As I mentioned in an earlier post, Max Baucus has established a secret submission process for Senators to let him know what pet tax loopholes they want to retain (probably the ones that high-paid lobbyists representing corporations with operations in their states have pushed for). Senators will be granted 50 years of secrecy--constitutents won't be able to find out what their own senators proposed and supported, or their rationales for those proposals, unless the Senators themselves opt out of the "protection from constituents" process. The anti-transparency measure adopted by Senate Finance Committee leaders smacks of a complete disregard for democratic processes and citizens' rights to know what proposals their representatives in Congress are supporting. The one thing we can be sure of is that whatever tax "reform" a group comes up with in these closed-door circumstances won't have the best interests of the ordinary American worker in mind but rather the best tax "loopholes" for multinational corporations and their wealthy managers/owners.
Senator Bernie Sanders already opted out of the secrecy promise by publishing his own proposals on his website. Let's hope many others realize the anti-democratic nature of a process that spurns the public's input or knowledge of what the Senate millionaires club is up to.
GOP representatives Camp and Boustany are continuing to beat the dead horse of an IRS "scandal" connected with the way the IRS has attempted to efficiently filter new applications for 501(c)(4) status to provide extra scrutiny to the most likely groups to be engaged in illicit politicking. See their July 30th letter to IRS deputy commissioner Daniel Werfel [hat tip Prof. Evelyn Brody] in which they suggest that there is email evidence that IRS official Lois Lerner may have inappropriately released confidential tax information in the 501(c)(4) application process to an FEC official. They've included in the pdf file a series of emails between Lerner and FEC officials and IRS officials relating to a request for information about the exempt status of a particular group.
Folks, the emails do not represent any kind of smoking gun about the matter suggested in the letter. In fact, quite the opposite. The emails show that Lerner released only information that is publicly available, and that she was quite careful on this issue throughout the set of emails! Take two items from the letter and compare them to the facts as revealed by the emails.
The letter notes that the FEC spoke with Lerner about a right-wing group. Camp's letter leaves out the rest of it--that it was just asking for PUBLIC information about the group's exempt status, and that Lerner merely responded with the information that was published (in Tax Analysts) in August of 2008.
The letter suggests that Lerner went out of her way to get IRS officials to give the FEC whatever information they wanted from confidential files. It says that the followup query from the FEC asked for "additional information" and that Lerner nine minutes later sent out an email asking IRS officials to accommodate his request. The suggestion is that Lerner was trying to assist in enabling the sharing of confidential tax information. That is an extraordinarily misleading --indeed, one could even say 'fraudulent'--interpretation of the actual email correspondence. The "additional information" he asked for was whether there was any further (public) listing of exempt organizations showing the group he was tracking now that it was somet time after Lerner had shared the available public information. And Lerner asked IRS officials to check the IRS website for any updated (public) exempt-status information. This was not a conspiracy to reveal confidential information in any shape, form or fashion.
Do Camp and Boustany and the House Republicans in general think that Americans are so ignorant that they can make ridiculous assertions in a letter, backed up with nothing whatsoever in a series of emails, and get away with it? It would seem so. This letter is an insult to Americans generally, because it attests to a willingness among partisan politicians to misinform and mislead the American public if it will possibly gain them a political, partisan advantage with their base (tea party conservatives) in the upcoming elections.
Let's be clear, here. There is very little evidence showing any kind of scandal at the IRS. There is no evidence showing release of confidential information by the IRS division dealing with tax exempt status. There is a lot of evidence showing an attempt by partisans on the right to fabricate a scandal and to distract the American public from considering the significant economic issues related to tax policy that they need to consider thoughtfully and carefully. All you have to do is google this issue of IRS collusion with the FEC and you will see how the echoing chambers of right-wing media-mania operate to spread what appears to be a wholly invented scandal.
Was Obama's speech on inequality really what Michael Lind claims in "The Day the Right Lost the Economic Argument" Salon.com (July 25, 2013)?
The right, both here and internationally, has been pushing for austerity for most while those at the top reap unparalleled rewards from upward-moving stocks and their interests in private equity and other financial assets. The problem with austerity is that it puts all the burden on those who can least bear it, and rewards those with capital assets (mostly, people who grew up from birth onwards with incredible advantages). The problem with austerity as the prescribed path to prosperity is that it doesn't work.
Obama's speech, says Lind, gave "a capsule summary" of mainstream progressivism.
In the period after World War II, a growing middle class was
the engine of our prosperity. Whether you owned a company, swept its floors, or
worked anywhere in between, this country offered you a basic bargain – a sense
that your hard work would be rewarded with fair wages and benefits, the chance
to buy a home, to save for retirement, and, above all, to hand down a better
life for your kids.
But over time, that engine began to stall. That bargain
began to fray. Technology made some jobs obsolete. Global competition sent
others overseas. It became harder for unions to fight for the middle class.
Washington doled out bigger tax cuts to the rich and smaller minimum wage
increases for the working poor. The link between higher productivity and
people’s wages and salaries was severed – the income of the top 1% nearly
quadrupled from 1979 to 2007, while the typical family’s barely budged.
Towards
the end of those three decades, a housing bubble, credit cards, and a churning
financial sector kept the economy artificially juiced up [resulting in a devastating financial crisis and recession].
The progressive prescription for curing the economy isn't austerity--it is investment in infrastructure, education, innovation, and restoration of a manufacturing base that makes things in the USA for sale and use in the USA.
Manufacturing: “The first cornerstone of a strong and
growing middle class has to be an economy that generates more good jobs in
durable, growing industries. Over the past four years, for the first time since
the 1990s, the number of American manufacturing jobs hasn’t gone down; they’ve
gone up. But we can do more. So I’ll push new initiatives to help more
manufacturers bring more jobs back to America.”
Innovation: “And I’ll push to open more manufacturing
innovation institutes that turn regions left behind by global competition into
global centers of cutting-edge jobs.”
Infrastructure: “We’ve got ports that aren’t ready for
the new supertankers that will begin passing through the new Panama Canal in
two years’ time. We’ve got more than 100,000 bridges that are old enough to
qualify for Medicare. Businesses depend on our transportation systems, our
power grids, our communications networks – and rebuilding them creates
good-paying jobs that can’t be outsourced. And yet, as a share of our economy,
we invest less in our infrastructure than we did two decades ago.”
...[and Education:] If we don’t make this investment, we’ll put our kids,
our workers, and our country at a competitive disadvantage for decades. So we
must begin in the earliest years. That’s why I’ll keep pushing to make
high-quality preschool available to every four-year-old in America – not just
because we know it works for our kids, but because it provides a vital support
system for working parents.
Of course, as Lind notes, Obama flunked on one point--his concession to the radical right that we have to cut back on Social Security and Medicare when in fact we should be finding the means for making Medicare universal (cutting private insurance out of basic health care provision) and making Social Security better for many of the lower-tier retirees (assessing the tax on all compensation income, defining compensation income to include fund managers' "profits interest" shares of purported partnership income and gains, and making the benefits continously progressive as the recipients move up the overall income scale).
Obama continued his bully-pulpit discussion of America's growing inequality and the problem of right-wing obstructionism in an interview with the New York Times, discussed by Kate McDonough, Obama Warns Growing Inequality is Weakening America; Slams Obstructionist GOP, Salon.com (July 28, 2013). In the interview, Obama commented on the civil rights movement and the 1963 March for Freedom, noting that they weren't “just folks who believed in racial equality. It was people who believed in working folks having a fair shot.”If Congress doesn't act to address these issues of inequality, he said that ”racial tensions won’t get better; they may get worse because people will feel as if they’ve got to compete with some other group to get scraps from a shrinking pot. If the economy is growing, everybody feels invested. Everybody feels as if we’re rolling in the same direction.”
That fits with the economist Benjamin Friedman's arguments that broad-based growth is the baseline requirement for a fair society in which everybody enjoys a better quality of life. It also fits with recent studies that show that inequality in the US has resulted in an abundance of bad news along most measures of quality of life--from teen pregnancies to illiteracy rates, from shorter lifespans to higher costs of health care, from fewer college-educated citizens to higher unemployment. We fail, compared to our other advanced-nation peers--on almost all the measures of a decent society.
Austerity economics (or, in other words, the brute-force capitalism favored by the tea-party-supported GOP right) would continue and worsen that trend by privatizing even more public education, even more of the military, and even more of health care, while insisting that the problem is getting those "failures" to realize that they need to work harder and take "personal responsibility" for making better choices about education and health care and having children.
So in this regard, much of the talk about Detroit's bankruptcy reflects the right-wing "austerity" agenda and fails to encompass even Bush's compassionate conservatism, much less a progressive view of how ities that have suffered decades of corporatism, cronyism and white flight should be treated. The negative sentiment about Detroit is expressed even in letters to the Times such as Richard E. Miller of New York, whose letter to the editor published July 24 argues that it's all the Detroit residents' fault:
For years, the residents of Detroit elected officials who they knew were spending billions more than the city's revenues. For years, the union representatives of municipal employees extracted from those same officials on pain of nonsupport for re-election unfunded pension contributions. ... There must be consequences to greed and irresponsibility.
That letter reflects the right-wing austerity mantra and the "let them eat cake" attitude of the right throughout the country. In the 70s, New York State came to the rescue of New York City. Michigan, with its right-wing legislature and governor, has no such intent. Snyder even had a new accountant recalculate the city's pension obligations in a new way that increases the present value, to give him and his "emergency manager" even better leverage to take away $19,000 annual pensions from firefighters and other city employees who kept their job here for the "good" benefits. These right-wing tactics are, as another writer (Anita Caref from Chicago) put it in her letter published the same day, "reprehensible."
Detroit workers did not cause this crisis, and in fact have made many concessions over the past decade, including large pay cuts. Their pensions are not a bonus or gift; they are a deferred part of their wages. The banks and bondholders that invested in Detroit where hoping for a profit but kiinew they might take a loss. They should bear the whole burden. ...That's the way the market is supposed to work, right?
Robert Samuelson's op-ed in the Washington Post, riffing off Harvard economist Ed Glaeser's views, seems to be suggesting that the problem with Detroit is two fold--the decline of manufacturing, and the ability of workers during manufacturing's golden age to get decent wages and decent pension promises. He notesthat various "potential villains have emerged: the ineffectiveness of Coleman Young, mayor from 1974 to 1994; white flight (from 1970 to 2008, the white portion of the city’s population fell from 56 percent to 11 percent); costly government workers’ pensions. " Already, his list appears to put much of the onus on Detroit residents--for re-electing someone labelled "ineffective" as mayor, for instituting what Samuelson calls "costly" public employee pensions, and impliedly, for causing white flight (in which most of the Jewish and business community moved from within the city limits to just a few miles out to the sprawling, affluent, 90% white suburbs like Bloomfield Hills).
The crux of it all, in Samuelson's accounting, was the auto industry promising too much, with a result of strengthened labor unions that he blames for ruining not only Detroit but the State of Michigan.
High costs, shoddy quality and mediocre management made the companies vulnerable to foreign competition from imports and nonunionized plants, generally in the South. Employment eroded. Worse, the auto industry’s model shaped the state’s labor market and policies. By 1978, average hourly earnings in Michigan were 32 percent higher than the national average. Michigan had an anti-business reputation. This frustrated the state in its efforts to diversify its economic base.
Now, the auto managers were for sure guilty. They set on their [a....s] and didn't innovate, didn't listen to worker ideas, didn't pay attention to environmental concerns. I've had a taste of how they managed in our importing of Allan Gilmour to be president for three years of my university--a corporatist shil for big business who has mostly paid millions of the university's scarce resources to hire fancy accountants to tell him how to run the university like a business and has both scorned and ignored the role of faculty in policy development while hiring more and more administrators at higher and higher salaries. No wonder the auto industries had problems, when they had leaders like him.
But the labor unions were doing good work. They were demanding that workers be paid a fair share of the boom profits. The problem wasn't their demand or their success. The problem with the auto industries was that they didn't put back the funding during the boom times when they had it. They preferred to continue skimming high profits off the business and calculating pensions in a way that allowed them to shortchange the pension funding. Samuelson's support for Michigan's current pro-busines, anti-worker perspective--bankrolled by big corporations and rightwingers like the Koch Brothers, is another example of ideological bias against workers and for Big Business.
Funny how the right and its economists always blame the decent wages/pensions for economic ills. But that is a distortion of the story. It is the corporatist decision to seek ever higher profits (and ever higher compensation for corporate managers) that is to blame. A year-after-year profit ratio of somewhere between 5% and 6% became too little: private equity funds were promising double digit returns, and the ideologues on the right --from Milt Friedman to Ayn Rand-- were suggesting that greed was good and that if you succeeded, after all, in making huge returns, it was because you merited it (and those who didn't get it, were just not taking "personal responsibility"--in the Mitt Romney version). So now we have Wall Street expectations for year-after-year returns on investment matching their speculation gains during casino capitalism's raging pre-crisis years. And blaming any problems on pensions promised to ordinary workers in return for lower wages during the boom years, even while those workers' shares of the productivity gains they mostly generate and real-dollar wages have declined while the CEOs and fund bosses got filthy rich.
So what has all this got to do with taxes? The inequality in this country is getting worse. it will continue to get worse as concentration of resources at the top allows more resources to concentrate at the top. Tax policy is one of the ways to address that problem, at least in a small way. Michigan needs to overturn its "flat" income tax rate and institute progressive taxation. Michigan also needs a decent business tax. The federal income tax needs to be more progressive. States and the federal government need to up the ante with estate taxes that are more biting. And executive compensation needs to be scaled back while minimum wages are increased. The first can be done in part through tax systems that prohibit deductions for executive compensation in excess of some amount (say, one or two million). Many other tax provisions can help attack the inequality problem. Congress needs to start paying more than lip service to fairness, and start legislating real tax reform.
As the budget battles loom again in our dysfunctional Congress, one of the targets of the right is, not unexpectedly, funding for the IRS. Sequestration is already hampering the IRS's ability to perform its functions. See $6 collected for every $1. But the right wants to cut funding for the IRS to a mere three-fourths of its current level. See Rubin, GOP Proposes Reducing IRS Budget by 24%, Bloomberg, July 9, 2013, at Accounting Today.
It's worth thinking about what this kind of budget reduction for the IRS--one of the biggest "too big to fail" financial institutions in the country--would mean. Remember that the IRS performs essential governmental functions--enforcing the tax laws and collecting necessary government revenues. In connection with these enforcement and collection functions, the IRS has implement a number of congressional policies (often with very little guidance) and, working with others in Treasury, provide guidance in the form of revenue rulings and regulations for many different types of taxpayers, as well as internal procedural guidelines for revenue officers. It has to determine eligibility of numerous organizations for the various "tax-exempt" categories Congress has created. It has to track information received from the myriad tax-reporting provisions. It has to ferret out tax scams and shelters invented by high-paid accountants and law firms and in-house counsel. It has to examine and audit and negotiated with taxpayers who are often better resourced and therefore able to "outgun" the agency. It has to provide information and testimony to Congress. It has to interact with tax lawyers in their professional organizations, such as the ABA Tax Section and the NYSBA Tax Section. And, to do its job decently well, it must spend considerable effort recruiting and training employees and overseeing them.
Much (if not all) of the problems pointed out (especially by the right-wing propaganda corps attempting to generate a "scandal") about the IRS mismanagement of the thousands of 501(c)(4) applications it receives stems from under-resourcing of the agencies and the lack of skills training, computerized systems and solutions, and sufficient management personnel to ensure efficient and timely use of resources to target scrutiny to those organizations most likely to be in breach of requirements.
So one would think that the right response to the intense need for a good revenue collection and tax-law enforcement agency would be to increase resources rather than to cut them. But there is a significant portion of Congress people-especially in the House--that is not interested in ensuring that the government that they are a part of function properly and especially not interested in having the tax-collection-and-enforcement agency work properly. As James Maule put it on Mauled Again earlier this year in a discussion on IRS hearings:
[A]nother member of the panel tried to make the point that cutting IRS funding doesn’t necessarily mean revenue will decrease. He tried to make his argument by claiming that increasing IRS funding does not increase revenue. He asserted that funding for the IRS increased from 2001 to 2009 and yet revenue decreased during that period. No kidding. The revenue decreased because in 2001 and again in 2003, the geniuses behind tax cuts succeeded in persuading the nation to accept a cut in its tax revenues at the same time it was pumping trillions of dollars into war expenditures. It was encouraging to hear another member of the party point out that the economic downturn also was a reason for the decrease in revenue collection. Yet it remains deeply disturbing that Americans have elected to Congress someone who thinks that sequestration of IRS funding won’t have an adverse impact on revenue.
The attempts to shrink the IRS is part of a larger, pervasive, foundational aspect of the anti-tax crowd’s plans to unchain themselves from any attempt on the part of anyone to get in their way as they exalt themselves at the expense of the society on which they are, no matter their denial, very dependent. I have explored the short-term foolishness of cutting IRS funding in posts such as Another Way to Cut Taxes: Hamstring the IRS. At a time when the Congress has piled dozens of new credits, deductions, and exclusions onto already complex tax law, has turned the IRS into the health care enforcer, and has required the IRS to serve as a collection agency for unpaid child support and other debts, it is absurd to cut IRS revenue collection efforts. When people defending the anti-government agenda claim to take their inspiration from the private sector, they conveniently ignore the fact that if a business wanted to eliminate its operating loss, the prognosis for success would be zero if the business ceased all advertising and left its cash registers and online payments systems unattended and unfunded.
This idea of cutting the agency that is already so underresourced that it cannot fight the hired guns of the multinational corporations and Big Oil, Big Pharma, and other sophisticated big-monied taxpayers fits with the general corporatist approach of those on the right these days. It is an approach laden with anti-populist, pro-oligarchic, class warfare sentiment. It is the "meritocratic" notion that those who have most already should have even more because they "merit" it, while those who have less can be allowed to suffer their plight without any role of government to provide a safety net. It is the force that pays CEOs and other top managers and directors obscenely high salaries in bad times as well as good times, no matter what they do to create ruin for their communities and their employees and even their companies, under the false belief that the people at the helm are responsible for all productivity gains and none of the productivity losses of the firm. It is behind the effort to reduce pensions of already-retired union employees and the fight against unionization from wealthy interests (like the billionaire Walton heirs whose WalMart stores still refuse to pay a living wage). It is behind the decades of Reaganomics and Friedmania, two cult ideologies masquerading as economic theories that have wreaked havoc on the US economy and most especially on its middle class and poor. It has left one-fourth of American children living in poverty. It has created a country with untold wealth that won't pay for decent public schools or decent public health care. It has privatized education to the point that poor school districts are forced to subsidize religious and other private schools while trying to maintain a decent quality of education in public schools for the not-wealthy children that remain in them. It has allowed Big Banks and Big Insurance companies to reap "rentier" profits from municipal necessities and personal health care needs, all in the name of claiming to support personal freedom. It is behind the GOP-driven refusal to support Detroit in Michigan where businesses and the wealthy get huge tax breaks, but the city on which the state depends for its future is treated as a misbehaving child, with its (mostly black) residents punished for the city's exploitation by Big Banks and by corrupt leaders. This right-wing behemoth continues --with the aid of the so-called "centrist" Democrats--to paint Social Security and Medicare as too-generous "entitlements" whose benefits need to be pushed back to avoid the need to increase taxes to support them. This corporatist class warfare, in other words, is remaking the US economy into a have and have-not society that privileges the wealthy while peonizing everyone else. The push to defund the IRS is a useful piece of the class warfare battle gear for the right--by handicapping tax revenue collection and tax law enforcement, the right facilitates the wealthy elite and the multinational corporations they own and run in ripping off the nation and jeopardizing the lives and fortunes of the middle class and especially the working poor.
There is one bright spot in this budget debate--those Senate Democrats who are proposing an increase of about $26 million in IRS funding, in recognition of the great disadvantage in which the agency, with so many diverse tasks, is put by underfunding compared to the sophisticated taxpayers who are willing to aggressively push the boundaries of tax evasion. See several links, below.
There continues to be more blather about the need for "tax reform, and buddies GOP Dave Camp and skin-deep Dem Max Baucus seem to be intent on accomplishing something "big". And that's what's worrying me.
The Republicans have been arguing that we need tax reform to "simplify" the Code, but that's close to ludicrous. Most of the complicating portions of the Code exist for two reasons: (1) to provide some anti-abuse provisions to counter the tax avoidance techniques of wealthy, sophisticated taxpayers (including multinational corporations) and (2) to provide special tax subsidies through tax expenditures, again mostly for the wealthy (think capital gains preference) and industries with clout (consider the various subsidies for the natural resources extractive industries), accompanied by a few good ones that benefit the poor and marginalized individuals (such as the Earned Income Tax Credit). We shouldn't get rid of the anti-abuse provisions or of those tax expenditures that support lower-income families or favor emerging industries like wind power. That leaves getting rid of the subsidies for Big Oil, Big Pharm, etc as the only simplifying moves that make much sense. Something tells me that's not what will come of the Camp-Baucus rewrite.
The GOP also claim that "tax reform" (by which they invariably mean diminishing tax revenues though cutting tax rates for the wealthiest and corporations) will result in "supporting competition", economic growth and job creation. These claims aren't supported by empirical evidence or, in the case of "supporting competition" aren't necessarily anything that tax writers ought to care about. Yet the mantra of lowering corporate tax rates seems to be what is driving this effort--when corporations already pay an pittance of the tax revenues they originally paid, shifting more of the burden to the middle class.
Why do the Democrats support the idea that we need a major rewrite of the tax code? Regrettably, for much of the same reasons. They've been lobbied by the multinationals that want even lower taxes than they currently pay--those guys ALWAYS want lower taxes, no matter how much their share of tax revenues as a percentage of GDP has shrunk. And the Dems have long bought into the Wall Street mythology that the market's high marks mean good times for all. They are heavily influenced by Wall Street banksters who want low taxes and more speculative profits. ( Obama is even considering that misogynist, mostly wrong economist Larry Summers to head the Fed, a move that should cause deep nausea among any thinking woman and anyone who understands the Fed's role in preventing another Great Recession catastrophe for ordinary Americans. See Mark Thoma's, Larry Summers to head the Fed, WTF post.) The Democrats, that is, are generally disregarding the reality of the role of corporatism, and corporate power, in America today and the way that results in declininng wages for ordinary workers and declining quality of life. See Profits, Norms, and Power, July 20, 2013.
We should not be thinking about "major rewrites of the Code". We should be thinking relatively small. Fix the obviously bad provisions. My list would include considering the following:
Get rid of captive reinsurance companies and other transfer pricing silliness that allows MNEs to avoid US taxation, such as with legislation that refuses to recognize a sale of intellectual property to an offshore affiliate.
Eliminate deferral for offshore earnings altogether, not just for Subpart F earnings.
Install a financial transactions tax--it could raise billions while protecting the financial system and acting as a brake on speculative trading.
Eliminate the preferential rate for capital gains. At the least, eliminate the treatment of "carried interest" compensation income to fund managers as partnership flow-through income. Increase the estate tax, and making it a progressive rate that taxes gigantic estates at higher rates than small estates.
Eliminate the mortgage interest deduction for second homes.
Get rid of the like-kind exchange nonrecognition under section 1031.
Make the reorganization provisions more restrictive, and eliminate any possibility of loss recognition on reorg stock exchanges.
Make any compensation over $1 million nondeductible, no matter how determined.
These are just a few of the reasonable reforms that Congress could engage in now. But lowering rates--not something we should even be considering. The United States is one of the lowest taxed, overall, of advanced countries. Because we tax ourselves too little, we are not spending what we should be on public transportation, public education, and public infrastructure, and we are allowing too many important public services to be highjacked for private profit--from building decent housing for military on military bases to letting middlemen profits eat away at decent health care, compared to the single payer systems that every other modern advanced civilization enjoys. We need to raise taxes, and we need to do so in a way that will redistribute economic resources to support public infrastructure needs and move away from oligarchic concentration.
The Baucus-Camp "blank slate" approach--now with this promise of 50 years of guaranteed secrecy for whatever particular senators support or don't support--is extraordinarily worrisome? Secrecy to lawmakers is travesty in a country that claims to be a democracy. Legislation cannot be conducted behind closed doors where Senators are protected from exposure of their views.
Yet secrecy regarding senators views on tax reform is just what Baucus is promising. See Offering 50 Years of Secrecy, The Hill (July 24, 2013). [Hat tip Francine Lipman]
“The letter was done at the request of offices to provide some assurance that the committee would not make their submissions public,” the aide said. “Senators Baucus and Hatch are going out of their way to assure their colleagues they will keep the submissions in confidence.”
Keeping the submissions confidential for a half century, the aide added, was “standard operating procedure for sensitive materials including investigation materials.”
The lengths Baucus and Hatch have gone to reassure their colleagues underscores the importance the tax-writers are placing on the blank slate, and shows they are working hard to ensure that all 100 senators engage in the process.
So the rationalization is that this will protect the Senators from exposure to lobbyists. But if Senators don't have the guts to stand tall for what they believe in, what good are they? Are they really hiding from lobbyists or are they hiding from their ordinary-folk constituents? Lobbyists, after all, have many different avenues for influencing Senators--including the proximity to big money. Lobbyists will pursue legislators whether or not these written views are kept secret.
What about constituents? Constituents often don't know what their Senators are really doing unless it's covered in the news. Secrecy seems to have more to do with permitting Senators to pony up their favorite Big Money fundraiser's idea to be preserved, without constituents getting a whiff of the cozy relationship, than any other thing.
This kind of secrecy has nothing to do with "investigations" or "sensitive materials." It's got to do with "protecting" congressional representatives from having the public know what they really think about critical tax issues (including ones that benefit themselves and their biggest donors).
One of the ways that corporations manage to cut their federal income tax bills way, way below the statutory rate is by setting up reinsurance affiliates offshore. While some of these reinsurance affiliates may actually function as full-service reinsurance companies to many different customers, those truly taking on and diversifying risk, most are scams, in that they are just ways to offshore U.S. profits through premium payments for self-insurance.
Two bills now before Congress, H.R. 2054 and S.991, reintroduced recently by Rep. Richard Neal (D-MA), Rep. Bill Pascrell(D-NJ) and Sen. Robert Menendez (D-NJ), are intended to end this run around the US corporate tax laws, picking up a proposal from the President's FY2014 budget to deny tax deductions for certain reinsurance premiums paid to foreign-based affiliates of domestic insurers.
Naturally, the GOP-Big-Business-Friendly machine is up in arms about any bill that would take away this kind of tax subsidy for multinational corporations.
[Although the GOP professes to believe in a 'free market', that is demonstrably false, in that every preferential tax subsidy for Big Business is highly lobbied for, and at the same time, "reforms" (like further preferential capital gains rates or regressive consumption taxes) that would push the burden of supporting federal government programs that are immensely important for ordinary people are pushed.]
So GOP Governor Rick Scott of Florida has issued a letter to Congressman Vern Buchanan (R-FL), a member of the US House of RepresentativesWays and Means Committee (who had been involved in various lucrative real estate gambits that smacked of crony capitalism in the time before his elevation to congressman). Gov. Scott claims that legislation that gets rid of the loophole of deducting premiums paid to a corporation's own offshore (tax haven) subsidiary is just a terrible idea. Gee, it would increase costs and that would be "disastrous." He also cites a Brattle Group "study" that claims that insurance availability would decrease by 20%. He also makes various claims about the importance of reinsurance generally as part of the insurance market.
Scott's letter seems to mix up questions about general reinsurance versus the kind of reinsurance to offshore affiliates that the legislation is targeting. Reinsurance occurs when an insurance company seeks to diversity its risks by reinsuring part of them with another insurance company that acts as a reinsurer. Genuine reinsurance is a useful part of insurance, and the legislation doesn't outlaw reinsurance or add to the costs of reinsuring through bona fide third-party reinsurance companies. The legislation deals with offshoring of insurance premiums through affiliated reinsurers, quite a different thing, through which US corporations essentially convert US profits to offshore profits, reducing their US taxes correspondingly, by paying premiums (sometimes exaggeratedly high premiums, providing even greater tax avoidance) to their own subsidiaires located in offshore tax havens.
Yes, not getting to use the offshoring reinsurance scam to cut US corporate taxes would increase those companies' costs. But every time a US company reduces its own costs and increase its own profits through offshoring its profits to tax havens and thus avoiding US taxes, it is shifting the tax burden off onto ordinary Americans who can't/don't engage in such lucrative offshoring. Ordinary workers thus end up bearing an increased tax load to support those companies' lower tax burdens.
(Oh, and a bunch of reinsurers appear to have been involved in illegal trade with Iran, too. See article on NY regulators, below).
The US has prospered most when we have had a more equal society in which corporate entities have borne a greater share of the tax burden (resulting, if the incidence of tax falls mainly on shareholders as may be the case) in their shareholders, who are in the main members of the upper crust, paying a fairer share of the tax burden and relieving ordinary folk from having to take up too big a share.
It seems to me that we have reached a point where Americans have to decide what kind of society they want. If we want a highly unequal society in which children of the wealthy receive a prime education, go to the best colleges, are introduced through their wealthy parents to societal leaders who can open doors for them in whatever career they want while most everybody else finds themselves forced to opt for expensive online colleges, few connections, living from hand to mouth and hoping against hope to be able to satisfy basic needs, then we can just continue on the path we are already moving on. But if we are not satisfied with that kind of oligarchic society, we have to vote out the right-wingers who are pushing it and institute new policies, reviving labor laws to support workers, instituting a more progressive income tax, reforming the tax code to remove the many tax subsidies for Big Business (and especially those for Big Finance and Big Oil) and otherwise attempt to shift the focus of the economy to creating jobs for ordinary people. Revamping the reinsurance industry is one of the obvious reforms along the way to a more sustainable economy.
This has been a much needed break for me, but now I am ready to resume daily postings on tax, economics, and the potential for a just and fair society. As you all are undoubtedly aware, Messrs Camp and Baucus continue their claim that they will accomplish "tax reform" before Baucus leaves the Senate in January 2015. I remain unconvinced that this pair will put together the kind of reform that could merit passage. Too much likelihood of favoritism for capital income at the expense of ordinary workers; too much likelihood of favoritism for multinationals and natural resource extractives, etc.
On another front, the expected surge of additional cases challenging gay-marriage restrictions is taking place. Just Monday, a federal judge in Ohio ordered the state to recognize a 20-year couple's relationship, suggesting that at least some judges will read Windsor expansively to declare that same-sex married couple's marriages in one state must be recognized in other states just like any other out-of-state marriage would be. The case is Obergefell. Here's how Salon describes the ruling.
[Obergefell's husband] Arthur was diagnosed with amyotrophic lateral sclerosis (ALS), a progressive neurodegenerative disease. Earlier this month, the couple sued the state to have Arthur’s death certificate reflect Obergefell as his spouse, and secure Obergefell’s right to be buried in Arthur’s family plot, which is only open to direct descendants and spouses.
Al Gerhardstein, the attorney for the two husbands, argued that Ohio should recognize same-sex marriages from other states because it recognizes opposite-sex marriages from other states, including some that are banned in Ohio like first cousins or too young people marrying.
Black found that the Ohio Constitution on the issue “violates rights secured by the … United States Constitution in that same-sex couples married in jurisdictions where same-sex marriages are valid who seek to have their out-of-state marriage accepted as legal in Ohio are treated differently than opposite-sex couples who have been married in states where their circumstances allow marriage in that state but not in Ohio.”
This suggests that the Windsor decision invalidating (at least) section 3 of DOMA may be read more broadly a s finding the entire statute unconstitutional, including section 2's provision permitting states to refuse to recognize gay marriages from other states. It also foreshadows the likely trend in cases challenging states' statutory and constitutional prohibitions on same-sex marriage on the grounds that they violate the Equal Protection Clause of the U.S. Constitution.
Proponents of lowering the U.S. corporate income tax rate commonly point to evidence that the U.S. statutory corporate tax rate of 35 percent, as well as its average effective tax rate, which equals the amount of income tax corporations pay divided by their pretax income, are high relative to other countries. However, GAO's 2008 report on corporate tax liabilities (GAO-08-957) found that nearly 55 percent of all large U.S.-controlled corporations reported no federal tax liability in at least one year between 1998 and 2005. Id. (from "highlight").
The report looks good for corporations. The GAO report shows that corporate taxes paid to the US are going down, down, down. Corporations paid 15.3% in 2008, 13% in 2009 and only 12/6% in 2010--that's less than have the corporate tax rate of 35% for each of those years! The proportion of federal revenues raised from corporate taxes has been decreasing over the years as well--the GAO reports that for 2012 it is estimated that corporate taxes will have raised only 242 billion, compared to 1.1 trillion in individual taxes and 845 billion in payroll taxes.
When you couple the very low corporate taxes actually paid with the very favorable preferential capital gains taxation to shareholders (including both dividends paid from corporations and sales of corporate shares), corporate shareholders--mostly the very top few percent that own and/or manage most of the financial assets--are doing extremely well. At the same time, ordinary Americans continue to suffer the impact of the recession. For those with jobs, we haven't made up for the losses from the Great Recession. And for those without jobs, Republicans across the country are enacting measures to make them suffer even more--as though, as Paul Krugman notes, making them even more miserable would somehoe restore the economy. See Paul Krugman, War on the Unemployed, New York Times (June 30, 2013).
So why all that chatter about how high the US tax rate is (35% on corporations with more than about 18.4 million in annual income) and how it makes US corporations losers in the cutthroat global competition? That's not hard to understand. Corporate managers like to have the profits earned from workers' labor accrue to themselves and they don't like paying any taxes. So no matter how low the effective tax rate already is, corporations will lobby for even lower statutory tax rates, using corporate resources that are available in part because of those tax policies favoring "paper" deductions for noneconomic depreciation, until they get the statutory rates down to zero (and the effective rates actually negative).
So why do our representatives in Congress buy into that sad-sack tale that really isn't true--both in terms of the need to use any revenues generated by tax reform to cut the rates on corporate tax, and in terms of the refusal to eliminate the discriminatory preferential rate for capital gains that treats profits earned from having money as much better than profits earned from hard work? Because every time there is something for corporations and the wealthy to lobby for, there is also something for congressional representatives (and, importantly, their staffs) to use as a campaign fundraising tool with the corporate elite.
THe lobbying, and the campaigning, and the PR blitz supported by all those purported "think tanks" funded by the corporate and wealthy elite, where the "scholars" are paid to produce the "scholarship" to support the ideology that claims that the wealthy got that way on their merit and therefore merit continuing tax expenditure support for their activities from the government--it all fit together hand in glove to pave the way for yet another corporate tax break that will benefit managers and owners and leave workers high and dry.
Think about the recent brouhaha over the fact that the IRS gave closer scrutiny to 501(c)(4) applicants that were likely to be politicking organizations rather than do-gooder organizations as the exemption requires. That was all about keeping the big wealthy and corporate funders of politicking groups secret. When those groups are secret, it makes it more possible to influence elections with misleading or false statements without people becoming more skeptical because of realizing their source. And the more that goes on, the more those corporations can hobnob with Congress and let them know the items on their wish lists without much intervention from the unknowing public.
This is why the Baucus-Hatch "base broadening to support rate cutting" plan for "tax reform" doesn't make sense. We don't need to cut corporate tax rates. Let's do some base-broadening, but use that revenue where it is really needed--to fund basic scientific research, to support public education, to fund needed infrastructure projects--not to give another tax break to multinationals and their owners/managers. For once, the country needs to think long-term rather than from election to election with campaign fundraising as the holy beacon.
Bloomberg today covers a story about another tax-shelter ploy by hedge fund billionaires to make themselves even richer at the expense of ordinary Americans who will have to pony up more (or be beset by a bigger deficit) when the billionaires don't pay their fair share of taxes. See Zachary Mider & Jesse Drucker, Simons Strategy to Shield Profit from Taxes draws IRS Attack, Bloomberg (July 1, 2013).
As the article notes, the IRS is challenging a tax-lawyer alchemy for converting ordinary hedging income to preferentially treated capital gain income by using a bank as an accommodation party to a derivative transaction--the bank buys the portfolio that the hedge fund wants to own, the bank then hires the hedge fund to manage the portfolio just as the hedge fund would do if it were the legal owner rather than the beneficial owner (which it probably should be considered under general tax principles, with the result that the hedge fund "manages" the purported bank portfolio by engaging in almost daily trades, as is a hedge fund's practice, and then the bank purports to sell an option on the portfolio to that very same hedge fund (surprise! :) !) and then the hedge fund exercises that option (quelle surprise!) more than a year after its purchase and claims thereby to have converted its trading gains (ordinary income) into an investment contract gain (Ipreferentially taxed capital gains).
This is the reason that most derivatives are such a financial scam. They are merely an artificial way for banks to make more money than they should by accommodating other parties in practicing banking alchemy--doing artificial stuff that doesn't do the economy any good, produce any goods, or create economic growth that extends to non-banksters. In fact, it does actual harm by assisting other big financial players (in this case, hedge funds and, in particular, hedge fund employees) in scamming the system for no reason other than to reduce their taxes. Simons and Renaissance employees own nearly all of the fund in this case. Id. This is what we can continue to expect from the "greed is good" and "I got everything by my own merit [HA!] but just let me get by with another scam while also subsidizing me with "too big to fail" bailouts" generation of financial institutions and "shadow" financial insitutions like the hedge funds. Hedge funds aren't very good for investors (see, e.g., this item showing that hedge funds return less than the S&P 500 on average--considerably less), but they make good money for their managers--especially when they engage in derivatives to turn ordinary income into preferentially taxed capital gain.
Thankfully, the IRS has challenged the scam, utilizing the core tax principle of "substance over form". See the November 2010 Chief Counsel Memorandum noting that the contract does not function like an option and since it provides the benefits and burdens of ownership to the hedge fund and not to the bank, the hedge fund is treated as the beneficial owner for tax purposes. But remember that the IRS Is underresourced and outmanned by the lucratively compensated tax advising teams for funds and other wealthy institutions. "If they [the hedge funds] win, that will signal to the rest of the hedge-fund community that aggressive strategies can work.," said Steven Rosenthal from the Urban Institute (a former tax partner at Ropes & Gray).
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