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Dan Shaviro (NYU) and Tim Smeeding (WISC) on NPR's Detroit Today Show

For those of you who may not have the opportunity to tune into Stephen Henderson's radio program Detroit Today on NPR, it might be useful to have a short summary of the January 9 discussion of the "wealth gap" from that program.

Background

Tax lawyers have traditionally talked of the "tax gap"¹  and frequently mentioned the growing "income gap" between the top 1% of the income distribution and the remaining 99%, but the "wealth gap"² discussion among tax lawyers, tax policy thinkers, economic analysts and indeed progressive legislators about the relative net assets of different segments of the population has become increasingly important as people have recognized the trend of increasing wealth for the top 0.1% in the US and stagnating wealth for most of the US population.  The wealth gap is even more significant when race/ethnicity is taken into account: the 400 wealthiest families in 2015 owned as much as the country's entire African-American population plus 1/3 of the Latino population.⁴  The median white household in 2011 had about $111 thousand in wealth, while the median black household had $7 thousand and the median Latino household had $8 thousand, with the impact of slavery and post-WWII homeownership policies being the underlying source of most of the disparities.³ See also How Ameria's Vast Racial Wealth Gap Grew: By Plunder, New York Times, Aug. 14, 2019.  The generational wealth gap is also worrisome: older Americans' wealth grew between 1989 and 2013 but all other age groups had their wealth decline.³  The gender wealth gap underlies the power distinction that lies at the bottom of the MeToo movement: women earn less than men for the same work at the same level, and they save less and are more likely to live in poverty in old age.

That means that children in this country born to families in the top 10% of the wealth distribution have enormous advantages from birth:  they are essentially guaranteed the best medical, educational, and institutional support imaginable, with every opportunity for learning and advancement laid before them.  Their parents can afford to ensure they are able to get into top colleges (e.g., Harvard alumni preferences for their children), meet the "right" people for success in their preferred field (the "connections" that wealthy families build), take a preferred non-paying internship in another city with family funds supporting living expenses and more, all the way up the ladders of success.  Children born into families in the bottom half of the wealth distribution face a struggle at every point along that ladder:  schools that are inadequately funded after decades of Republican concentration on assessment and hurdles rather than support and educational opportunities; lack of exposure to different possibilities and the people who can open doors into those possibilities; lack of funding to make it possible to accept an opportunity when it presents itself.

These wealth disparities don't just impact these choices--they also affect aging parents who have inadequate retirement savings, young adults who have inadequate resources to deal with sudden medical emergencies, or aspiring students who get tangled in the payday loan vicious cycle of ever-escalating interest payments. And the wealth gap is compounded by at least three key components of the US federal tax system: 

1. the income tax system that claims to be progressive yet has income tiers that ignore the escalating heights of the highest paid corporate managers, university presidents, and other high-income labor and a capital gains preference that privileges ownership over labor;
2. the estate tax system that has been a GOP target for decades that has too low a rate on too little income of the dynastic estates that the run up in wealth over the last four decades has created while passing the estate along to heirs without taking any tax bite because of the absurd step-up in basis rule;
3. the cap on the social security tax that requires even the poorest laborer to pay in while letting the CEO earning a $10 million annual salary pay on only a pittance of the total compensation.

The wealth gap has in some sense always existed, but it is increasing⁵ and today begins to look like the Gilded Age before the Great Depression.  While the tax system isn't solely responsible for the increasing wealth gap in this country, it has played a significant role in aggravating the problem and thus deserves focussed attention as a matter of tax policy.

Key Points from Dan Shaviro's Interview

Dan noted that the wealth gap had its beginning in the 19th century when the government didn't respond to increasing disparities.  The progressive era under Roosevelt and Wilson, then the New Deal era under FDR did see some reduction in the wealth gap, much of which could be attributed to the reduction in wealth because of the stock market crash and the Great Depression.

As wealth increases, power increases.  Even proposals that have huge public support are rejected by Congress--including the idea that corporations and the wealthy should be taxed more.

Finding policies to ameliorate this current situation is not easy.  There are a variety of ideas--Warren and Sanders have proposed wealth taxes, though there are  constitutionality concerns that might defeat such a tax given the current conservative Supreme Court.  And a wealth tax won't solve all the problems of inequality. Other ideas include more progressive income taxes or a mark-to-market system of taxing appreciation of capital assets.

The reasons for attempting to address the wealth gap are many, and include the need for better transportation, health care, education, end of life and geriatric care, etc. 

We live in a capitalist system, but markets don't work well for addressing all problems.  In particular, they don't work well for the kinds of things that are so important like health care and education. 

Any transition, of course, will be very difficult.  The top 10% own 77% of the wealth while the bottom 50% own less than 2%.  Those with financial wealth live very well indeed, since that wealth isn't taxed til it is used and may never be taxed.

 

Key Points from Timothy Smeeding's Interview

Understanding the wealth gap is critical, because wealth provides a "cushion for consequential life moments" such as when a parent covers a child's tuition or supports the child in their first apartment in a different city.

Deciding how to respond to the wealth gap is difficult, but various possibilities exist, including a wealth tax, a reinvigorated estate tax, elimination of the capital gains preferential rate compared to ordinary income, elimination of the carried interest provision that allows private equity managers to be compensated with capital gains at a 23.8% rate rather than a 38% plus 3.8% rate and avoid paying social security taxes, elimination of the one-time exclusion for capital gains on sales of residences, etc

There are many important institutional advantages that can better lives as well, especially providing access to health care and to university education.

Responding to a question about labor, Smeeding notes that unions will be important in areas such as the public sector, nursing, education.  But in the corporate context, an important change might be to consider bringing a labor voice to corporations' Boards of Directors.  Other possibilities are to reward corporations that reward their employees:  a tax break that goes only to corporations that raise their employees' wages, for example.

¹ Generally speaking, the tax gap is the difference between the tax burden owed and tax liabilities acknowledged and paid and thus provides some understandable standard for judging trends in compliance by taxpayers with their federal tax obligations. It is calculated periodically by the IRS and published on the website.  See The Tax Gap;  IR 2019-159 (Sept 26, 2019),  The 2019 document provides estimates for tax years 2011 through 2013 and shows an estimated average gross tax gap of $441 billion per year which, after enforcement efforts and late payments, yields a fibure of $381 billion a year.

² See, e.g.,  Lola Fadulu, Study Shows Income Gap between Rich and Poor Keeps Growing, With Deadly Effects, New York Times (Sept. 10, 2019) (summarizing research from the U.S. Government Accountability Office in August 2019 entitled Retirement Security: Income and Wealth Disparities Continue Through Old Age);  St. Louis Federal Reserve Bank Open Vault Blog, What Wealth Inequality in America Looks Like: Key Facts and Figures (Aug 14, 2019) (showing income distribution from 1989 to 2016 (before the impact of the highly distortive 2017 tax legislation) skewed to favor the top 10% of income earners at the expense of the bottom 90%).

³ See, e.g., Amelta Josephson, What is the Wealth Gap? SmartAsset.com (Jul 23, 2019) (noting that the CBO's 2013 wealth data showed a figure of $67 trillion for total family wealth, with the top 10% of families holding 76% of that total wealth (and having incomes of $942,000 a year or more).

⁴ See, e.g., Institute for Policy Studies, 2015.

⁵ See, e.g.,  Pedro Nicolaci da Costa, America's Humongous Wealth Gap is Widening Further, Forbes (May 29, 2019). Noting that "distribution is everything" in response to proclamations that the economy is healthy because of stock market trends or eomployment numbers, the article states that "a steady economic expansion and historically low jobless rate can mask deep inequalities in income and wealth that leave American families in vastly different financial situations."  It relies on a recent Federal Reserve Bank (Fed) report that shows that the poorest 50% are "getting crushed" by "rising inequalities."  The increase in net worth since 1989 (growing almost 4X the prior figure) has accrued mostly to the top of the distribution, with the bottom 50% seeing essentially zero net gains in wealth over 30 years.   Figure 2 from the article is duplicated below.

What is the GOP goal? A return to the "gilded age" (or worse)

When right-wing Roy Moore said that the time when America was great was during slavery, he revealed something key to the current GOP members of Congress and state legislatures--their primary goal is to return to a time when owners of property held all the keys to the kingdom and workers were just serfs expected to do as told and whose lives didn't really matter much to the boss capitalists.

Historian Nancy MacLean suggests that this is the reason for the tax bill's largesse to corporatists and the wealthy, the reason the GOP wants to undo Medicaid, Medicare, Social Security and essentially all the progressive programs introduced in the twentieth century to form the basis for a thriving middle class and surging democratic union.  See Cahuncey DeVega, Historian Nancy MacLean on the right's ultimate goal: rolling back the 20th century, Salon.com (Dec. 13, 2017).

Here are some key points from the article.

1) "[T]he Democratic Party is terrible at translating complex questions of public policy into simple narratives that evoke emotion and, in turn, action from the American people." Id.

Indeed, having an able, sympathetic messenger who can translate the issues that truly matter into terms that make sense to ordinary people is something the Democratic Party lacked in the last election.  The tone deafness of Debbie Wasserman Schultz and, much of the time, Hillary Clinton, meant that ordinary people didn't understand that Trump is merely a blowhard capitalist who doesn't care if he cheats or lies or exploits other people so long as he gets notoriety and money, while the Democrats have been the party working for a decent sustainable economy, environmental protection and preservation, protection from pollution and diseases, and working wages for ordinary folk.

The GOP, on the other hand, has mastered the art of lying to the point that they can pat themselves on the back for fooling the majority of the people the majority of the time, while blaming anything that goes wrong on Democrats (even when it is--most of the time--entirely GOP policy that the 'wrong' occur).  So a tax bill that enriches the oligarchs and ultimately raises taxes on the ordinary people is exactly what they have in mind, but they rush it through without any public hearings and discussion because they don't want people to realize it.

2) The GOP tax "reform" bill is intended to create a deficit that will justify "huge automatic cuts to Medicare, Social Security and Medicaid", to be followed by a "push for a constitutional convention, at which the No. 1 agenda item will be a balanced budget amendment" with the goal ultimately of privatizing Social Security.

MacLean calls this Ayn Rand-brand of hateful thinking followed by GOP House majority leader Paul Ryan "economic eugenics".  Since the GOP right-wing libertarians believe that only people who are successful have any merit, they are comfortable "inflict[ing] harm on other people.  At its most basic, this libertarian moral system says that it would be better for people to die than to get health care financed by government from taxes paid by others."

3)The GOP emphasis on voter fraud (and consequent efforts across the country to make it harder for people to register to vote or to actually vote) allows the oligarch-led anti-democratic movement to disregard the will of the people because they have "gamed the system to maintain power."

The majority of Americans opposed the tax bill that almost every single Republican representative and senator voted for (no Democrat voted in either house of Congress to support the GOP tax scam).  But the GOP legislators think they can ignore what the voters want, because they have held discussions behind closed doors, and are "using the power of national government to prevent voters in more progressive lcoalities and states from being able to choose more progressive policies" by enacting a bill that penalizes voters living in high-tax, progressive states that actually already send more money to low-tax, economically suffering "red" states.

MacLean notes that George Mason University's Mercatus Center, funded by Charles Koch, has been leveraging universities for their political project of undoing progressiivism for decades.  They think people will be "absorbed with Facebook and binge-watching Netflix" so will disregard the way that the GOP and their oligarchic allies are using the national government to return to the late 19th century when oligarchs with property had all the power.  That's what is the "stealth nature of this tax bill."  Returning to a world where "only the wealthy were doing well and everybody else was screwed", a world preferred by James Buchanana, who "devised the playbook that the Koch network is using."

This tax legislation is, indeed, class warfare.  It represents a huge blow in favor of wealthy corporatists though creation of a gaping $1.5 trillion deficit hole that will be used by the GOP to decimate New Deal and Great Society programs on which most ordinary Americans depend --Medicaid to pay for nursing homes in the last years of life, Medicare to help afford needed medical care, Social Security to make up for the gap between the meager savings in retirement plans and the increasing costs of living after retirement.  These wealthy people in Congress just don't give a damn for ordinary working Americans, whether black or white, rural or urban, "conservative" or "liberal".  All they care about is making sure that people with property have even more property.  It has nothing to do with creating or promoting a sustainable economy that will lift ordinary workers stagnated wages.  It has everything to do with appeasing the top one percent.

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Trump's Refusal to Release His Own Tax Returns and California's Legislature

As most everyone is aware, Trump has refused to release his tax returns, breaking precedent with decades of presidential candidates and president's release of tax returns.  Even Dick Cheney,  grumpy corporatist veep, released his tax returns.  I had fun using them as the raw material for an introductory course in federal income taxation where we looked at the returns to understand how the various "lines" correspond to items specified in the Code (like "adjusted gross income" and "miscellaneous deductions").

Trump, however, used various excuses, none of them particularly strong, to say he "couldn't" release his returns.  The main excuse was that his returns were under audit.  Of course, that makes no difference whatsoever.  Any taxpayer can release returns, whether or not they are under audit, and other presidential candidates (Nixon comes to mind) have done so during an audit period.  Trump most likely didn't want to release his tax returns because he didn't want to provide fodder to critics who would look at the relatively measly amounts of taxes that he had to pay,  or find information about trusts and other entities set up to keep money of shore or, who knows, find information about connections to various Russian oligarchs.  Another reason that Trump likely hasn't wanted to release his returns--he wants to be able to pretend that he is not a beneficiary of all those many loopholes in the Code that particularly benefit the ultra-wealthy.

That comes to the surface now, because of his claims, in an Indianapolis speech, that he would not receive any benefit from the so-called "reform" tax "framework" put out by Trump and the GOP leadership.  We know from 2005 returns that he has, at least in that year, had to pay $31 million in Alternative Minimum Taxes (AMT) in a year when he would otherwise have paid very little in taxes.  That is, in fact, the purpose of the AMT--to force wealthy taxpayers to pay some tax on their incomes when they otherwise have the ability to take advantage of so many loopholes that they would get off pretty much tax free.  So we know that Trump lied when he said in Indianapolis that he would not get a benefit from his own tax proposal.  His tax proposal would eliminate the AMT backstop for wealthy payment of at least some taxes.  That would directly benefit Trump.  He lied.

Trump would also directly benefit from the elimination of the Estate Tax.  That is a tax that is very low at this point, because of decades of GOP whittling away at it to reduce it to zero on behalf of their wealthy donors.  When a married couple with $11 million in assets die, their estate would not pay any estate tax, because there is an exemption for the first $11 million for a couple.  On the rest of the estate above $11 million (a size of estate of those in the top 1% of the distribution), the tax rate is now exceedingly low--only 35%.  Trump's plan would reduce it to zero.  He said in the Indianapolis speech that eliminating the estate tax would help middle class people, small family farms, and small businesses.  He lied.  Only the wealthy pay any estate tax (see above).  Very few small businesses and family farms are subject to the estate tax at all--estimates say there would be only about 80 in a given calendar year at this point.  Of those that are subject to it, the amount subject to the estate tax is only the excess over the exemption amount.  And family farms get 14 years to pay off any tax like that the heirs might owe, through a provision for installment payment intended to help preserve family farms and allow them to pay the tax due, if any, over time out of the operating profits of the business.  So, again, Trump lied. 

Trump also would likely benefit huugely from the reduction of rates on corporations, through getting more dividends out of the even higher corporate profits that would result  (to the extent that he has investments in corporate stock, which are likely substantial, since most of the financial assets in this country are owned by those in the very tip-top of the income and wealth distribution). So, again, Trump lied.

Trump would also likely benefit bigly from the reduction of rates on pass-through income from real estate partnerships and hedge funds.  The Trump empire is clearly in real estate, and there are likely quite a few partnerships in the structure of the Trump companies.  Since otherwise passthrough income is currently taxed at the individual partner's personal income tax rate, a 25% rate on income that would currently be taxed at a 39.6% rate (including the tax on investment income), is a 14.6% lower rate or more than a 1/3 reduction in the tax rate on the income. So, again, Trump lied.

Given that Trump distorts so easily the actual effect on him personally of his tax proposals, it would clearly be helpful to the citizenry to have a chance to review Trump's tax returns (and to have had them before the election to take into account as he talked about taxes and wealth). Every president has done so since the 1970s.  Seventy four percent of respondents in national polls think Trump should release his tax returns.  See McGuire release.

The California legislature has decided that if Congress won't act to do something about this, than it will.  As Democratic Senator Mike McGuire, a proposer of the bill, noted in a June 1, 2017 release about the bill:

 "Everyone knows that President Trump used the birth certificate issue against President Obama as a dog whistle to white supremacist groups,” Senator McGuire said. “The truth is that we have never elected a president who was not a citizen. That has never been a problem and does not require a solution. But we have elected a president – and he is currently in office – who has serious conflicts of interest that are endangering our national security and who is consistently violating ethical norms to enrich himself and his family. That’s a very serious problem which does require a solution – and the solution is SB 149.”

The legislature has passed a bill (Senate Bill 149, titled Presidential Tax Transparency bill), now apparently awaiting Governor Jerry Brown's action, that adds a ballot-eligibility disclosure provision requiring presidential candidates to release 5 years of tax returns.  See Brandon Carter, California legislature passes bill requiring presidential candidates to release tax returns, The Hill (Sept. 14, 2017); CNN Wire & John Fenoglio, California passes bill requiring presidential candidates to release tax returns; Trump could be impacted in 2020, KTLA News (Sept. 16, 2017). The California secretary of state would make the returns public (with redactions as necessary) on the state website. Although it was mostly Democrats who supported the measure, the bill was bipartisan: some Republican members in both chambers supported the effort.

Expect a court challenge to the bill if Governor Brown does sign it into law.  The challengers would argue that any additional restriction--even a ballot eligibility requirement--is unconstitutional, since it would add to the eligibility requirements in the Constitution.  But the supporters would ably demonstrate that's a specious argument: every state has requirements that candidates must comply with to get on the ballot--mode for getting signatures, mode for making requests, timelines within which to comply, fee payments, etc.  This tax return release provision is more similar to those (i.e., a disclosure requirement that is procedural in nature) than it is to the eligibility requirements of age, citizenship, residency set forth in the Constitution ("achievement" requirements that are substantive in nature).  The substance on the tax return isn't relevant to whether a candidate can be on the ballot; just the procedural element of complying with the disclosure requirement.  Constitutional scholar Laurence Tribe agrees with me that a disclosure requirement isn't an additional qualification (see KTLA News article for quote). And other states--New Jersey, Connecticut, Massachusetts, New York, for example-- are considering or have passed similar action.

Trump's "Give the Rich a Break" Tax Plan

National GOP leaders on Wednesday released a 9-page document that they called a tax "framework" (available here on the Washington Post site) describing in vague terms how they intend to cut taxes for the nation's wealthiest people while doing very little that serves the government needs. Overall, the GOP framework would amount to about $2.2 TRILLION in less revenue to support federal programs (like protecting the environment from corporate pollutants, supporting higher education loans for students, funding basic university research) (assuming $5.8 trillion loss to lowering rates and shift to territorial system and maybe $3.6 trillion recouped by eliminating as yet unspecified deductions).  See GOP proposes deep tax cuts, provides few details on how to pay for them, Washington Post (Sept. 27, 2017).

• They promise 3 rates (12%, 25% and 35%, without stating what the applicable income brackets for those rates should be).  That lowering of rates is primarily beneficial to the wealthiest, since the people who just barely get by on their wages (especially with the new corporate regime of calling people in for short shifts, as needed, rather than paying them a regular full-time job) are hit hardest by the payroll taxes that won't be lowered at all under this plan.  That is, ordinary wage-earners in the middle and lower classes are generally already taxed on a consumption basis--they spend what they earn and have little left for saving for the future.  They pay relative low income taxes but pay significant payroll taxes through withholding on their wages (with no deferral).  This is another excursion into the current GOP's 'alternative fact' universe, where huge tax cuts mainly benefiting the wealthy are sold as a 'simplifying' reform that will benefit ordinary people.

 

• Although the lowest rate is higher than the poorest wage-earning taxpayers pay now, the planners claim that this is still a tax cut because of the "doubling" of the standard deduction for those taxpayers that do not itemize.  However, the personal exemptions are eliminated, so that the combination of the standard deduction and the higher rate is likely to be at best a minimal cut for small families and an actual tax increase for larger families.  See, e.g., this article.

 

• They promise to eliminate the "alternative minimum tax", a tax provision that was enacted as a safety provision to ensure that wealthy taxpayers who can afford tax planning and generally can most easily benefit from the various loopholes and tax subsidies written into the code would pay some modicum of taxes rather than get off scott-free from any tax burden. The "framework" (page 5) claims that "it no longer serves its intended purpose and creates significant complexity."  It is admittedly somewhat complex, but not unduly so with modern tax preparation software which makes that complexity a minimal problem.  I have been required to pay the AMT, and it hasn't made my life or tax return filing more complex.  In fact, the people who owe the AMT should be paying more tax than they would pay without the AMT, and that means it is in fact serving its intended purpose of ensuring that taxpayers cannot aggregate too many of the various haphazard subsidies in the Code to permit them to essentially escape a reasonable tax burden on their economic income.  Elimination of the AMT is a tax break for the well-to-do:  Trump, for example, has had to pay the AMT (real estate developers are one of the much-favored groups in terms of various tax expenditures in the Code that benefit them).

 

• They plan to eliminate the estate tax--a tax that ONLY applies a low 35% rate to individuals who leave estates worth more than 5.5 million dollars or couples that leave estates more than 11 million dollars, and even then is often the only tax that the assets in those estates have ever been subject to, since these wealthy Americans are the ones most able to take advantages of various trusts and other loopholes and borrowing to ensure that they live as tax-free as possible off their assets during their lifetimes and pass them almost wholly intact to their heirs with stepped up basis to start the game all over again.  This is a tax break for the very wealthy and their silver-spooned heirs--especially lucrative for the multibillionaires who own (and live off of) most of the financial assets.

 

• They plan to give corporations an exceeding low statutory rate of 20%, even though the primary beneficiaries will be the owners and managers who already have enjoyed a hugely disproportionate share of corporate gains (compared to their workers) that has resulted in the cascading inequality of distribution of resources in this country, in part because the wealthy typically own most of the countries' financial assets and get a very low preferential capital gains rate on their income compared to the higher rate on wages paid by ordinary, non-wealthy wage-earners.  It is claimed that low corporate tax rates are necessary to allow corporations to be competitive, based on the statement that our statutory rate (the rate provided in section 11 of the Income Tax Code) reaches a maximum of 35% for the biggest companies.  But the majority of corporations--even highly profitable ones-- pay no income tax at all.  And those that do pay a corporate income tax pay an average effective tax rate (actual tax as a percentage of actual economic income) around 24% , at best, and that is not substantially higher than the corporate tax rates in other developed countries.  Further, most of those other developed countries do not depend solely on the income tax--they generally have some kind of value-added tax (a VAT) in addition to income taxes and often have various other taxes (such as a financial transaction tax).  Making claims about competitiveness based solely on the corporate income tax is, in other words, foolishly incommensurate and really says nothing whatsoever about ability to compete.

 

• Further, they plan to allow corporations to expense all investments, at least for the next 5 years, even though the economic reality is that expensing is an upfront subsidy since wear and tear is most significant at the back end of an investment, not the front end.  Expensing (see page 7 of the framework) will cost huge amounts of tax revenues.  It is just a way to reduce corporate taxable income (not economic income) even further, making the 20% rate on a lower amount of income produce even less tax revenues from corporations, which already pay a ridiculously low amount and are enjoying record high profits.

 

• The framework calls for changing to a territorial system (at a time when most U.S. multinationals have already used various gimmicks to 'offshore' their main profit-making IP) and lower taxes on U.S. multinationals.  The result will likely be significantly lower corporate tax payments from U.S. multinationals.  Further, unless the reorganization provisions and ability of U.S. multinationals to move active businesses overseas on a tax free basis is curtailed, these rules will likely encourage other companies to offshore even more of their active business assets.  It will favor multinationals over domestic corporations, pushing even more companies to move businesses overseas.

 

• And they intend to preserve the R&D credit (see page 8 of the framework) -which was eliminated in the 1986 tax reform and then reinstated  on a piecemeal basis over multiple years due to pressures from corporate lobbyists.  There is no evidence that the R&D credit, rather than the more legitimate business deduction or capitalization for research expenses, produces more research.  And Congress has done nothing--in spite of years of pushing for making the R&D credit permanent--to establish that it provides any actual economic growth benefit.   It just provides an upfront dollar for dollar reduction in taxes compared to the deduction's lesser benefit.  And there is no evidence that the credit has resulted in more money being put into research.  Research intensive businesses with good leadership invest in research whether or not they get a special tax benefit because otherwise their busienss will die.  (Of course, businesses with no attention to anything other than the bottom line may make bad decisions:  one reason the pharmacology industry has been lagging is that they have tried to merely buy others' research rather than doing it themselves, and like the infamous purchaser of Epipen, they have simply gorged themselves on exploitative prices because of their monopoly on a particular drug.)

 

• They plan to have income from "pass-through" entities like partnerships taxed at very low rates to the individuals, who already enjoy exceedingly low rates on their gains from corporate stocks and other financial assets (the preferential capital gain rates) and will receive even more cash out of their corporate stock ownership with the even lower proposed statutory rate on corporate stock.  This plan for pass-throughs, by the way, will continue to lavish tax benefits on an already super-coddled wealthy class--those who run real estate development businesses through partnership structures (the Trump empire, for one), those who run hedge funds (some of the wealthiest individuals in the country) and those who run master limited partnerships (fossil fuel tycoons).

 

• They say they will "simplify" taxes--which should mean eliminating most or all of those absurd provisions that have grown over the years to clutter the tax statute with special subsidies (that, again, mostly benefit the wealthy).  But there is no indication that the GOP has any intent to eliminate any of the special giveaways.  With real simplification that made economic sense, the framework would call for things such as
  • eliminating the preferential capital gain rate (that benefits the wealthy who own the vast majority of the capital assets)
  • eliminating the section 1031 "like kind exchange" rules (that allow wealthy real estate developers to trade properties for significant gains but defer tax on those gains indefinitely, often til death when the step up in basis allows their heirs to inherit and start the game all over again)
  • eliminating the various preferences for fossil fuels that have been in the code in one form or another for years, giving oilmen their wealth while subsidizing the most polluting kind of fuel extraction and use (all the while with their lobbyists arguing against significant long-term subsidies for more environmentally friendly wind and solar)
  • phasing out the mortgage interest deduction--at least for mortgages at more than the average national housing price-- so that multimillionaires cannot get the benefit of the interest deduction on $1.1 million of mortgages, again, a provision that primarily benefits the wealthy in the top 20% of the income distribution, and
  • eliminating the provision in the charitable contribution provisions that allows wealthy shareholders to donate certain assets for  a full fair market value deduction rather than a basis deduction--thus significantly reducing the overall income tax they owe.

But of course--although most academic research suggests that a mortgage interest deduction serves no legitimate purpose, the GOP 'six' indicate they will retain it, because it "help[s] accomplish important goals that strengthen civil society as opposed to dependence on government:  home ownership".  Fact is, countries without a mortgage interest deduction have just as high rates of home ownership, and the economic effect of the deduction (especially in its current form) is to favor purchase of ever larger homes by those taxpayers in the upper income distributions.  

As with so much else from the man currently holding the office of President, what is said (paraphrasing) --that the wealthy will not get a tax cut and the poor and middle class will get big tax cuts --can't be trusted.   Like so much else, Trump says he is "very good at it", but then he thinks he is good at everything and is inevitably shown to be fairly ignorant of the issues that matter. The framework, like everything else the GOP has proposed this year --including repeal of the Affordable Care Act; defunding of Medicaid; withdrawal of scientific information about climate change from the EPA website, reduction in the size of existing national monuments meant to protect the land for all of us --is designed to benefit the GOP establishment's wealthiest donors who continue to call the shots on tax and economic policies.

And of course the claim that this 'framework' can result in "the simplicity of a 'postcard' tax filing for the vast majority of Americans" is absurd.  The complexities of accounting for various income sources and the heightened complexities that most low-income Americans face in claiming the Earned Income Tax Credit will remain, even if rates are reduced and the standard deduction replaces the standard deduction and personal exemptions.  The claim (page 4 of the framework) that "typical families in the existing 10% bracket are expected to be better off under the framework due to the larger standard deduction, larger child tax credit and [unspecified] additional tax relief that will be included during the committee process" seems clearly wrong for many if not most of those taxpayers in that lower bracket. 

 And their posturing that this "reform" is to benefit "small businesses" is equally absurd.  The main beneficiaries of the pass-through rate will be the huge joint ventures, master limited partnerships, real estate partnerships (like the Trump companies), and hedge funds whose owners will enjoy a reduction in their tax rate on that income from 39.6% to 25%.  Most actual small business owners are already paying tax around the 25% rate.

The proposal will not end incentives to ship job and capital overseas (see page 3 of the framework on goals)--those gimmicks with transfer pricing of intangibles will continue, as any lowering of the corporate tax rate here to 20%, which is below the international average of 22.5% (according to the report--it may well be too low a figure), will push other countries to lower their rates as well.  It is a corporate lobbyist's ideal playground--playing one country against the other to push the "race to the bottom" faster and faster and continue the quasi-sovereign hegemony of multinational companies around the world.  If we want to end the corporate inversions and the transfer pricing gimmicks, we know various ways we could do that, including changing transfer pricing mechanisms in ways that various academics have recommended.   Congress hasn't really wanted to, since their wealthy corporatist donors wouldn't like it.

What reveals the hypocrisy of the GOP is their sudden switch from deficit hawks during the Obama administration, which made it harder to get a decent stimulus package through Congress and to promote funding for desperately needed infrastructure projects, even when interest rates were incredibly low, to a willingness to incur significant deficits in order to debt- fund even more tax cuts for the wealthy on top of the Bush-era tax cuts that led to a switch from federal surplus to federal deficits and more debt. As Ed Kleinbard so aptly states, "The Republican tax "plan" is a deficit-busting mess, and it would slash the President's taxes", Vox.com (Sept. 28, 2017).

What reveals the GOP hypocrisy even more is their presentation of this framework without any appropriate CBO or Joint Committee on Taxation analysis.  And statements by Senator Bob Corker (Tenn) in connection with scoring tax reform that they don't trust the CBO, implying that the GOP should go to a private (pro-GOP) source for "dynamic scoring" so that it will show the results they want--is truly worrisome.  See The sudden and regrettable demise of the CBO, USNews.com (Sept. 21, 2017).  It disparages the nonpartisan professionals in the Budget Office while showing that the GOP is willing to do practically anything to further the lie that their budget, with  huge tax cuts proposals for the wealthy, will miraculously result in widespread economic growth that will float even poor folks' boats. 

We already know that tax cuts do not have the miraculous growth effect that they claim.  Kansas actually engaged in an "experiment" to prove that tax cuts would stimulate growth.  Even the state's GOP legislature recognized the utter failure of the claim, as the state's economy sank under the burden of the tax cuts.  Kansas actually voted to end the experiment and raise taxes!

And of course we have experimented this way nationally with various Republican administrations.  Reagan cut taxes drastically in his first year in office, caused huge deficits and then increased taxes every year of his term afterwards.  The cuts ended up most especially benefiting the wealthy, because the tax increases took the form of higher payroll taxes and other means of hitting lower-income folks that didn't bother the wealthy.  George H.W. Bush promised not to raise taxes, but recognized that he could not keep that promise and run the government appropriately. If we are going to spend billions on continuing to buy arms and military planes we don't need (a silly idea, but one that seems ingrained in the GOP mentality), then we have to have more money to fund things we really do need, such as a fair medical care system for the most vulnerable (Medicare) and funding for basic research that corporations don't want to pay for (NSF and NIH, among others).  George W. Bush cut taxes on the wealthy and corporations, fulfilling corporate lobbyists wish lists that had been circulating for 20 years, including creating a 'tax holiday' for corporations to repatriate untaxed profits that they had offshored at a very low rate.  All that was promised to drive economic growth, but of course it didn't.  As with the similar idea in this year's "reform" talk, the 2004 tax holiday provided a way for corporations that had engaged in various gimmicks to move their profits overseas to low tax jurisdictions (even while the money is often in U.S. banks) to bring it back to the US at low or no taxes and then use it to do stock buybacks that benefited their wealthy shareholders with big boosts of income taxed at preferential capital gains rates.  Most of those corporations did not use those funds in any way to create job--in fact, some of the biggest so-called repatriators laid off employees at the same time.  The tax holiday merely gave even more of a tax subsidy to unpatriotic corporations that were willing to scam the system by pretending to sell their invaluable IP to offshore subsidiaries, and then even higher payments to the CEOs for raking in more cash.  In other words, the tax holiday was a great exercise in supporting the creation of an even greater inequality gap.  Historical trends are fairly clear on this.  The U.S. economy has thrived more under Democratic presidents who have increased taxes and has turned to deficits more under Republican presidents who have cut taxes.

What we should do at a minimum is increase the amount that corporations pay into the federal government, so that a higher percentage of our GDP is paid in corporate taxes, as in other developed countries.  And we should add a financial transactions tax, at least, to the mix while eliminating the preferential capital gains rate and the like-kind exchange provision. 

Funding the government so that it can deal with the hundreds of billions in financial aid needed in Texas (Hurricane Harvey) and Florida (Hurricane Irma) and Puerto Rico (Hurricanes Irma and Maria) while at the same time starting to handle some of the deteriorating federal roads, railways, bridges and other infrastructure throughout the country would be the best way to ensure that we could continue the economic growth begun under the Obama administration. That funding would require REAL tax reform:  eliminating the preferential capital gains rate, eliminating the many loopholes by which highly profitable corporations manage to pay almost no federal income tax, and creating a significantly higher graduated rate structure for taxing estates (while eliminating the step up in basis).

(Of course, we should also recognize that spending the hundreds of billions annually on defense does much less to defend America and make it great than spending a higher proportion of that money on education, infrastructure, and other ways to increase opportunities for all.  Let's get rid of the militaristic jingoism that keeps the U.S. armament industry rolling in cash and start funding scientific and health research through NSF and NIH.  That is the way we created a thriving middle class after the second World War and the way to support continuing innovations that will make a difference in our lives and economy into the future.)

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The Tea Party's Disruptive Anti-Government (and anti-tax) Politics

The New York Times ran an interesting piece by Kim Messick on the Tea Party's psyche yesterday: Messick, The Tea Party's Paranoid Aesthetic, New York Times (Aug. 10, 2013).  It's worth trying to understand this political group's understanding of itself, since it " is a political movement ... that tries to shape the decisions of political actors — voters,legislators, pundits — into maximum coherence with its own agenda."  Id.  Its agenda is much influenced by the corporate funding that supports it but there is clearly something that holds the group together.  Messick says that they so identify their own ideas and values with the country that they see any divergence from those values and ideas as literally "unAmerican" and any evidence that the country supports things they do not support as evidence of a vast conspiracy causing the undoing of the true America.

In the case of the Tea Party, the content, though mostly political, is often religiously inflected. (A 2011 study ranked the predictors of Tea Party affiliation. The strongest was being a Republican. The second strongest? Believing that religion should play a larger role in politics.) There are invocations of God and His justice, historical interpretations (of the Constitution, say, or some program or proposal), evaluations of candidates for  office, and policy recommendations. (“Affordable Care Act bad! Tax and spending cuts good!”) These elements are then assembled in various ways to communicate the message an advocate finds appropriate for a given audience or occasion. I want to argue that we can discern in these messages a kind of master narrative, a collection of meanings that expresses the Tea Party’s sense of American history and of its own place within that history. It is this “story line,” I think, that explains the powerful appeal of the Tea Party movement to so many of its adherents, as well as its endorsement of a uniquely intransigent approach to the conduct of political affairs.

The key, says Messick, is Columbia historian Richard Hofstadter's description of paranoia in American politics (originally set forward in a 1963 essay):

The central image is that of a vast and sinister conspiracy, a gigantic and yet subtle machinery of influence set in motion to undermine and destroy a way of life. One may object that there are conspiratorial acts in history, and there is nothing paranoid about taking note of them. This is true… The distinguishing thing about the paranoid style is not that its exponents see conspiracies or plots here and there in history, but that they regard a ‘vast’ or ‘gigantic’ conspiracy as the motive force in historical events. History is a conspiracy, set in motion by demonic forces of almost transcendent power, and what is felt to be needed to defeat it is… an all-out crusade. The paranoid spokesman sees the fate of this conspiracy in apocalyptic terms— he traffics in the birth and death of whole worlds, whole political orders, whole systems of human values.  Id.

So Messick surmises that the intransigent, destructive tendency of the Tea Party to fight "to the death" against any policy or idea that it disagrees with stems from this paranoid identification of its own values as the only true American values, and any divergence from those values as a betrayal engendered by conspiratorial Others whose efforts to destroy the 'real' America must be stopped at all costs.

Tormented by difference, unable or unwilling to abide the fluidity of American identity, some persons anchor it in the racial, ideological, or ethnic features of their own community. This community then becomes “normative” for the nation as a whole; any threat to the former, any challenge to its prestige or authority, is automatically a threat to the latter.

***

The Tea Party’s paranoid aesthetic conveys this narcissistic view of itself and its role in our politics and history. ... This is the message paranoid narcissism ceaselessly delivers to its devotees. “The Others are irreligious, unproductive, licentious, treacherous. You are the rock on which this nation was built and you are the foundation on which it will rise again. You.  It’s all about you.”

***

[W]hen our identity is at risk — as it always is for the paranoid narcissist — there can be no room for compromise. The very suggestion is absurd: it amounts to the claim that we should accept being only partly ourselves. For the Tea Party, intransigence is another name for self-preservation.

If Messick is correct, we can count on this group to place itself and its own values above all else, to be willing to destroy in order to avoid having any bit of its view of the correct American way being undone. 

On tax issues, the Tea Party's ideas seem to be sharply influenced by the assumptions of personal decisionmaking and market "freedom" espoused by Chicago School economists.  Because Tea Party adherents define "freedom" in a unique way that disregards at least a century of developing understanding of the role of government in supporting the freedom of individuals to live a decent life, their views  on taxes tend to be anarcho-libertarian in nature--they see taxation itself as "theft by government" rather than the reasonable contribution of each citizen to the furtherance of a civilized society that supports all members and ensures that the basic institutions for a decent life are available to all.  This is perhaps the most threatening aspect of this religio-political group--their fervent ideological belief that they have the one view of the way America is supposed to work, and that progressive income taxation is anathema to that view.

It is not clear how one counters such religio-political fundamentalism.  Anyone who has ever tried to have a rational discussion of religious faith with a fundamentalist religious person knows that reason cannot penetrate such belief. Facts are generally irrelevant.  Any evidence that counters the exact specifications of the faith is treated as spurious.  The Tea Party adherents that I've met seem very similar.  It appears to be much more convenient for Tea Party adherents to close their minds to evidence than to question their ideologies or even to allow any adjustment to their "values" based on historical developments.

So the only defense appears to be making sure that this minority group never becomes a majority political group.  The filibuster in the Senate, in the context of Tea Party extremists, is a worrisome procedural tool that favors just such intransigent minorities.  We should get rid of it.  As for the House, perhaps the only answer is  engaged and energetic contesting of any election in which a Tea Party extremist has a chance.

 

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The Boom and Bust Cycle of Tax Shelters and Intimidation of the IRS

[edited 6/9/13 to correct some glaring typos :) ]

In response to concern about taxpayer rights and potentially abusive tax collection activities, Congress passed two "taxpayer bill of rights" laws, in 1988 and again in 1996.  Together, these laws protect taxpayers with further notice and information, shift the burden of proof to the government in many cases, and create an office of taxpayer advocate that reports directly to Congress, among many other provisions.  The 1988 law (consolidating five different proposed bills into an "omnibus" bill under HR 4333) included provisions that sharply restricted IRS' employees' ability to ferret out tax evasion for fear of potentially violating the law. See summary of HR 2190,  "the IRS Administration Reform and Taxpayer Protection Act of 1987", incorporated in the 1988 legislation passed as HR 4333.  The 1996 law, HR 2337/ Public Law 104-506, beefed up the Taxpayer Advocate office, modified various penalty and collection provisions, and required an annual report to Congress on IRS employee misconduct.  While these laws provided important new protections for taxpayers and noteworthy additions to the law governing collection authority, some were  overgenerous to taxpayers and at the least made enforcing the tax laws more difficult for IRS employees.

It was only a short while after the 1996 law was enacted when the Senate Finance Committee held an elaborate series of hearings looking into alleged "abuses" of "innocent" taxpayers by the agency in collecting taxes and investigating potential criminal evasion of taxes:   hearings on IRS practice and procedures, Sept. 23-25, 1997;  hearings on IRS restructuring, Jan. 28-29, Feb. 5, 11, and 25, 1998; and hearings on IRS oversight, May 28-30 and June 1, 1998. Let it be clear: these  hearings targeted the IRS with an apparent objective of changing the agency's focus from enforcement and collection of taxes to "nice-guy" relations with taxpayers.  They included "sob stories" about harassment by the IRS from a priest, a divorced mother, a restauranteur and others, and alleged abuses in the collection and investigatory processes within the agency.  

Much of the inflammatory testimony in those late 90s hearings was just that--stories, hand-picked to highlight purported problems, with the result that they inflamed the citizenry against the agency.  The selected testimony was anything but balanced, in that it ignored myriad examples of just the opposite and included made-up tales of abuse.  Danshera Cords, in an article discussing the 1998 Act, describes the restaurant owner's testimony and its lack of truthfulness as follows:

John Colaprete, owner of the Jewish Mother restaurants, "told the Finance Committee that IRS agents and other law enforcement personnel forced children to the floor at gunpoint, leered at scantily clad teenage girls, and generally violated his Fourth Amendment rights against illegal search and seizure, all on the word of his felonious bookkeeper." Ryan J. Donmoyer, Judge May Dismiss Jewish Mother Lawsuit, 83 TAX NOTES 1696, 1696 (1999). Mr. Colaprete testified before the Finance Committee that, while attending his son’s first Holy Communion, "[a]rmed agents, accompanied by drug-sniffing dogs, stormed my restaurants during breakfast, ordered patrons out of the restaurant, and began interrogating my employees." IRS Oversight: Hearings Before the Senate Comm. on Finance, 105th Cong. 75–79 (1998); ROTH & NIXON, supra note 5, at 189.

Danshera Cords, How Much Process is Due? IRC Section 6320 and 6330 Collection Due Process Hearings, 29 Vermont L. Rev. 51, 52 note 7.

That sounds atrocious, until you find out that Colaprete later recanted the whole thing, when it was found that he was actually out of the country at the time it was claimed to have happened.  Id.

There were two later reviews of the testimony--the Webster Commission and a GAO study (both cited in Cords' article).  The Webster Commission found isolated abuses but no pattern of misconduct by the criminal investigation division.  Criminal Investigation Div. Review Task Force, IRS, Review of the IRS's Criminal Investigation Division (1999).  The GAO study found no evidence supporting the allegations that tax assessments were improperly handled or criminal investigations inappropriately undertaken. GAO, Tax Administration: Investigation of Allegations of Taxpayer Abuse and Employee Misconduct Raised at Senate Finance Committee's IRS Oversight Hearings (reprinted in 2000 Tax Notes Today 80-13 (Apr. 25, 2000)). David Cay Johnston, in his highly regarded book on the tax shelter business, describes those hearings as "going after the IRS".  Perfectly Legal (2003).  Bryan T. Camp describes Congress as seeing tax administration as an "inquisitorial" process.  Bryan T. Camp, Tax Administration as Inquisitorial Process and the Partial Paradigm Shift in the IRS Restructuring and Reform Act of 1998, 56 Fla. L. Rev. 1 (2004) (describing the hearings at 78-86).

The  Senate Finance hearings enabled the passage of additional legislation in 1998, the Internal Revenus Service Restructuring and Reform Act of 1998. The law reorganized the IRS, the main agency to enforce the law, into "units serving particular groups of taxpayers with similar needs"--i.e., changing its focus from law enforcement to "serving taxpayers".  It  "significantly limited" the agency's "historically broad powers".  Id. (Cords, at 51).  It created a collection due process hearing requirement before the IRS can proceed to collect on taxes due; a bureaucratic (red-tape) approval process for levies, liens and seizures; and severe limitations on examination and audit techniques and impositions of penalties.  The agency suffered not only from increased disrespect (from media attention to the inflammatory hearings) that facilitated the right's mission to spread the Reagan mantra that "government is the problem," but also from underfunding, strict limitations on methodologies, and effective intimidation that made it harder to enforce the tax laws and collect unpaid taxes, thus encouraging tax evasion and even tax fraud. Stress, time and resource constraints, and understaffing, got worse, even while Congress dumped more and more administrative responsibilities on the agency.

The always innovative tax practitioners (attorneys and CPAs) noticed.  Corporations and their high-wealth CEOs and majority shareholders were already engaging in more tax avoidance with the help of crafty lawyers finding loopholes in the interstices of the tax law and the more restrictive 1988 and 1996 laws that made it harder to enforce or collect.  Many now took advantage of the newly flourishing tax shelter schemes from the late 1990s to mid 2000s.  These were often promoted by big-money law partners at law firms like Donna Guerin at (now shut down) Jenkens & Gilchrist or Raymond Ruble at Brown & Wood (later Sidley Austin) and financed by investment banks like Deutsche Bank and others eager to profit from derivatives that made deals appear to move money around while essentially leaving it in place, with avid assistance (and sometimes design) by accounting firms like Arthur Anderson, KPMG, and BDO Seidman. The shelters usually had fancy acronyms like "COBRA" and "FLIPs."  They frequently involved invented (phantom) losses or phony deductions.  Many used purported federal income tax partnership structures to selectively pass gains to tax-exempt or tax-indifferent parties so (phantom) losses could be passed to parties that "needed" a tax loss to offset a large, expected, and real gain. 

Hitting the news today is yet another story about a top CEO who engaged in those phantom-loss- generating partnership tax shelters.  Zajac & Drucker, Ray Lane Rode Tech-Boom Tax Shelter Wave Broken by IRS, Bloomberg.com (June 7, 2013). Lane, former president of Oracle and current chair of Hewlett-Packard, used a shelter involving partnerships with long and short positions called "POPS"--put together by Sidley & Austin, Deutsche Bank, and BDO Seidman--to shield $250 million from taxation. Id.  As Chris Rizek, a tax lawyer at DC's Caplin & Drysdale told Bloomberg, the IRS slacked off on enforcement in those years after the series of bills restricting tax administration because "they were intimidated." Id.  "They could be cowed again," Rizek said, given the focus in Congress this month.

We seem to have a "boom or bust" cycle in terms of attitudes towards the IRS as the primary agency for enforcing our tax laws.  And that's unfortunate, because a country that cannot force wealthy and corporate taxpayers to pay their share of the tax burden is a country that will fail.

This history should serve as an important warning to Congress, the mainstream media, and citizens as hearings exploiting anti-IRS sentiments spread cries of alleged abuses (seemingly with as little evidentiary support for widespread patterns of abuse as the 1998 hearings) that may again lead to overly restrictive legislation.  

While any agency should avoid wasting money on unnecessary travel (and certainly luxury suites is a waste for any government employee), IRS employees should not be restricted from participating in important activities like attending and speaking at the ABA Tax Section's three annual meetings.  And while it is important to ensure that there isn't a corrupt abuse of agency power, the hearings so far into the 501(c)(4) selection of various groups (conservative and liberal) for greater scrutiny bear too strong a resemblance to the hyped-up hearings by the Finance Committee in 1997-98, which inappropriately intimidated IRS employees from doing their jobs.  Congress should not prevent the IRS from taking forceful actions to fight violations of the tax laws, such as appropriately screening applicants for 501(c)(3) and (c)(4) tax-exempt status.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Inequality, Taxes, and Corporatism viewed thru the lens of Nick Reding's "Methland"

[editorial note: back from a great break in Colorado with children and grandchildren, so postings will resume normal routine. edited in afternoon to add cite to Angry Bear post by Mike Kimel.]

The Congressional Research Service recently released a new report on U.S. income inequality.  See Hungerford, Changes in the Income Distribution Among Tax Filers 1996 to 2006: The Role of Labor Income, Capital Income, and Tax Policy, CRS (Dec. 29, 2011) (Download Hungerford. Changes in the Distribution of Income Among Tax Filers Between 1996 and 2006. Role of Labor Capital and Tax. 122911).   The CRS report is a sobering document, especially in light of the growing unrest as ordinary people realize how their opportunities are limited by the increased control of resources at the top (e.g., Occupy Wall Street, the "99% vs. 1%, etc.).   For example, see the New York Times article today on inequality and the fact that U.S. mobility trails that of Europe and Canada.  The article is based on a number of different studies such as that of Marcus Jantti and colleagues, American Exceptionalism in a New Light, and suggests that inequality has lingering impacts, especially on the poor and the ability of the poor to move out of the bottom.   See Jason DeParle, Harder for Americans to Rise from Lower Rungs, New York Times, Jan. 4, 2012 (in print edition, Jan. 5, at A1).  The article discusses the considerable evidence that there is limited access today to what we have called the "American Dream":  stickiness exists especially for the poor and the affluent, as the poor generally lack opportunities to get out, and the affluent generally have all the advantages they need to stay affluent.  See especially the graphic accompanying the article, Comparing Economic Mobility.  Id. at A12.  The causes of America's mobility problem are multiple--poverty; a thin safety net (threatened even more now by the right-wing's determined attack on earned benefits like Social Security and Medicare under cover of their purported concern about deficit reduction); the disadvantages of single motherhood; high incarceration rates, especially for black males; a long history of racial stratification that still impacts daily life; the pay tilt towards educated workers (usually made up of children of the affluent); the decline in unionization compared to other affluent countries; and the magnitude of the gap between the rich and the vast majority of Americans.  Even conservatives, who tend to think that mobility is overrated as a policy goal, may conclude that "stagnation at the bottom [is] alarming and warn[] that it will worsen."  Id. at A12 (citing conservative journalist Reihan Salam of the National Review and Daily Post).

Meanwhile, not surprisingly, the right-wing in this country continues to pursue exactly those policies that have so contributed to the decline of mobility, the stagnation of incomes for the lower income population, and the loss of employee power in the workplace.  See, e.g., the plan of the Republican majority in Indiana  to enact so-called "right to work" legislation that allows non-union members to freeload off unions by getting the bargained for rights and wages without paying dues to make that bargaining possible.

What those interested in tax policy should pay especial attention to is the role of tax changes over the last 40 years in augmenting the inequality gap.  Tax is not the sole culprit, but it is a contributor and something that Congress can easily do something about, if it can summon the political will to act.  From the report summary:

Inflation-adjusted average after-tax income grew by 25% between 1996 and 2006 (the last year for which individual income tax data is publicly available). This average increase, however, obscures a great deal of variation. The poorest 20% of tax filers experienced a 6% reduction in income while the top 0.1% of tax filers saw their income almost double. Tax filers in the middle of the income distribution experienced about a 10% increase in income. Also during this period, the proportion of income from capital increased for the top 0.1% from 64% to 70%.

Income inequality, as measured by the Gini coefficient, increased between 1996 and 2006; this is true for both before-tax and after-tax income. Before-tax income inequality increased from 0.532 to 0.582 between 1996 and 2006—a 9% increase. After-tax income inequality increased by 11% between 1996 and 2006. Total taxes (the individual income tax, the payroll tax, and the corporate income tax) reduced income inequality in both 1996 and 2006. In 1996, taxes reduced income inequality by 5%. In 2006, however, taxes reduced income inequality by less than 4%. Taxes were more progressive and had a greater equalizing effect in 1996 than in 2006.

Three potential causes of the increase in after-tax income inequality between 1996 and 2006 are changes in labor income (wages and salaries), changes in capital income (capital gains, dividends, and business income), and changes in taxes. To evaluate these potential reasons for increasing income inequality, a technique to decompose income inequality by income source is used. While earnings inequality increased between 1996 and 2006, this was not the major source of increasing income inequality over this period. Capital gains and dividends were a larger share of total income in 2006 than in 1996 (especially for high-income taxpayers) and were more unequally distributed in 2006 than in 1996. Changes in capital gains and dividends were the largest contributor to the increase in the overall income inequality. Taxes were less progressive in 2006 than in 1996, and consequently, tax policy also contributed to the increase in income inequality between 1996 and 2006.

 

The members of Congress who pass such preferences (the GOP in particular, but certainly various members of the Democratic party such as Max Baucus fall into the same group) spin such preference for the rich (a group which includes most members of Congress) as supporting job creation.  Their spin suggests that anytime anyone invests in corporate stock, they are acting as entrepreneurs and increasing the possibility of jobs for the rest of us. 

The spin is mostly just that.  Most of the capital gains from sales of corporate stock have nothing to do with having invested in a company directly in ways that provide more capital to the company and lead to creationof jobs.  Most of such gains are from secondary market sales--sales of stock from one rich person to another.  Secondary market sales have absolutely nothing to do with job creation or entrepreneurship: they have everything to do with acquiring more money with taxes that are at extremely low preferential rates. 

Similarly, getting dividends from a corporate enterprise has nothing to do with job creation--they just make the corporate stock holder richer at a preferential tax rate (under the 'temporary'[ provision enacted in 2003 and extended several times since).   Many 'freshwater' economists and many tax professionals argue for "integrating" the corporate tax and the tax on dividends or outright elimination of the corporate tax, claiming that  the dividend tax represents a 'double' (and therefore wrong) taxation of corporate profits.  That logic has led to an increasingly rich variety of corporate loopholes built by Congress into the Code--from the various expensing and bonus depreciation provisions (letting corporations reduce their taxable income compared to their actual business profits by claiming a deduction for capital expenditures) to various preference gimmicks, such as the "domestic manufacturing deduction" that provided a significant reduction in the corporate tax rate to all kinds of industries, including many processes that few would consider to qualify for "manufacturing." 

 But the double taxation claim is merely that--a claim based on the way the theor treats corporate entities.  Economists been unable to prove empirically that shareholders actually bear the burden of the corporate tax.  But even if they do, there are other reasons having to do with institutional power and the sustainability of democracy for supporting a corporate tax.  If you start out thinking that "only people pay taxes", you would likely conclude that "corporations can't pay taxes; therefore, the corporate tax is 'really' being paid by the owners of the corporation."  Of course, we used to say that only people can vote, so only people should be allowed to spend money on campaign speech.  Now the Supreme Court--which has treated corporations as "persons" under the Constitution since the nineteenth century--has decided that corporations have free speech rights that are broad enough to allow them to use their vast resources to influence who gets elected.  Thus, corporatism has paved the way for corporations to buy elections and then lobby for the laws and regulations that suit them, while arguing that corporations shouldn't pay any taxes to support the government that grants them various subsidies through the election/lobbying/regulation (deregulation) process.  It has supported the US movement towards "free trade" agreements, such as NAFTA, that have been difficult for the poor in countries with whom we trade, for environmental protections in the U.S., and  for locally owned businesses and local workers in the U.S.

If you avoid the corporatist agenda and start out with the assumption that corporations pay tax (because we have treated such entities as taxpayers under the Code), then you can recognize that corporate tax policy can be set to permit reasonable profits and to disincentivize unreasonable--i.e., societally undesirable--behavior.  An example would be the problem of corporate consolidation in a globalized economy, which provides inordinate power to multinational entities (I have called them quasi-sovereigns) and significantly reduces the power of ordinary employees. 

To understand something about the problem of corporate consolidation (as if the 2007-08 financial crisis caused by "too big to fail" financial institutions shouldn't have been enought), read the book Methland: The Death and Life of an American Small Town, by Nick Reding (Bloomsbury 2009).  In trying to understand the causes of the meth explosion in U.S. rural towns, it details the devastating effect of corporate consolidation on rural workers and economies--Big Agriculture and Big Pharma essentially bought out the vertical processes (for Ag, from seed to table, with a few firms like Cargill, Tyson, and ADM controlling huge swaths of the American food system).  In the process of gaining control, they consolidated many small, local producers, shut out unions, sought-out illegal immigrant labor to avoid wage and benefits laws, and dropped wages--in one case, wages for workers in an Iowa meat processing plant dropped overnight from around $18 an hour to less than $6 an hour, with a simultaneous cut off of benefits. See Methland, at 69 (noting the decline in wages when Cargill took over the formerly locally owned Iowa Ham plant in 1987). 

"[T]he evolution of the meth epidemic had occurred in lockstep with three separate economic trends that had contributed to the dissolution of small-town United States.  ...  And the things that spurred this simultaneous rise and fall: the development of Big Pharmaceuticals, Big Agriculture, and the modern Meican drug-trafficking business."  Id. at 109.

***

"By 1999 ... Cargill-Ecxel [an agribusiness plant in Ottumwa Iowa] placed newspaper advertisements in the poork, industrial border towns of Jarez and Tijuana offering two free months' rent to workers who could make it to Ottumwa from Mexico.  For Cargill and the rest of the packing conglomerates, employing illegals would appear to have been the best of all possible situations, for the simple reason that these employees, lacking legal identification, didn't technically exist, and therefore had no rights.  Nor were they apt to argue with the harsh conditions of an industry that continues today to have the highest rate of employee injury in the United States.  A failed 2001 federal criminal case brought against a Tyson plant in Shelbyville, Tennessee made clear that corporations would essentially not be held liable for employing or recruiting illegal immigrants to work in the plants.  Despite the fact that two Shelbyville managers were caught on tape by federal investigators asking human traffickers for five hundred undocumented workers over four months, Tyson's defense team successfullyh maintained that it's too difficult for Tyson employees to determine who's who among legal and illegal employees.  The ruling institutionalized the notion that employers of immigrants are not beholden to offering the same rights to workers that other companies must, for the simple reason that they don't know--and don't need to know--who works for them."  Id. at 153.

***

"Consider what used to happen in Oelwein, Iowa before the large scale consolidation in the 1980s and 1990s of almost every niche of the food-production chain.  Corn farmers...would have bought seed from the local seed company.  Once harvested, that corn would go to a grain elevator, also locally owned.  It would be shipped to a small feedlot in order to fatten cattle raised in Nebraska, Wyoming, Florida or Arizona; or perhaps it would go to a dairy in northern Missouri, a chicken farm in Indiana, or a pork outfit in Kansas.  The variables were infinite and the market was dynamic.  The barge, truck or railroad car that carried the grain was likely independently owned, too, as would have been the pigs, cows, and chickens it fed.  At each stae, the price would have to be 'discovered' as multiple potential customers vied to handle the product, with competition keeping the price 'true'... in the context of the marketplace.  Eventually, the Oelwsin corn used to feed sows in Topeka might return to Oelwein in the form of hocks to be disassembled, packaged, and shipped at the Iowa Ham plant... From there, a whole new market ... would take over in order to distribute the food and sell it at the retail level, perhaps at the grocery once owned by the Leo family (which today is an IGA).  James and Donna Lein would have been the essential building blocks in a vibrant system in which the variables contributed at all stages to what's called the 'social capital' of rural communities.

Beginning with the precedent set in 1987 with the IBP takeover of Hormel in Ottumwa--and the subsequent takeover of Iowa Ham by Gillette--a few companies would come to control most of the U.S. food business. ... Price discovery no longer happens; the value chain is controlled by a limited number of entities.  Seed is not sold; it's biogenetically engineered by companies like Monsanto, which entered into a joint venture with Cargill in 1998.  Cargill--not the farmer--owns the corn this is grown [under contract]....  In the Illinois and Ohio river valleys, Cargill owns 50 % of the grain elevators and other storage facilities.  Along with Tyson, Swift and the National Beef Packing Company, Cargill owns 83.5% of the beef packing inustry [and so on for turkey production, flour milling, ethanol production, animal feed plants, and soybean crushing]. Id. at 169-160.

***

Once competition has been annihilated ... the surviving companies, like Cargill, begin to effect political decisions through their enormous lobbying capabilities.  The government no longer governs unimpeded: it does so in tandem with the major companies. Id. at 161 (citing Douglas Constance, a rural sociologist at Sam Houston State University, Huntsville Texas).

This loss of local ownership through massive consolidation of business enterprises was a change orchestrated from the top of the U.S. government under Reagan's policies of privatization, deregulation, tax cuts (and loosening of tax and antitrust mechanisms that had worked against consolidation), and militarization.  It is a change continued today through the more and more flexible tax regulations and Code provisions governing tax-free reorganizations.  These policy approaches supporting consolidation of enterprises both vertically and horizontally favor the development of powerful corporations that can influence governmenbt in their favor while demanding subsidies (bonus depreciation, expensing, and other tax loopholes that have steadily reduced corporate taxes well below 25% for most of those that pay them at all, even while the rates remained statutorily at 35%.  Looking at the way corporate consolidation has harmed rural America should lead us to ask whether reversing the policies favoring such consolidation--such as making tax-free reorganizations much more difficult, pursuing anti-trust violations under new theories that look to the problems inherent in quasi-sovereign corporate entities, charging corporate and other businesses an expatriation fee equal to the increase in value of business assets while in the United States--may not be worth considering as one step in remedying both the "too big to fail" and "quasi-sovereign" problems while also providing resources to address the thin safety net and falling wages of the bottom of the income distribution.

For more ideas on inequality and its relation to a dynamic, growing economy and more stable society, see Mike Kimel's post on Angry Bear, The Pelzman Effect: Why Economic Growth Has Slowed in the US over Time.

Why We Should Care About Romney Refusing to Release His Tax Returns If Nominated

As most are probably aware, Romney announced a two days ago that he did not intend to release his tax returns even if he were selected as the Republican presidential nominee.  See, e.g., Mitt Romney Declines to Release Tax Returns, Cementing Posture of Secrecy, Huffington Post (Dec. 22, 2011) (quoting Romney as announcing "Never say never, but I don't intend to do so").

The reasons that such releases have traditionally been pushed for presidential candidates are myriad.  Voters can understand  more about a candidate's wealth  and potential conflicts from reviewing the returns.  They also have some idea of the candidate's understanding of finance from viewing the returns. 

What kinds of things likely prompt Romney not to want to release the returns?  Are they issues that voters might reasonably take into account in assessing his candidacy or are they irrelevant concerns? 

One can speculate that Romney may be worried that the stark revelation of his immense wealth compared to most voters will be damaging.  We are living through a second Gilded Age, when wealth is concentrated in enormous measure in the hands of very few Americans at the top, and the vast majority of us are just barely getting along and are worried about being tossed out of the middle class into the New Poor.  In that context, surely the wealth of a candidate is information that is relevant to voters.  Persons of immense wealth may have trouble understanding the daily trials and tribulations of 'average' Americans who have to save judiciously for unusual expenses and who may be thrust into bankruptcy by a car accident, storm-caused damage to a home, sudden change in job possibliites, or onset of a serious illness.  Further, Romney is trying to take advantage of his experience as a businessman and claims about his market abilities and savvy financial training:  that makes his tax returns directly relevant and it strikes this voter as contradictory that he both wants to claim it and hide it.

Given Romney's wealth, it is likely that most of his income is in the form of income from capital that is privileged under our tax code with especially low preferential capital gains rates--capital gains, almost all corporate dividends and income from pension funds (his private equity firm Bain Capital, still pays him a generous share of 'profits' through a deferred compensation plan--another tax -reduction scheme that most Americans can't benefit from).   Surely it is relevant to voters whether a presidential nominee is particularly benefited by the current tax laws that favor the wealthy or not.  And surely it is relevant just how extensive that benefit is.  For example, Romney may well pay a lower effective tax rate than many Americans who have many times less income than Romney does. Voters are entitled to know that fact, since it will undoubtedly influence Romney's views about tax reform.  As David Donnelly, the national campaigns director of the Public Campaign Action fund, notes in the Huffington Post piece, "the implications are that he is afraid of what this says about who he is and who he will represent if he is in the White House."

The decision not to release tax returns also provides more evidence of a person who does not believe in transparency.  Romney hasn't released information about campaign contribution "bundlers."  He destroyed records from his tenure as governor of Massachusetts.  This tendency towards secrecy runs against the importance of openness for the sustainability of democratic institutions.

Romney is "one of the wealthiest men ever to run for the presidency" and he made most of that money in the extremely tax-advantaged world of private equity fund managers (who have claimed preferential capital gains rates on their compensation income under the "carried interest" loophole in the partnership provisions that the wealthy members of Congress haven't yet been able to bring themselves to close).   Shear, Romney Says He Won't Release Tax REturns, New York Times, Dec. 22, 2011.  Release of returns would call attention to the privileged tax system applicable to private equity fund managers, and to the fact that Romney enjoyed that kind of special tax system while average Americans who toil for a living pay higher rates on their compensation.  Shouldn't we have that information in front of us in black and white? 

Tax policy is where a great many of the important decisions affecting every facet of the economic wellbeing of this country are now being made.  For a presidential candidate to refuse to release his/her tax returns and allow citizens to arrive at their own conclusions about how the candidate's wealth, tax advantages, and tax positions will influence his/her thinking on tax policy issues is worrisome.

Of course, the mere fact that there will be rampant speculation about the tax rate that Romney pays and the income that would be revealed on his tax returns if released is itself a reason to release the returns.  Americans will be interested, and they will want to understand how Romney's tax rates compare to their own.  The Democratic National Committee has already created a webstie that allows people to compare based on assumptions about Romney's rates, according to the New York Times story, at www.whatmittpays.com.  We already have too much misinformation and speculative information in our national campaigns, so it behooves Romney to release the forms so that people can see what the real information is.

And finally, the fact that Romney has challenged his own opponents to release their tax returns (Ted Kennedy in the 1994 Senate race) should be a "shame-on-you" reason for him to release his own returns now.  If he thought that Kennedy's tax returns would be relevant information for voters, then it is surely reasonable to assume that he thinks that his own tax returns would be relevant information for voters.

There doesn't seem to be any valid reason for Romney to withhold his tax returns if he is the nominee.  If he doesn't release them, then voters should attribute it to Romney's sense of patrician privilege.  And it wouldn't be unreasonable to assume along with that his acceptance of the corporatist agenda to shift more and more taxes onto working Americans and his inability to understand the daily lives of ordinary Americans. It should count against him in considering just how he will handle the key economic issues of our times--changes to the tax code that will finally require the wealthy and high income to pay more to redress the imbalance of the numerous changes made in the last 40 years that favor the wealthy.

Presimetrics

Over at Angry Bear, my colleague Mike Kimel wrote a book called "Presimetrics".  It measures the economy in various ways related to the terms of presidents (and their parties).  Kimel concluded that Democratic presidents show the best broad-based economic growth and the best job creation.

Now, that fits because Democrats--albeit usually in weak form and often co-opted by the financial wealth holders of the country--generally adopt policies that do have something to do with furthering broad based growth that benefits ordinary American, rather than just feathering the nests of the already rich.  What kinds of policies?  Well, anti-trust, pro-unionization, financial regulation, regulation of industrial pollution, environmental protection, "green" industries, unemployment compensation, progressive taxation, estate taxation, and the AMT (which undoes some of the accumulated preferences mostly enjoyed by the rich, from charitable deductions for value they never paid taxes on and so comprising a pure windfall, to huge mortgage interest deductions on their million dollar homes, though it still leaves them their preferential taxation on capital gains).

Others are beginning to catch on to Kimel's conclusions.  See, e.g., this graph at The Far Left Side (constrasting the last 11 Presidents by party and their impact on the economy for bad or good--Republicans are almost uniformly bad, with their corporatist policies intended to benefit the rich at the cost of productivity sharing with the workers who make it possible).  You might want to read the site, as well as Kimel's book (available through Angry Bear).