with a] mission ... to achieve a government that spends taxpayer dollars responsibly and operates within its means." It's goal is to "increase transparency, expose and eliminate wasteful and corrupts subsidies, earmarks, and corporate welfare, and hold decision makers accountable." (from emailed release about the Golden Fleece award).
More transparency, less corrupt subsidies, less corporate welfare, and more accountability are all important. As Sheila C. Bair (former head of the FDIC from 2006 to 2011) put it in an op-ed in today's New York Times:
The yawning gap between rich and poor has been growing since the 1970s and reached a 90-year peak in 2007, just before the financial crisis. The Great Recession narrowed the gap a bit, but now, once again, the richest Americans are vacuuming up what wealth is out there, a trend that Mr. [Emmanuel Saez, UC Berkeley economist] expects to continue.
...I fear that government actions, not merit, have fueled these extremes in income distribution through taxpayer bailouts, central-bank-engineered financial asset bubbles and unjustified tax breaks that favor the rich. ...
Skewing income toward the upper, upper class hurts our economy because the rich tend to sit on their money--unlike lower-and middle-income people. ... .[M]ore fundamentally, it cuts against everything our country and my party stand for. government's role shouldn't be to rig the game in favor of 'the haves' but to make sure 'the have-nots' are given a fair shot.
So the Golden Fleece target is worth considering. They picked "Department of Energy for Federal Spending on Small MOdular Reactors." This is the nuclear-reactor-in-every-basement idea, for which another half billion dollars (in addition to $100 million already provided) in corporate welfare is planned. The corporations, not the federal government, will own the R&D and licensing rights. The government is, in other words, getting fleeced.
The federal government is in the process of wasting more than half a billion dollars to pay large, profitable companies for what should be their own expenses for research & development (R&D) and licensing related to “small modular reactors” (SMRs), which would be about a third of the size or less of today’s large nuclear reactors.
...
[Autumn Hanna, at Taxpayers for Common sense, said,] "Unfortunately, these technologies have an equally long tradition of expensive failure. If the industry believes in small modular reactors and a reactor in every backyard – great – but don’t expect the taxpayer to pick up the tab.”
The federal government already paid for a version of SMR R&D when small reactors were designed for the U.S. Navy’s nuclear submarine fleet. Now some highly profitable companies – including Babcock & Wilcox, Westinghouse, Holtec International, and Fluor Corporation -- are at the federal trough for another round of federal support for small modular reactors that could go into suburban American neighborhoods. Id. (TCS release)
This kind of tax expenditure subsidy for major corporations is just another example of corporatism in action in today's economy, often as part of a tax code that is rigged to favor the rich, from the preferential treatment of capital gains to the preferential treatment of fund managers' "carried interest" compensation income; from the subsidies provided for hugely profitable industries like oil and gas, pharmaceuticals, IT and real estate, to the subsidies provided to the rich through charitable contribution deductions for amounts they never invested. It is a part of the growth of plutocracy and inequality, as big corporations, their managers and owners garner most of the productivity gains and use their lobbying prowess to ensure that they also garner incredible amounts of unnecessary financial support from the federal government through direct subsidies (Agribusiness payments to corporate farmers) or tax expenditure subsidies (percentage depletion allowance and "domestic manufacturing deduction" and R&D credit and active financing exception and the allowance of offshore captive reinsurance companies, etc.). All this amounts to redistribution upwards to the wealthy and the multinational corporations that they mostly own--amounts funded by ordinary taxpayers.
Through a process of Wall Street interpretation of the law and the "Wall Street Rule" (that says that the government tax administration will have great difficulty gainsaying an interpretation of the tax laws that lots of high-powered--read "wealthy"--Wall Street bankers and friends have arrived at for their own benefit), private equity fund and real estate investment partnerships have long operated under the assumption that their managers can earn compensation income as though they were "partners" in the firms they are managing, even though they make no capital contribution whatsoever. This is the so-called "carried interest" treatment of so-called "service partners" who receive a so-called "profits interest" in various types of investment partnerships for managing the assets.
Various commentators, myself included, have long argued that carried interest should be taxed as ordinary compensation income, just like everybody else's compensation for work done. I would go further. The Internal Revenue Code provides for capital interests that are received, in a nonrecognition transfer, for contributions of capital to the partnership. The concept of profits interests is developed in regulations and lower-court case law, both of which could be overturned (as in General Utilities "repeal" when a court case allowing distributiion of appreciated property from corporations without tax to the distributing corporation was "repealed" through a statutory enactment of a provision that required gain recognition) by a legislative restructuring of the partnership provisions to make clear that there is no such thing as a service partner other than one who has made a contribution of equity and who also works for the partnership and receives a "guaranteed income" payment of compensation.
There are many in Congress who recognize the unfairness of the carried interest compensation loophole--not only does an interest that is claimed to represent a portion of the partnership's capital gain income get taxed at a much lower preferential rate than ordinary compensation, but it also avoids all the payroll taxes that the lowliest wageearners must pay. Sannder Levin, a Michigan Democrat, introduced a bill in 2007 in Congress that would have taxed carried interest at ordinary rates. It was defeated by massive lobbying by the private equity, hedge fund, and real estate millionaires (and billionaires).
This state of affaires denies our Treasury much-needed revenue; fuels public cynicism in government; and is evidence of the 'crony capitalism' that favors some economic sectors over others.
It is time for Congress to end this travesty. Tax compensation to private equity fund mangers and their ilk as what it is--compensation income for services rendered to investors.
It seems that billionaires think they are entitled to it all and think they should be able to run their speculative games without paying much of anything at all in taxes to the government they depend on. And none of this is good for the economy or good for the taxpayers not in "the 1%".
Case in point--John Paulson, the notorious hedge fund manager who got a CDO built to his desires with a bunch of iffy subprime mortgages and then took the short side of the bet, making a fortune off the bet against subprimes in the mortgage crashes underlying the 2007-8 Great Recession. See, e.g., Zuckerman, Trader Made Billions on Subprime, Wall St. J. (Jan. 15, 2008).
What has Paulson done? He established a new "reinsurance company" in Bermuda in April, that turned around in June and put the money invested in it back into Paulson's hedge funds in New York, as a portfolio of insurance "reserves" to be held to pay off insurance risks that go bad. The result is tax deferment for Paulson and other executives of his hedge fund along with recharacterization of ordinary compensation income as preferentially taxed capital gains.
For a discussion of the hedge fund reinsurer gambit, see , e.g., any of the following. The story at Bloomberg has reinvigorated media attention to this issue.
Barile notes that these hedge funds are using reinsurance premiums and investing in a very aggressive way, compared to traditional reinsurers". This aggressive position produces a downside if there are low investment returns, especially if there are catastrophes for which they have to pay claims when their investment strategies have produced losses. He says that "it remains to be seen" whether hedge-fund reinsurers are in it for the long haul, since they have a shorter time frame on making greater returns on their money.
Looking at this as a global concern, Baker ultimately suggests that the Basle Capital Accord rules should be extended to hedge fund reinsurer operations, "Another area in which the BIS should take a leadership position," he says, "is the role in which reinsurance firms play in hedge fund operations. The tax implications of hedge funds using reinsurance firms in their funds for tax advantages points to the need for more government regulation of this activity."
He describes the basic problem as follows: "wealthy individuals invest in private placement offerings of offshore reinsurance companies. These companies, many headquartered in Bermuda, buy insurance policies written by name-brand insurers...and "may then invest its stock issue returns in a hedge fund. ...[That reinsurer] pays no taxes on the trading profits until it sells the fund shares and then the reinsurer is taxed at a lower capital gains tax. The tax savings are passed on to the individual investor.
He goes on to say that "The problem ... is that insurers are exempt from registering as investment companies....These reinsurers do not have to make annual distribution of profits as mutual funds do and they are not taxed by the Internal Revenue Service as investment vehicles. ...In short, the activity ... is a method for wealthy investors to reduce their tax burden as a result of a tax loophole. Since these insurance companies are mixing insurance business with investment business, they need more supervision.
This is especially true when hedge funds are involved. "[H]edge funds work with reinsurers to reduce tax liabilities for their wealthy clients. ...U.S. hedge fund managers and investors form a tax-advantaged reinsurance company offshore in...Bermuda, which has no corporate income tax. The Bermuda-based reinsurer sends investment assets to the hedge fund to invest. Investors return to the United States with shares of the reinsurer and pay no taxes until the company goes public. At that time, investors [and managers] sell their shares in the reinsurer company and are taxed at a lower capital gains rate.
These schemes are worrisome from both tax and insurer regulatory perspectives. "Aside from the tax loophole problem, the real issue in these cases is the added underwriting risk incurred in the process. ... [Hedge funds acting as reinsurance companies] have insufficient insurance expertise.... Much of this activity has stemmed from financial engineering and deal making of the 1990s. ... [W]ithout the bailout of LTCM [Long-term Capital Management hedge fund] by national bank regulatory authorities, many banks and reinsurers might have collapsed as well."
So why do it and how does the hedge fund reinsurer gambit work? Remember that these hedge fund execs get a ridiculous amount in compensation in the form of a "fee" (usually 2% of assets under management) and a "carry" (usually 20% of the profits). (The fee and carry are often represented as 2 and 20, but can be much higher for some firms with status, rising to as much as 5 and 50.) Without more, hedge fund managers don't get as much benefit from the claimed treatment of a "profits" partner as private equity fund managers do. Though the managers claim classification as "profits" partners whose taxation is based on their share of the partnership's gains and ordinary income and not as payments of (ordinary) compensation, hedges mainly yield ordinary income so don't act directly as "converter" entities. Private equity fund managers also claim they are "profits" partners whose income should not be classed as compensation but as pass-through shares of the partnership items: in their case, most of the private equity fund's gains will be deferred anyway (for several years at least until the partnership sells the leveraged company) and they claim those deferred gains should be characterized as pass-throughs characterized by the partnership rather than being characterized as ordinary compensation income to them.
So for hedge fund managers, gaining deferment (of what is clearly in substance their compensation as managers) can achieve minimal current tax. If the money is cycled through an offshore corporation that pays no taxes, that's even better because it gets preferential rates as well. The deferrment is achieved by waiting to sell the stock, and the sale of the stock is reported as a capital gain. Thus what is really current compensation income is recharacterized, through the reinsurer "conduit" scam, as a deferred capital gain. So hedge fund and private equity managers ultimately both claim to get the best of all possible worlds--their wages from work are not currently taxed as wages at ordinary income rates, they pay no payroll taxes on their compensation, and their compensation is deferred and taxed at preferential capital gains rates.
This is so obviously unfair to the vast majority of ordinary taxpayers who pay taxes on their compensation income even before the end of the tax year through the withholding mechanism that Congress should step in with legislation. It seems hard to justify a "profits" interest in a partnership at all: it has been created by the "Wall Street Rule" that gains credence because big-money people claim it is correct. As usual, tax administration eventually mostly went along with it (Rev. Proc. 93-27) and a few court cases (Diamond, Hale) mostly treat the notion of a profits partner who pays no taxes on his compensation as reasonable. Congress could easily legislate away the profits interest and define partner in a partnership for tax purposes as someone who has made a genuine at-risk equity contribution of cash or property to the partnership. There really should be no such thing as a services partner with a "profits" interest who hasn't contributed up front for a capital interest. And all compensation shares to what are currently treated as profits partners could be treated as ordinary income --i.e., compensation currently subject to the income tax and to payroll (Social Security/Medicare) taxation.
This use of reinsurers by hedge funds is itself a tax dodge that has been around a decade or so. In 2007, the Senate Finance Committee held a hearing on Offshore Tax Issues: Reinsurance and Hedge Funds (S. Hrg. 110-875, Sept. 26, 2007) (179 pages). In his introduction, Baucus described insurance tax avoidance schemes as follows:
Insurance companies make a living by doing two things: they assess premiums based on the prediction of the likelihood of events against which they insure—that is called underwriting—and they also make money by investing the premiums that they collect until they have to pay out claims. If they are good at those two jobs, they make a profit.
Customers buy insurance from insurance companies to guard against the risk of fire, disaster, or some other calamity. In exchange for paying premiums, the customers shift some of their risk to the insurance companies. Insurance companies also buy insurance. Property and casualty insurance companies pay premiums to reinsurance companies in exchange for shifting some of their risk to the reinsurance company. Sometimes the reinsurance company is also the parent company of the property and casualty insurance company. In that case, the property and casualty insurance company shifts risk to their parent reinsurance company at something less than an arm’s length transaction.
Here is where the tax avoidance comes in. Some parent insurance companies set their headquarters in low-tax jurisdictions, like Bermuda. Subsidiary property and casualty insurance companies shift risk to the Bermuda parent. Because of Bermuda’s low tax burden, the Bermuda parent can get a greater after-tax return on their investment activities. As a result, subsidiary property and casualty insurance companies can charge lower premiums for their insurance. They get a competitive advantage over insurance companies doing business in jurisdictions that tax investments.
The second setting that we will examine today involves hedge funds. Foundations and other nonprofits are some of the largest investors in the world. The law requires a nonprofit investor that invests directly in hedge fund partnerships to pay the unrealized business income tax, otherwise known as UBIT. The policy behind the law is that tax-exempt entities should not be able to have an unfair advantage over taxpaying entities doing the same thing. To avoid UBIT, nonprofit investors sometimes invest in hedge funds through offshore entities incorporated in lowor no-tax jurisdictions, such as the Cayman Islands or Bermuda. These offshore entities are called blockers.
The third setting we will examine today is the compensation of hedge fund managers. Hedge fund managers receive fees from offshore blocker corporations used by nonprofits and foreign investors.Some hedge fund managers elect to defer their income, and deferring income means you pay taxes later, which is the same as a significanttax savings.
The IRS has already noted that offshore arrangements using reinsurers for hedge fund managers may be shams that are subject to challenge on audit. See Notice 2003-34 (indicating that "Treasury and the Internal Revenue Service have become aware of arrangements, described below, that are being used by taxpayers to defer recognition of ordinary income or to characterize ordinary income as a capital gain. The arrangements involve an investment in a purported insurance company that is organized offshore which invests in hedge funds or investments in which hedge funds typically invest.") Although the notice says that these purported insurers may be challenged as not insurers because they are not using their capital and efforts "primarily in earning income from the issuance of insurance", and although it states that such arrangements will be subject to close scrutiny that could result in the application of the PFIC rules (leading to current taxation), it has apparently not bothered to challenge any of the big hedge funds' reinsurer companies.
Again, why would they be subject to challenge? On the basis that they are not real reinsurers, since the low amount of reinsurance that many provide is the less risky part of the business and provides a buffer to the very high reserves that they retain, sometimes invested solely in a single promoter's hedge funds. And if they are not insurers, they are at the least "passive foreign investment companies" (PFICs) on which shareholders are subject to current taxation on profits. (Or perhaps the IRS might go further and recharacterize the arrangement as a sham , causing the hedge fund executive to have current ordinary compensation income.) In other words, there is good cause to think that for many of these, the tax haven corporation is acting as an offshore tax-avoidance pocketbook for the hedge fund executive, and not really as an insurer.
By the way, if you think these hedge fund managers who are making multi-millions and billions from managing other people's assets and hardly paying any U.S. taxes on those huge compensation payments are incredibly smart people who add to the economy's well-being and therefore merit that kind of out-sized pay or because of the returns they bring to people that then invest them in needed projects in the good ole US of A, you need to rethink that. Hedge funds typically pay out very poor returns, when all the expenses and profits to managers are taken into account.
Roughly speaking, if the typical fund manager worked for free, and if the investment firms didn’t charge, these masters of the universe would still have underperformed a balanced index since 2003, by roughly 2.5 per cent per year. Andrew Hallam, Think you're smarter than a hedge fund manager?, The Globe and Mail (Feb. 19, 2013) (emphasis added).
One of the right-wing's most cherished myths is that highly progressive taxes will kill state revenues, since the rich who have the money to pay them will simply move to a more accommodating jurisdiction.
This is repeated in most conversations I've had with staunch right-wingers. They cite their firm "knowledge" of this so-called "fact". "I work as a CPA and I've seen several rich people who left because of taxes", they'll say. Or "My friend is a private banker and he says lots of his rich clients are moving from California because of its high taxes." And similar anecdotes.
Of course, there are always a few high-profile cases that seem to confirm the myth. Celebrities like actor Gerard Depardieu who gave up his French citizenship for a Russian passport make the news. Celebrities like golfer Phil Mickelson who huffed off a golf course saying he might move because California increased its top rate from 10.3 percent to 13.3 percent get lots of coverage. These celebrities, of course, make many millions and 1) could afford to pay an additional 2% in state taxes but also 2) tend to develop huge egos that see themselves as the center of the universe and can easily move (since their work is not generally in a single locale). The people's response should be to shame them for being so greedy that they aren't willing to contribute what for them is a piddling amount to make their state better for all its citizens--Phil M experienced a bit of that. The government's response should be to discount them as a major force, since they offer merely a rare example of someone with enough money, flexibility, lack of loyalty and ties to carry out a threat to move.
My personal response tends to be--well,go ahead and move, Mr (Ms) Disloyal. You might as well move to Texas, where you can find a vast cultural lacuna along with a idiot Governor who denies global climate change, but you can always go barbecuing with George W. Bush on his ranch. Best of luck with the lack of decent water and decent air (and decent anything else) in the future--I hear Halliburton has made quite a mess of parts of Texas.....
The media, of course, has covered these cases elaborately--but luckily at least some of the national media has paid attention to what the empirical evidence, rather than anecdotes, says about moves of the rich. See, e.g., James B. Stewart, The Myth of the rich Who Flee From Taxes, New York Times (Feb. 15, 2013).
It turns out that various economists have studied the question of tax flight. Jon Shure (Center on Budget and Policy Priorities), Robert Tannenwald (former Federal Reserve economist) and Nicolas Johnson wrote a paper in 2011 called "Tax Flight is a Myth" (executive summary and pdf available at the link). Here are some excerpts from the summary.
The effects of tax increases on migration are, at most, small — so small that states that raise income taxes on the most affluent households can be assured of a substantial net gain in revenue.
***
Migration is not common. Most people have strong ties to their current state, such as job, home, family, friends, and community. On average, just 1.7 percent of U.S. residents moved from one state to another per year between 2001 and 2010, and only about 30 percent of those born in the United States change their state of residence over the course of their entire lifetime. ...
The migration that’s occurring is much more likely to be driven by cheaper housing than by lower taxes. A family might be able to cut its taxes by a few percentage points by moving from one state to another, but housing costs are far more variable. The difference between housing costs in two different states is often many times greater than the difference in taxes.
Recent research shows income tax increases cause little or no interstate migration. Perhaps the most carefully designed study to date on this issue concerned the potential migration impact of New Jersey’s 2004 tax increase on filers with incomes exceeding $500,000. ... At most, the authors estimated, 70 tax filers earning more than $500,000 might have left New Jersey between 2004 and 2007 because of the tax increase, costing the state an estimated $16.4 million in tax revenue. The revenue gain from the tax increase over those years was an estimated $3.77 billion....
The study goes on to look at several of the states that have been reported, anecdotally, to have considerable in-or out-migration due to low-or high-taxation--such as California, Florida, Maryland. It shows that much of the rationale for movement out of California (and now, out of Florida) had to do with the exceptionally high cost of housing. While taxes may sometimes be a factor in moves, the primary factors are housing costs, employment, weather, colleges, family, natural disasters and many other economic, democraghic and personal considerations. In fact, the study reminds that "many of the factors deterring people from moving are most prevalanet among households with higher-than-average incomes".
The claims underlying the tax migration myth are, in fact, "fundamentally flawed": they confuse correlation with causation, misrepresent irrelevant findings, and improperly measure migration.
The study provides some useful appendices, One illustrates how studies by a consulting firm drew arbitrary conclusions about migration patterns with the Portland metropolitan area.
Interested readers can find another study showing that higher tax rates don't cause significant numbers of wealthy taxpayers to flee, reviewing the new tax bracket created for millionaires in Maryland, at the Institute on Taxation and Economic Policy: Five Reasons to Reinstate Maryland's Millionaires' Tax, ITEP (March 9, 2011).
There are so many untrue views taken as "God's truth" on the right that it makes one's head swim. And they are often repeated in newspaper and magazine stories without a question.
I plan to do a series of posts on the right's anti-factual economic/tax myths as the foundation on which the right-wing policy ideology depends. For now, here's my list of the "top fifteen" anti-factual economic/tax myths of the radical right (not necessarily in ranked order).
Right-Wing MYTH 1: Higher taxes on the wealthy result in less revenues, because rich people flee from high-tax jurisdictions to low-tax jurisdictions.
Right-Wing MYTH 2: America is a classless society, with considerable mobility between income distributions from year to year, and an opportunity for anyone to make it to great riches on his or her own merit. Anybody who pretends otherwise is engaging in class warfare.
Right-Wing MYTH 3: There is an ideal rate of income tax, based on the "Laffer curve" theory, that shows that income taxes need to be relatively low, else the "confiscatory" nature of income taxation will drive those high ability "job creators" to do less work, resulting in a poor economy with fewer jobs for ordinary people.
Right-Wing MYTH 4: The US has the best health care system in the world because of private competition, so the best way to ensure decent health care for all is to make it even more competitive, by eliminating employer-provided health insurance and forcing Americans to take greater personal responsibility for their medical decisions. (This is an example of the way corporatism favors big institutions over individuals)
Right-Wing MYTH 5: The U.S. debt burden is unsustainably high and will cause the economy to crash--like a family, the US government should not use debt to make up for revenue shortfalls to pay for the budgeted spending.
Right-Wing MYTH 6: The best thing for the economy would be to cut Social Security and other "entitlement" spending that grows apace with the growth of the population.
Right-Wing MYTH 7: Government spending is always worse than private spending (this is one version of the "privatization" leg of the reaganomics economic stool)
Right-Wing MYTH 8: Estate taxes are unfair because they take away family farms and for others result in double taxation --once during the decedent's lifetime, and once upon death.
Right-Wing MYTH 9: The preferential taxation of capital gains is necessary to level the playing field with the taxation of wages, since holders are otherwise penalized by inflation.
Right-Wing MYTH 10: A national sales tax would be a simpler and fairer way to fund whatever federal government activities are needed.
Right-Wing MYTH 11: It was the quasi-governmental Fannie Mae and Freddie Mac that precipitated the mortgage loan crisis.
Right-Wing MYTH 12: Unions are harmful to the US economy, and it is important not to allow a "card-check" system for union approval, in order to protect employees from a union they don't want.
Right-Wing MYTH 13: Workers in states without "right-to-work" laws are forced to pay union dues but get nothing for them; workers in states with "right-to-work" laws are protected from paying for something that does them no good.
Right-Wing MYTH 14: A truly free market is the secret of a great economy, and the free market economy works best when taxes are very very low.
Right-Wing MYTH 15: The wealthy are the job creators.
Please add your candidates in the comments, and any studies you have found that directly counter them.
As most of the ataxingmatter readers know, I do not frequently applaud the economic punditry of those freshwater economists who think the way to deal with the problem of failed market fundamentalism policies is to double-down on those failed policies.
I've noted that we tried that already. We doubled down on reaganomics policies of tax cuts/militarization/deregulation/& privatization throughout the Bush regime, and that got us into a witch's brew of problems.
Because of that double-down mentality, where the neos told us war was good and greed was good and where we applied the laughable, made-up-out-of-whole-cloth "Laffer theory" that told us there was no evil that tax cuts (especially for the rich and big corporations) couldn't conquer, the Bush regime very ably turned a budget surplus into a staggering deficit and a financil crisis that would guarantee more deficits and debt before we were done with it.
We ended up with failed (de)regulatory policies. They allowed Big Banks and their big moneymakers to speculate their way into phantom billions of profits (all soaked up by the big jefes/big moneymakers). But instead, we got a near-breakdown of the financial system, that forced all us ordinary taxpayers to subsidize the Big Banks' losses without getting recompense from the banksters' earlier oversized payouts.
We ended up with failed tax (cut) policies. They cut taxes on big multinational corporations and the ultra rich, based on the claim that those are the "job creators" that we should reward. But instead they only ended up siphoning off needed revenues from programs that could build infrastructure and support quality education and research. They privatized education by providing lots of federal loan money to students that went to for-profit schools, only to learn that those schools tend to be traps that don't educate but just take money for the profit of the "education" business. They quit funding the stuff we need, so they could subsidize those that didn't need it. And they kept the subsidy up--for Big Oil, for wealthy decedents--even when the money was just piling on for those that already had lots of it.
That's what makes the current ultra-partisan Congress and the constant right-wing talk of deficits and debt as justification for stripping the safety net (while still conferring outsize gains on the ultra rich and Big Business) so disgusting. The right still refuses to pay attention to facts and justifies this oft-discredited, clearly wrong-headed market-fundamentalist and class-warfare orthodoxy as "plain as day" correct thinking.
ASIDE: This seems sort of like the GOP's plans for gaining the loyalty of our increasing diverse electorate by being careful to package their mostly white, Friedman-orthodox, oligarchy-favoring policies in the sheep's clothing of multicultural spokespersons who avoid the "tell" of who they really are and use words that talk about ordinary people as though the policies were actually aimed at benefitting them. Meanwhile they double-down on their claims that redistribution upward is all about job creation, and condemn those who talk about preserving the safety net by NOT reducing benefits as "socialists" who don't understand the American way.
The American way they seem to be harking to is the era of the corporate titans of malfeasance that Teddy Roosevelt warned us against, who grabbed the gains of the market place well in excess of their productivity merit and didn't give a damn about the rest of us. (Take Leland Stanford and the building of the great western railroads, subsidized by vast land grants and other programs from the federal government. Stanford was quite willing to let the Chinamen he hired to use their explosive expertise to carve out railroad tunnels live in hunger because he withheld their pay and die because of inadequate safety , but meanwhile he lived a life of luxury supported by his corporate structure that sent all the money supported by the government subsidies his way and none of it theirs.)
Douglas Holtz-Eakin is a prime example of doubling down on failed policies by ignoring the facts of recent experience. See Holtz-Eakin, We have to get US government spending under control, guardian.co.uk (Feb. 14, 2013). Mark Thoma does a good job of putting him on the hot seat and telling it like it really is. Read it at Holtz-Eakin Tries to Scare You. Don't Let Him, Economist's View (Feb. 14, 2013). Here's an excerpt
Holtz-Eakin (in the Guardian essay): "Debt reduction produces jobs and better economic growth."
Mark Thoma (in the Economist's View take-down): "[R]eading that last line, he has learned nothing from the failure of the confidence fairy to appear. Waiting to fix the debt--a problem driven mainly by health care cost escalation that won't become severe for many years--is not risky, but his advice certainly is."
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Holtz-Eakin (in the Guardian essay): "Down with the orthodoxy. It is time to get the deficit under control."
Mark Thoma (in the Economist's View take-down): "The notion that we are responding in the same way as in the 60s and 70s, and that we are faced [with] the same type of shock (that require[s] the same types of policies)--an oil price shock and other large supply-side distrubances from demography that we faced then--is wrong and he ought to know that."....."The 'pundit orthodoxy' he disses is from Paul Krugman. Kind of funny, given how wrong Holtz-Eakin has been relative to Krugman ... but Krugman can speak for himself, and has, on how wrong the 'we're about to become Greece!!!' crowd has been. There is, however, one thing he [Holtz-Eakin] is correct about. Holtz-Eakin is right to say we shouldn't listen to some pundits, especially those like himself who have been so wrong about how events would unfold at every step along the way."
Holtz-Eakin does a lot more in the Guardian article that is just plain bad, such as claiming that the so-called Affordable Care Act "entitlement" will contribute to the so-called "entitlement problem," which will contribute to the "serious" problem that the "deficit orthodoxy" won't acknowledge. He then hammers on the right-wing orthodoxy's pet do-away-with-it-if-we-can projects--Social Security, Medicare, and Medicaid, suggesting that "serious debt reform" requires "serious entitlement reform."
As I noted in another recent post, right-wingers like Holtz-Eakin love to talk about safety net programs as "entitlements", whereas they talk about entitlements for the rich and MNEs, such as the percentage depletion allowance, the preferential capital gains rate, and the various subsidies that have handed outsize profits to big banks as though they were rightfully merited acknowledgements of the good those institutions do the rest of us! The talk about these safety net programs, when entering into a right-winger's discussion of fiscal issues, is always lopsided. It is always how we need to cut back on them, and never about how we need to consider if the programs are worthy, the funding currently provided needed or even currently inadequate, and, if the answer is yes, what means make sense, in a sustainable democracy to serve the people, to ensure the ongoing viability of the safety net. Not reducing benefits but increasing revenues and decreasing rent-profit-taking.
So Holtz-Eakin fails to acknowledge that actually the Affordable Care Act is a first step in addressing otherwise mushrooming health care costs which occur because we treat health care as a ripe field for rent-seekers to make rentier profits rather than acknowledging (like other advanced countries) that health care is at least a quasi-public good that must be heavily regulated to ensure accessibility. And like all the right-wingers pushing the hand-wringing worry over deficits for which their own policies are the primary cause, Holtz-Eakin suggests that the core of what we have to do is, quelle surpise, "spending cuts and deficit control", since "doing nothing or worse, increasing spending, is a profoundly anti-growth strategy."
This is the doubling-down on failed policy orthodoxy that Americans should reject out of hand. Spending cuts and efforts at "deficit control" that focus on taking away health care and pension benefits from retirees and others dependent on the safety net are perfect prescriptions for disaster. We aren't Greece. But if the right-wingers like Holtz-Eakin get their way, we will be.
Elizabeth Warren started out her questioning of big bank regulators by noting that actual trials, where guilty parties are paraded before juries, information about their wrongdoing is spread over front pages, and everybody is aware that bad guys get punished for their bad deeds has an effect on whether the wrongdoing is committed in the first place. In the case of the big Wall Street banks, however, she notes that they made out like bandits during the speculative orgy that caused the financial system crisis, and yet not a one has paid by being taken to trial in this expressive way.
"Tell me," she says to a group of bank regulators called before her Senate committee, "about the last few times you've taken the biggest financial institutions on Wall Street to trial. Anybody?"
The FCC representative, Tom Curry, notes that ordinarily they are just trying to move things along and correct deficiencies. Warren interrupts and notes--"yes, and you set a price for that... that's effectively a settlement. What I'm asking is ... when did you last take a financial institution, a Wall Street Bank, to trial? " Curry "We've had a fair number of consent orders. We don't have to bring them to trial." Warren "I understand that you say you don't "have" to but my question is when is the last time that you did?" (No further responsive answer).
The same kind of interchange--can you identify when you last took Wall Street Banks to trial --was similarly nonresponded to by Elisse Walter. Nobody else even offered to comment. Certainly nobody offered a single date for "last time a Wall Street bank was taken to trial."
Warren closed with a comment that made clear that she thought that a very different standard was being applied to Wall Street than is applied to ordinary citizens that commit even minor infractions. She noted that there are District Attorneys every day squeezing ordinary citizens on rather small matters and taking them to trial explicitly to set an example, but "For Wall Street banks, 'too big to fail' has become 'too big to try [take to trial]'. That just seems wrong to me."
You go, Elizabeth. Without using the words "class warfare", she has made absolutely crystal clear the class warfare problem that exists in our country today, where Wall Street institutions and their chiefs and chief owners get all kinds of protections while the little guy is shaken down for peanuts. As a commenter on the site already noted, if only there were 99 more like her in the Senate.....
Rep. Camp's Ways & Means Committee held hearings today on the charitable contribution deduction. To watch the hearings, you can go to this website. Camp is planning a tax code rewrite, which he says is intended to lower rates, simplify the code, and curb some tax breaks.
Regarding those Camp objectives--they are not generally the right ones.
Lowering rates is the wrong objective. We already have very very low tax rates, especially when you consider that we do not have a VAT alongside the income tax as most European countries do. The primary motivation for lowering rates appears to be to cut revenues even more, in another ratcheting up cycle of the GOP "starve the beast" game. Lowering rates allows wealthy taxpayers and corporations to retain more of their profits, when they already garner a higher share of that income than average Americans who toil in their businesses as regular employees. Lowering rates also results in less revenues and increased borrowing, resulting in higher deficits and higher debt, contributing to the right-wing demand for cutting safety net programs like unemployment insurance, Medicaid, Medicare and Social Security.
Simplifying the Code is the wrong objective. About 70% of US individual taxpayers do not itemize, meaning that their tax returns are quite simple. For the 30% of taxpayers who do itemize, the complexity is necessary to prevent scams, manipulation and unreasonable subsidization of those who don't need it. A tax system intended to cover the many complex transactions of today's globalized economies cannot be simple without being naive.
Curbing some tax breaks is a good idea. But it should be more than "some" and it should be vigorously done to shift the tax burden towards the upper class and business and away from those in the lower and lower-middle income distributions. The tax breaks that should be curbed are the ones that are most regressive in nature--i.e., the ones that provide the majority benefit to the very rich.
The hearing today included lots of representatives of charities who were arguing their interest--keeping the tax-incentivized flow of money coming. The typical argument from charities is that the tax deduction is necessary to incentivize the transfer of money to charities. If it weren't there, the argument goes, rich people might not give at all, or at least not nearly so much money.
There's not a whole lot of empirical evidence to back this up. On the one hand, there are studies showing that non-rich people give much more of their limited assets away, proportionately, than the richest people (though of course it amounts to much less in absolute dollars), and many of them don't get any break at all because they don't itemize. Furthermore, rich people like the names-on-gold-plates-on-opera-house-chairs a heck of a lot, too. Maybe they give most of the money they give because of the status, the recognition, the remembrance-in-perpetuity, and to get to attend the events they've sponsored, which are usually the kinds of cultural events that they enjoy (opera, ballet, elite art museums, etc.). Does what a rich person says about why he gives hold a lot of weight in this debate? I'd argue it should not, since those who give typically want to be thought of as important philanthropists and not as status-greedy opportunists who are just giving the minimum amount to get their name and face plastered all over the New York Times.....
Does the tax incentive come into play in determining how much a person will give? Indubitably. But it isn't clear that people who want to give $20 million to their alma matter wouldn't do so even without the charitable contribution deduction! All that put together suggests that the deduction is highly inefficient. Most rich people would give money anyway to the things that bring them prestige and status and recognition and that accomplish what they want to accomplish now that they are rich and can afford to spread money around.
In addition to the inefficiency of the charitable contribution deduction--at least in amounts above some reasonable amount to allow to those who are NOT in the top quintile (say, 10% of adjusted gross income), there is also the problem that the deduction is primarily beneficial to the very wealthy. They pay tax at the highest rates (well, except when the system doesn't work well because they have mostly preferentially taxed capital gains) and they get the most bang from the buck for the dollars they contribute. They invariably itemize, whereas most lower-bracket taxpayers do not. They give in ways that gives them prestige (there is really a quid pro quo for much of their giving, though it may not be financial).
Another complaint from charities and wealthy donors is that the absence of a charitable contribution deduction will result in the government just taking all that money that would have otherwise gone to the charity, because of higher taxes. The implication is that such a result is disastrous, putting the recipients of the charity's charitableness at risk. But the truth is otherwise. The government may be more likely to support the poor and downtrodden than the wealthy are through charitable donations. How many wealthy are making contributions to Museums and Opera Houses and Elite Universities, versus a local homeless shelter or similar programs for the needy? And the decision of what to support, when made by a democratically chosen government, should more accurately reflect the will of the people than the decision of the one (wealthy) donor who gets the tax benefit of a deduction (though of course in these days of partisan gridlock and GOP obstructionism, that is regretably less true). Shouldn't democracies favor taxation and redistribution via program selection over subsidizing the wealthy's favored charities?
So some new, reasonable limits on the charitable contribution deduction make a lot of sense from the perspective of democratic egalitarianism. My suggestion would be to limit the deduction to 10% of the adjusted gross income reported on the tax return. (Ideally, such a modification to the deduction would be accompanied by a rethinking of the estate tax, to limit the amount that can be passed on to heirs without tax to an amount that more or less approximates the average estate of a taxpayer in the fourth quintile of the distribution.)
What about other changes that would be easier to pass and make lots of sense?
Prime amongst them would be the elimination of the fair-market-value deduction (rather than basis) for contributions of certain properties. This is a sheer giveaway to the wealthy that cannot be justified. It allows zero basis stock where there is no remaining unrecovered capital investment to be contributed and yield a deduction for the full value, whereas if the person sold the stock, they would at least have to pay capital gains tax on the value. This provision should simply be deleted from the Code. That's one simplification that would actually result in more fairness.
Another area to tighten is the rules governing private foundations, to prevent the kinds of abuses (where 20 family members receive exorbitant salaries) that give charities a bad name.
And Congress should eliminate the tax giveaway to large corporations (enacted in the Tax Reform Act of 1976) that permits them an enhanced deduction for donations of excess inventory--a deduction in excess of their cost basis and for more than the value of the inventory. It's not clear that the deduction incentivizes any additional donations--if a corporation has excess inventory, it will either give it away (which can serve a significant PR function) or sell it at fire-sale prices (which can serve a negative PR function). IN most cases, it would likely give it away without the enhanced deduction. Of course, instead of urging Congress to eliminate the large busienss excess inventory special treatment, small businesses (mainly, S corporations with wealthy shareholders) are whining about how tough a time they have and arguing that they should be given a "level playing field" by letting them get the enhanced deduction too. See NAEIR President Gary Smith's comments, below (in email).
Congressman Schock and Mr. Smith agree that the bill [H.R. 2592, introduced in the 112th Congres by Schock] would greatly benefit the small business community by establishing parity for S corporations and other small businesses and as such a level playing field with larger regular corporations. In addition to the principle of fairness inherent in this legislation in the tax benefits it extends to the small business community on par with larger corporations, Mr. Smith notes that “The impact of this legislation must be understood on the grassroots level: promoting greater collaboration between businesses and charities at the local level.” In brief, several million struggling small businesses and millions of individuals served by our nation’s charities would benefit through previously unavailable access to a wide variety of free donated products. (NAEIR email release Feb 14, 2013)
Not surprisingly, NAEIR is busy promoting the "enhanced" tax deduction (for up to two times the value of the excess inventory) to businesse--see here.
Jack Lew, former budget director under Clinton and Obama and former Obama chief of staff, answered questions at Senate Finance today in his bid to succeed Tim Geithner as Treasury Secretary. See, e.g., Rubin & Klimasinska, Lew Says He Didn't Know Money-Losing Investment Was in Caymans, Bloomberg.com (Feb. 13, 2013) and other related articles linked below.
When he was first nominated, I noted that I found his candidacy somewhat worrisome. While there are a number of considerations that suggest a decently competent person, there are also some suggestions of a person who has lived in the "Wall Street" flow too long and thus falls into line with the typical Wall Street/mainstream economics thinking--thinking which ultimately supports policies that will continue to slide towards oligarchy.
The hearing focused on several interesting aspects of Lew's career and investment choices.
1) Investing in the Caymans. Lew made an investment of 50 to 100 thousand in a Citigroup fund based in theCaymans while he was at Citigroup, and claimed that he didn't know it was an offshore investment. He got out of it when he went into government and lost money on it.
ME: There we have it--like most rich people, he just didn't care enough to consider closely whehter his investment was in a tax haven country and certainly didn't ponder the negatives .
2) Compensation at Citigroup. Lew got a "bonus" of $940,000 in January 2009 when Citigroup was receiving federal bailout funds. He defended it as being paid in the same way other private-sector employees in similar jobs were paid.
ME: But there was a ridiculous racheting up of financial sector compensation during the years when the big banks were feeding at the trough of easy mortgage securitization money and derivative speculation. Shouldn't someone that we hire as the head of Treasury have been more aware of that speculative binge? Or shouldn't that person be at least somewhat ashamed now that such an exorbitant "bonus" (10 times what most Americans receive in annual pay) should have been funded, in essential part, by taxpayer bailouts of his institution?
Now, Orrin Hatch (GOP-Utah) tried to make a big deal out of Lew overseeing the Financial Stability Oversight Council in administering the Volcker Rule limiting proprietary trading, saying that "it could lead to an awkward situation in which, in your role as chair of the FSOC, you would effectively be saying to financial firms: 'Do as I say, not as I did.' " Hatch claimed that this issue "bear[s] directly on your qualifications." I'm not so sure that is such a big worry since I think it is advantageous if Treasury has some understanding of how big banks trade, but it is just one more piece of Lew's overall nature of being well-attuned to Wall Street (and not so well-attuned to Main Street).
3) Corporate taxes. Lew suggested in the hearing that Republicans and Democrats could "work together" so that changes in the international tax scheme could lead to lighter burdens on some foreign income of US multinationals. The Bloomberg report notes that he supported a global minimum tax, but indicated that could be nominally territorial, with limits on offshoring income to tax haven countries.
4) Earned benefit programs. Lew is one of those Democrats who is more right of center than the party's base. He still mentions the need for "entitlement" program changes as well as additional revenue increases as a part of "balanced" deficit reduction.
ME: This is one of the most disturbing aspects of the Lew nomination. He is pushing the GOP agenda of deficit reduction and "entitlement" reform when instead he should be staunchly defending the New Deal against the oligarchs who want to shrink government, diminish the safety net, end any support for innovative environmental and energy progrms, yet continue to reap benefits from the long-term government subsidies for Big Oil.....We should not tamper with Social Security--and there is no deficit reason for doing so.
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