On November 14, the US Treasury Department announced that it had signed an agreement with France relating to the implementation of the 2010 Foreign Account Tax Compliance Act (FATCA) law. That makes the 10th such agreement signed between the US and other countries to date, and helps move the law towards smoother implementation.
The purpose of FATCA is to cut tax avoidance by increasing transparency--especially in the case of offshore bank accounts that have, in the past, served as key mechanisms for avoiding taxation.
It requires U.S. financial institutions to withhold a portion of payments made to foreign financial institutions (FFIs) who do not agree to identify and report information on U.S. account holders. FFIs have the option of entering into agreements directly with the IRS, or through one of two alternative Model IGAs signed by their home country. The IGA between the United States and France is the Model 1A version, meaning that FFIs in France will be required to report tax information about U.S. account holders directly to the French government, which will in turn relay that information to the IRS. The IRS will reciprocate with similar information about French account holders. Id.
Treasury officials praised the French government for its support in the effort to implement FATCA.
"France has been an enthusiastic supporter of our effort to promote global tax transparency and critical to drafting a model of FATCA implementation," said Deputy Assistant Secretary for International Tax Affairs Robert B. Stack. "This agreement demonstrates the growing global momentum behind FATCA and strong support from the world's most important economies." Id.
The IRS got court orders permitting it to see information about taxpayers with undisclosed offshore bank accounts from US banks. In re the Tax Liabilities of John Does (SDNY No. 1:13-mc-00377 Nov. 12, 2013).
According to BNA Daily Tax RealTime (Nov. 12, 2013 5:59pm), these orders will apply to Bank of New York Mellon, Citibank NA, JPMorgan Chase Bank NA, HSBC Bank USA NA, and Bank of America NA. Those banks will be "required to produce information about U.S. taxpayers with undisclosed accounts at the Bank of N.T. Butterfield & Son Ltd. and its affiliates. The Butterfield bank operates in the Bahamas, Barbados, Cayman Islands, Guernsey, Hong Kong, Malta, Switzerland, and the U.K."
I should have written about this long ago, but a recent "dealbook" by my former colleague Steven Davidoff, A Chance to End a Billion-Doillar Tax Break for Private Equity, New York Times (Oct. 23, 2013) reminded me of the import of a recent court decision--Sun Capital Partners (No. 12-2312 First Circuit Cout of Appeals July 2013), --important for its implications for the private equity industry's privileged "carried interest" tax treatment (income to managers currently treated as preferentially taxed capital gains rather than ordinary compensation income) and the assumed treatment of the pension obligations of employees of companies taken over by those funds (ability of private equity funds to disavow a company's pension obligations to its ordinary workers through bankruptcy).
As Davidoff notes, private equity managers claim that changing the carried interest privilege would result in less investment and ultimately harm economic growth. That's an argument long used by the right to justify the capital gains privilege, but certainly controversial (at least), since uninvested money will earn even less than invested money that is taxed at a slightly higher rate. Given the hugely outsized earnings by equity fund managers--in the hundreds of millions and even billions annually--it seems unlikely that a higher tax rate would sharply reduce investment. They'd still have after-tax income equal or more than most CEOs. And as I've noted frequently here, getting carried interest taxation right would be at least one step towards ensuring that the tax system performs its most important justice function by reducing, rather than exacerbating, the income inequality dynamic that harms the kind of broad-based economic growth that underlies a sustainable economy. See, e.g., works on income inequality and the problems of unequal wealth distribution for sustainable economies by Benjamin Friedman, Piketty & Saez, Kate Pickett and Richard Wilkinson (e.g., The Spirit Level: Why Equality is Better for Everyone (2009)).
The Sun Capital case arose out of the takeover of Scott Brass, a manufacturing business, by Sun Capital Partners, a private equity fund that buys out distressed companies for restructuring and resale (often involving firing workers and using bankruptcies to disavow pension obligations). As Davidoff summarizes:
About a year after the takeover, Scott Brass sought bankruptcy protection. Sun Capital sued the comapny's pension fund, the New England Teamsters and Trucking Industry Pension Fund, seeking a judgment that it was not liable for $4.5 million of the company's pension. Under the pension laws, Sun Capital would be responsible for this amount if Scott's employees were under the control of Sun and the funds were engaged in a 'trade or business.' The pension fund argued that the Sun Capital funds were liable because the funds were engaged in the trade or business of operating Scott. Sun Capital argued the opposite, saying that it was merely a passive investor. A Chance to End a Billion-Doillar Tax Break for Private Equity
The court concluded that the private equity fund was engaged in a trade or business for purposes of the Employee Retirement Income and Security Act (ERISA), rather than merely a passive investor in the business that it took over, Scott Brass, Inc. Sun Capital Partners (No. 12-2312 First Circuit Cout of Appeals July 2013).
This decision could clearly "make it harder for private equity funds to walk away from the unfunded pension liabilities of companies they have bought if the company goes bankrupt." Vic Fleischer, Sun Capital Court Ruling Threatens Structure of Private Equity, DealBook, New York Times (Aug. 1, 2013). And it is "not a big leap to argue that the fund was [also] engaged in a trade or business for tax purposes." Id.
No one disputes that the general partner (or its affiliated management company) often gets highly involved with the fund's portfolio companies. In Sun Capital, for example, the management company weighed in on the portfolio company's personnel decisions, capital spending and possible acquisitions. The critical question is whether the general partner's activities can be attributed 'downward' to the fund--that is, from the partner to the partnership.
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...[T]he court noted that Scott Brass Inc. paid fees to the general partner of the fund for the management services it provided. Those fees were then used to offset part of the 2 percent annual management fees that the limited partners normally pay to the general partner. The court explained that these fees thus 'provided a direct economic benefit' that 'an ordinary, passive investor would not derive: an offset against the management fees it otherwise would have paid its general partner.' ...
If the Treasury and IRS (or courts) were to conclude that the trade or business determination for ERISA should carry over to tax, a number of tax consequences could well follow that would upend the current highly favored tax treatment of private equity fund investors and investor/managers.
foreign investors in a private equity fund could be treated as having income that is "effectively connected" with a U.S. trade or business, resulting in being subject to tax on that effectively connected income;
tax-exempt investors in a private equity fund could be treated as having trade-or-business income, resulting in application of the UBTI (unrelated business taxable income) rules that would subject the normally tax-exempt investors to tax on that income; and
private equity fund managers' profit shares ("carried interest") could be treated as ordinary income from sales in the ordinary course of business (bought out and restructured companies) rather than as capital gains income from a passive investment.
Will Treasury grab this lifeline for eliminating the privileged private equity tax treatment? Remains to be seen.
PS. If private equity funds are really trades or businesses, then isn't a private "credit fund" really a banking business that should be regulated as such? See, e.g., Manning, Exclusive: Florida Private Equity Fund Expands, Plans to Offer Credit, Tampa Bay Business Journal (Oct. 28, 2013).
Bloomberg reports (in a minimal news story at this point based on an anonymous tip prior to the settlement being officially released) that the United States and Switzerland have reached an agreement that settles the dispute about Americans' use of Swiss banking secrecy to evade US taxation of undeclared accounts.
Apparently, the deal will result in some banks being permitted to voluntarily disclose activity, while others will face penalties because of undeclared assets.
One of the ways that corporations manage to cut their federal income tax bills way, way below the statutory rate is by setting up reinsurance affiliates offshore. While some of these reinsurance affiliates may actually function as full-service reinsurance companies to many different customers, those truly taking on and diversifying risk, most are scams, in that they are just ways to offshore U.S. profits through premium payments for self-insurance.
Two bills now before Congress, H.R. 2054 and S.991, reintroduced recently by Rep. Richard Neal (D-MA), Rep. Bill Pascrell(D-NJ) and Sen. Robert Menendez (D-NJ), are intended to end this run around the US corporate tax laws, picking up a proposal from the President's FY2014 budget to deny tax deductions for certain reinsurance premiums paid to foreign-based affiliates of domestic insurers.
Naturally, the GOP-Big-Business-Friendly machine is up in arms about any bill that would take away this kind of tax subsidy for multinational corporations.
[Although the GOP professes to believe in a 'free market', that is demonstrably false, in that every preferential tax subsidy for Big Business is highly lobbied for, and at the same time, "reforms" (like further preferential capital gains rates or regressive consumption taxes) that would push the burden of supporting federal government programs that are immensely important for ordinary people are pushed.]
So GOP Governor Rick Scott of Florida has issued a letter to Congressman Vern Buchanan (R-FL), a member of the US House of RepresentativesWays and Means Committee (who had been involved in various lucrative real estate gambits that smacked of crony capitalism in the time before his elevation to congressman). Gov. Scott claims that legislation that gets rid of the loophole of deducting premiums paid to a corporation's own offshore (tax haven) subsidiary is just a terrible idea. Gee, it would increase costs and that would be "disastrous." He also cites a Brattle Group "study" that claims that insurance availability would decrease by 20%. He also makes various claims about the importance of reinsurance generally as part of the insurance market.
Scott's letter seems to mix up questions about general reinsurance versus the kind of reinsurance to offshore affiliates that the legislation is targeting. Reinsurance occurs when an insurance company seeks to diversity its risks by reinsuring part of them with another insurance company that acts as a reinsurer. Genuine reinsurance is a useful part of insurance, and the legislation doesn't outlaw reinsurance or add to the costs of reinsuring through bona fide third-party reinsurance companies. The legislation deals with offshoring of insurance premiums through affiliated reinsurers, quite a different thing, through which US corporations essentially convert US profits to offshore profits, reducing their US taxes correspondingly, by paying premiums (sometimes exaggeratedly high premiums, providing even greater tax avoidance) to their own subsidiaires located in offshore tax havens.
Yes, not getting to use the offshoring reinsurance scam to cut US corporate taxes would increase those companies' costs. But every time a US company reduces its own costs and increase its own profits through offshoring its profits to tax havens and thus avoiding US taxes, it is shifting the tax burden off onto ordinary Americans who can't/don't engage in such lucrative offshoring. Ordinary workers thus end up bearing an increased tax load to support those companies' lower tax burdens.
(Oh, and a bunch of reinsurers appear to have been involved in illegal trade with Iran, too. See article on NY regulators, below).
The US has prospered most when we have had a more equal society in which corporate entities have borne a greater share of the tax burden (resulting, if the incidence of tax falls mainly on shareholders as may be the case) in their shareholders, who are in the main members of the upper crust, paying a fairer share of the tax burden and relieving ordinary folk from having to take up too big a share.
It seems to me that we have reached a point where Americans have to decide what kind of society they want. If we want a highly unequal society in which children of the wealthy receive a prime education, go to the best colleges, are introduced through their wealthy parents to societal leaders who can open doors for them in whatever career they want while most everybody else finds themselves forced to opt for expensive online colleges, few connections, living from hand to mouth and hoping against hope to be able to satisfy basic needs, then we can just continue on the path we are already moving on. But if we are not satisfied with that kind of oligarchic society, we have to vote out the right-wingers who are pushing it and institute new policies, reviving labor laws to support workers, instituting a more progressive income tax, reforming the tax code to remove the many tax subsidies for Big Business (and especially those for Big Finance and Big Oil) and otherwise attempt to shift the focus of the economy to creating jobs for ordinary people. Revamping the reinsurance industry is one of the obvious reforms along the way to a more sustainable economy.
Hidden away inside the front section of the New York Times today is some good news for tax enforcement (and probably for tax compliance)--Switzerland's decision to allow its banks to disclose hidden accounts, what the article calls a "watershed move" in the ongoing saga about banking secrecy and tax avoidance. See Browning & Werdigier, Switzerland to Allow Its Banks to Disclose Hidden Client Accounts, New York Times (May 30, 1913).
The US enactment of strong rules requiring disclosure (commonly called the FATCA rules) and its stepped up efforts of enforcement of US taxpayers' reporting of offshore assets, including voluntary disclosure initiatives and criminal prosecutions, have had an effect. Many Americans were intentionally or inadvertently hiding millions offshore. Switzerland was "an offshore money haven for wealthy foreigners" because of its banking secrecy. Some Americans are still hiding their money there (and elsewhere). But those who still have offshore accounts should recognize that the day of reckoning is drawing nearer and nearer.
One of the (many) ways by which rich, sophisticated taxpayers who are also ultra-greedy have managed to avoid paying their fair share of taxes is to move money offshore through trusts and "companies" set up in various no-tax/lo-tax, hi-sun jurisdictions like the Cayman Islands, British Virgin Islands, Cook Islands, Singapore, etc. I suppose for many years this scheme served multiple objectives--it stashed the cash beyond the reach of the US government, it provided a nice place to visit the cash, and it had the cachet of belonging to the exclusive jet set behind it.
That's becoming less so as the US continues to pursue tax cheats with unreported offshore accounts. The dam started bursting with the revelation of the way Swiss bankers groveled at their American clients' feet, from smuggling diamonds into the country in toothpaste tubes to secreting gold in deep, hidden vaults to setting up sham companies in the Phillipines or other countries. Over the last half decade, more people have participated in voluntary disclosure and more have been identified for more serious penalty programs (including criminal prosecution). Each voluntary disclosure included full information about those who facilitated the offshoring--bankers' names, other involved lawyers, accountants, and bankers, other entities. That groundswell of information facilitated identification of even more tax cheats, and those identifications yielded a new trove of relational data--those who had assisted them. That finally seemed to begin to put some teeth into enforcement efforts and some gnashing of teeth into the lives of the otherwise obliviously happy tax evaders.
But various commentators (including my colleague at Wayne Law, Professor Michael McIntyre) have been concerned that the offshore gambit can't be cleaned up until countries begin more automatic sharing of the tax information they have without requiring the requesting country to have already identified the accountholder well enough to ask for information specifically about that person. If they can ask specifically, of course, it means they have already been found, which makes for a catch-22 that has made pursuing secret bank account holders an overly arduous task.
That makes the IRS's announcement today of a new coordinated effort among the U.S., U.K, and Australia heartening news. They have agreed to share information about trusts and companies holding assets in tax havens like the British Virgin Islands, the Cayman Islands, and Singapore. See IRS news release IR-2013-48 (May 9, 2013). With the cache of information each country has gleaned from the recent efforts, coordination will allow them all to benefit from each one's effort. That should accelerate the effort to catch the tax cheats.
Obama's budget isn't even released yet and he's already caving to the "let's make the rich richer and forget the rest" crowd. That crowd that claims that we need a capital gains preference so the rich can gather all that extra money to purportedly create jobs. The crowd, that is, that fails to acknowledge that the rich tend to take all that extra money to Singapore, the Bahamas, or the Cayman Islands or hide it away in some Swiss bank, none of which does any good for our economy compared to what the government investing that money in infrastructure projects would do. See, e.g., David Leigh, Leaks reveal secrets of the rich who hide cash offshore, The Guardian (Apr. 3, 2013); The corporatist crowd that refuses to admit the empirical evidence that says government investment is as important as private investment in creating jobs. It is the government that makes the market go round. And government money--our money--spent for schools, bridges, safer communities provides jobs and improves lives. Without that government investment, there is no market, just barter.
President Obama seems to have forgotten that he was elected. as a Democrat, over the Republican candidate. Obama has no business proposing cuts to Social Security benefits as part of a purported deficit reduction package. Social Security is not a deficit driver: it is a social insurance program earned by those who receive it by payments over lifetimes of hard work. It is the only stable retirement income most have. The average Social Security beneficiary receives just short of $14,000 a year from Social Security--that's just 125% of the poverty line, which of course is defined so low as to guarantee that anyone living at or below that line is indeed in abject poverty and unable to move out of it.
The Republican Party has argued for cuts to Social Security benefits for decades, using whatever crisis of the momen they can engender to argue that we can't afford the system in place. They've invented the perjorative term "entitlement" to imply that those who rely on social insurance because of disabilities or old age are just 'freeloaders' who are mooching off others. Not so, since Social Security is an earned benefit program like insurance: workers pay premiums throughout their working life, and then once they reach retirement age they may draw benefits.
There are a number of reasons for the amount of debt that the US government has--most of them related to the four-decade-long drive by the Republican Party to protect the wealthy and the corporations they own from much of a tax burden and to allow the accumulation of immense wealth by a few at the top of the income distribution. Outsize military expenditures driven by Bush's preemptive wars undertaken at the same time that the Bush Administration pushed through tax cuts that favored the rich are of course a big problem. The Bush tax cuts threw us from surplus to deficit and we haven't gotten beyond them yet. The almost complete capture of the financial regulatory agencies by Wall Street, and the resulting financial crisis driven by casino capitalism spiked with the heady bubbles of derivative inflation is of course another part of the problem, and we haven't gotten beyond that yet, as Big Banks still exercise far too much power over their own regulation, proven by the LIBOR scandal that demonstrated their ability to manipulate the purportedly objective market rate to suit their profit machines.
But Social Security is not one of those drivers of the debt. And the debt is not so outsize that it merits sacrificing the most vulnerable amongst us to mollify the wealthy who merely want to avoid paying their fair share of the revenues needed to get rail service up to snuff, bridges safe, and public schools owned by the public again.
The average Social Security benefit is just under $14,000: the use of chained CPI will result in a loss to the average recipient of "$4,631 in Social Security benefits by age 75, $13,910 by age 85; and $28,004 by age 95" (from release by Social Security Works, based on “Inflation Indexation in Major Federal Benefit Programs: Impact of the Chained CPI,” Alison Shelton, AARP Public Policy Institute, March 2013.).
Obama has no business facilitating the gluttony of the rich. He should drop the proposal to use “chained CPI” that will result in a cut benefits for Social Security recipients.
David Cay Johnston, former NY Times reporter and now Syracuse professor, writes about the thing that most journalists don't bother to (or are told not to) write about--the way that Big Business successfully lobbies legislators and regulatory agencies to write the rules to favor Big Business, at the expense of ordinary Americans, all under the false claim that they are pushing de-regulation for the good of competition and ordinary consumers. Johnston, Missing the Story, American Journalism Review (March 2013).
Johnston describes a number of ways that state legislatures, Congress and state and federal regulatory agencies have made life easy-street for Big Business at the cost of ordinary consumers. He notes it is often discussed as "deregulation" but that "is a misnomer because, literally, no such thing exists in commerce....Everything in business is regulated in some fashion, and has been since long before the first nearly full set of laws we have.... [Thus, d]eregulation typically means reregulation under new rules that favor business interests." Id.
Businesses claim that the 'deregulation' they seek is just another step towards their ideal of "free markets" to help competitiveness. Not so, Johnston replies. The regulatory climate that results is almost always one that creates "moats" making competition much harder for small businesses and allowing duopolies or monopolies to arise that can set prices as high as they wish. And often the captured regulatory agencies allow the most absurd subsidies imaginable.
The Bush Treasury did that in spades. One example is the changes the pro-business Treasury under Paulsen made in the regulations under section 368 governing corporate reorganizations, in which the Bush Treasury (many officials of whom are still part of the Obama Treasury) promulgated rules that provide, for the first time, the possibility of a loss recognition by shareholders in the nonrecognition reorg exchange. Settled law at the time said no such loss could be recognized. And the Bush Treasury also did it in setting up (through regulations) yet another tax subsidy of Big Oil (as an add-on to an already ridiculous subsidy enacted by Congress when it allowed Big Oil to operate as limited partnerships). Here's how Johnston describes this.
The simple story is that Congress in 1986 exempted monopoly pipelines from the corporate income tax if they organized themselves as Master Limited partnerships. The George W. Bush administration then let these pipelines include the nonexistent tax in the rates they charge.
The cost of this fake tax is both tiny and huge.
The pipelines raise prices to cover the cost of the tax, which in turn means they have to raise prices even more to cover the taxes on the extra earnings, known as "grossing up." A 42 percent tax on profits, grossed up, means a pipeline gets to earn its profit plus 75 percent for taxes. These higher costs are then built into prices people pay for gasoline and natural gas to heat homes. Paying this fake tax costs each American less than three cents per day, about $10 per year, I calculate. That is the tiny part. The huge part is that collecting just a penny a day from everyone in America adds up to $1.1 billion in a year — or $3.3 billion at three cents per day per American. Id. (emphasis added).
Note, folks. That's an unnecessary $3.3 billion subsidy provided to already-profitable businesses that comes entirely at the cost of ordinary Americans. It is a subsidy put into law entirely through Big-Busienss-friendly tax administrators in ways that most Americans do not see it--or, if they see it, they believe it is a "real" tax cost of the businesses rather than just another theft subsidy.
This is another aspect of the problem of the way the media treats any discussion of "free markets." The fundamentalist approach to free markets (that I have sometimes labeled "free marketarianism" or "friedmania") claims to believe that deregulation helps people by increasing competition and opening up markets. In fact, it is usually the opposite. Deregulation helps Big Business by decreasing competition and allowing the development of powerful oligarchs and powerful monopolies or near-monopolies. Brute capitalism, that is, allows those who hold capital to hold power, and those who hold power act against the interests of ordinary people in order to consolidate their power. Another blog addressed this well:
A free market requires that everybody plays nice and follows the rules. Guess what. There’s always someone who will do whatever evil they think is required to make money. Once you realize that, you know there can be no such thing as the free market.
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That’s one of the primary reasons that uncontrolled capitalism has been such a gross failure since the Reagan/Thatcher “revolution”, leaving us with record inequality and damaged democracy, and bringing the world economy to the brink of total collapse that simply evaporated trillions of dollars. Random Notes from the Exasperation File, Class War In America.
I have often noted that the media treat the daily ups and downs of the stock market as though it is an accurate reflection of the entire economy. It is not. When the stock market is up, it is likely that one or another segment of Big Business is doing well or exceptionally well. That means the affluent--those in the top 30% who own most of the financial assets of this country, including Big Business's CEOs and board members, are doing well. So as the stock market has resurged after the 2007 financial crisis brought on by the excess of Big Financial Businesses, the wealthy who run and own those Big Businesses are doing mighty well indeed.
This is corporatism at its worst--the takeover of the economy and all of its institutions by a corporate mindset that favors the wealthy and the managers/owners of Big Business over ordinary people, leaving ordinary people's views unheard. It often is associated with class warfare, wherein the rich ensure that their money buys laws and regulations written by, for, and of the rich. Corporations pay less in taxes and ordinary workers pay more--either in direct taxes or in the indirect tax of wage and benefit loss that is a tax subsidy for the wealthy.
Those at the bottom of the economic distribution are of course the ones most hurt by the decline and by the class warfare policies of the rich. They are most likely still doing poorly or just barely getting by, mostly because those big profits at Big Business are taken at their expense--through constantly rising prices not reflected in increased quality or costs of production, or through increasingly unfair worker wages and benefits that have been cut in order to increase the rents to the owners/managers. And usually with the assistance of legislators and regulators.
Take a friend of mine, who was laid off from an auto parts manufacturer for almost three years and has been struggling to make a full-time living at it since he was reinstated--at a much lower salary then before the crash (conveniently for the company but not so good for the workers). He bought a new truck about a year before the financial crash. The payments were supposed to be around 250 a month. In the first months of the layoff he couldn't find any substitute work, and he fell behind in payments on the truck (his family depends on him as the sole breadwinner; his family has almost no assets and no liquid assets; he depends on the truck to allow him to take odd jobs when his job at the factory is on hiatus--often landscaping, mowing, etc.). The interest rate on the loan went up to 32% almost immediately. That would once have been treated as illegal usury. Not now, since "deregulation" has allowed financial firms to rip off their customers coming and going for their own profits. Now his payments are around $400 a month and he owes as much on the truck as he did several years ago in spite of all the payments he has worked hard to make since then. This Thursday he missed the payment again, after keeping up for most of the year. He missed it because his company began selectively laying off workers for a week or 3 days at a time during the winter, and he didn't work for about ten days of the month before the payment was due. On Wednesday he talked to his adviser at the financial firm that gave him the loan. It was a new "adviser". They replaced a more understanding one with one who was considerably harsher. The adviser told him on Wednesday that he would give him til Friday to make the next payment. On Thursday, however, he sent a repo man who took the truck. Friday my friend got a paycheck and could have made the payment (as he'd told the adviser on Wednesday). Instead, when he went to make the payment thinking he could get the truck back that day, the financial firm advised him that he now had to pay off the truck in full--as well as a bunch of additional charges due to the repossession. What would that be, he asked? He assumed he owed about $3500, in his calculations the amount still due on the original loan. Oh, no, the finance guy told him. You will have to pay $4975 on Monday, and that amount will increase by $25 a day for every day you do not pay. It's that much because of all the late fees we added on the bill. Oh, and we are charging you $400 for repo-ing the vehicle on Thursday (even though we had promised we would not do so).....
Again, deregulation of financial institutions has made these rent-seeking add-on charges customary for anyone in the lower part of the income distribution. Big Business sells it as competitive services for the underprivileged but it is really deregulated excess profits for the financial firms for acting like modern equivalents of plantation owners with a captive workforce unable to ever build up financial assets and always dependent on the firms' calculations as to what they owe or are owed.
How is my friend (who happens to be an African American) supposed to ever advance beyond the near-serfdom in which he currently exists? Lucky for him, we are willing to offer him a personal loan at market-rate interest so that he can finally pay off his overseer and begin to dig himself out of the hole that our deregulated, GOP-ideology-driven state puts most Detroit low-income residents in. Mass transit hardly operating and not permitted to expand as it should to permit low-income residents to commute easily to work in the region. White suburbs that cannot be annexed into the city, so continue their oblivious lives exploiting Detroit's assets while pitying the poor black residents that just can't seem to do anything right. Businesses that charge white folks in the suburbs less than black folks in the city. Insurance companies that rip off their Detroit clients. And on and on.
This is all happening in a world where white folks with money set all the rules and now, in Michigan, have made it very hard for any union to form and exert some worker-power on behalf of the employees. Michigan's new, so-called "right-to-work" law that the religiously right-wing Republican party of Michigan passed with no input at all from the people and with misinformation galore--all of the newspaper coverage talked about workers being "forced" to join a union unless you have "right-to-work" and how "right-to-work" would free them not to have to pay for the union and encourage more economic growth and more jobs. None of the newspaper articles or the legislators reported the fact that right-to-work states tend to have lower wages for their workers, less good jobs, and poorer economies. Of course, the information was wrong to start with--no one was forced to join a union without right-to-work laws--they were merely required to pay some amount (less than union dues) for the services that the union provides. Now, they can demand the same services and pay nothing. No Republican business would provide services on that basis, but Republican legislators serving their oligarchic base ensure that no true freedom exists for anybody without money.
Michigan, of course, has also just taken over the City of Detroit, with Gov. Snyder's appointment of an emergency manager. This is as undemocratic as it gets, given the state vote rejecting the last EM law and the fact that the EM will have dictatorial power to ignore the Mayor, the City Council and all other elected officials. Snyder is a right-wing tool, in office backed by a majority-GOP legislature that reflects the racism of most of the "upstate" part of Michigan and blames Detroit's problems on its predominately black residents. The legislature passed right-to-work to retaliate against unions for trying to get protection for workers' rights in the constitution. Apparently, the GOP thinks the constitution should only protect the wealthy, as it does by prescribing a flat tax, ensuring that the wealthy in Michigan get to choose what they support but are hardly taxed at all by the State. The rabid right in this state forget that what condemned Detroit was the "white flight" to the suburbs and Michigan's foolish state constitution which does not allow Detroit to take the suburbs into the city. So Royal Oak's mayor a few years ago could refuse to fund metropolitan buses because he didn't want Detroit's black population able to cross the border into Royal Oak and pollute the city by taking jobs there. And the wealthy residents of the 90% white suburbs of 80% black Detroit come into the city for its amenities--opera, plays, sports, museums--and its work, but take their pay out of the city to maintain their schools and shops and amenities while complaining about how awful Detroit is. We Detroit residents are very worried that the GOP's takeover of the Democratically elected city government will result in the rape of the city's assets--Belle Isle is a jewel in Detroit's crown that the state covets; Detroit's water system is another asset that the state--and the white suburbs--covet and want to control. The EM will be pressured by Snyder and the rest of the upstate Detroit haters to take over those assets and make Detroit pay for being a center of unionism and Democratic voters.
The Michigan passage of the so-called "right-to-work" law and the renewal of the emergency manager law AFTER it was defeated by the people in Novemberare perfect illustrations of the contempt that the current Republican party shows for ordinary people when it is in power in a state. And it also illustrates well the capture of legislators and agencies by oligarchs, monopolies and duopolies. This is, as Johnston notes, a sad state of affairs that will only get worse unless the press reinvigorates itself to inform rather than kiss Big Business's ass.
The New York Times today reiterated what many Americans lament--Big Banks went uncharged for serving as the main engine of the Great Recession that cost ordinary Americans jobs, homes and futures. See Andrew Ross Sorkin, Big Banks Go Wrong, but Pay a Little Price, New York Times, at B1 (March 12, 2013).
Big Banks (and especially their managers), however, made out like bandits through the socialisation of losses and privatisation of gains. The aftermath of the crisis provided lower cost of funds from the perceived government TBTF subsidy. Big Bank managers made big bucks leading their institutions into disaster and "staying on" after the disaster because their "expertise" was essential. The stock market, but not ordinary Americans' pocketbooks or paychecks, has recovered from the recession, forging a return of lucrative M&A activity and, of course, the management of wealthy people's assets. No Big Bank has faced criminal indictment for "the damage caused to the economy and millions of Americans" by their sloppy mortgage financing, sloppy foreclosure procedures, and casino capitalism "bets" with credit default swaps and other derivatives.
The reason--the lesson from Enron and Arthur Andersen, where thousands of lower-level employees who had no control over corporate actions lost their jobs when the firms collapsed after wrongdoing and charges. Any Big Corp can be TBTF. "[S]imply charging a company with a crime reaises the possibility of putting the firm out of business." Id. at B5. Collateral damage is therefore a major hurdle to bringing a criminal case against a corporation.
The takeaway, according to the Times article, is that "prosecutors should focus on the individuals responsible for the misconduct" rather than indict corporations, which can result in "condemnation of one person [many employees] for the actions of another [boards and managers or 'rogue' employees]" (quoting, in the latter case, Elizabeth Ainslie's paper on indicting corporatrions).
While protecting employees of rogue firms (where management and directors have pursued aggrandisement of their own status and riches at the cost of society's well-being) is important, it is not clear that the takeway outlined above is a complete answer. Several additional components should be addressed, by a combination of Congressional and state legislative action and regulating agencies. And actions to limit the size of corporations would have another advantage--acting as a deterrent to their power in dictating the well-being of ordinary employees, and thus helping to deflect the growth of corporatism in our society.
First, boards that make irresponsible judgements that allow CEOs and managers to engage in reckless bets with their companies should be able to be held personally responsible more easily, without corporate protection for the ultimate costs.
Second, anti-trust needs to be expanded to limit the interwoven boards and contractual relationships that permit a few TBTF institutions in an industry to dominate the market and set the "Wall Street Rule" for what is acceptable behavior. ULtimately we need forced split-up of TBTF institutions, through anti-trust or new means, as necessary.
Third (and most relevant for this blog, of course), tax policies encouraging corporate consolidation should be strictly limited. The section 368 reorganization provisions should be tightened to require a much higher percentage of continued shareholder interest: the current requirement for a tax free reorg of only 40% (under an example in the reorg regulations) should be tighted to at least 70%. The opportunities for loss recognition in reorgs provided by the Bush Treasury under regulations should be eliminated. Spins of parts of mega corporations to existing shareholders should remain tax-free, but spins that amount to initial steps in acquisitions should be more limited.
Will Congress (or state legislators) take any of these actions? It is highly dubious. The left is too often too cowardly to act and mostly funded by wealthy interests. Most on the right--disproportionately represented in Congress because of gerrymandering in the House and the disproportionate Senator-to-population ratios in the Senate--dogmatically favor market fundamentalism no matter the evil it causes when it comes to advantages for business to make more profits, even if it comes at the expense of ordinary people through market power to defeat unions, defeat reasonable pay requests, etc. (Of course, when it comes to exploiting government , the right tends to favor government subsidies--look at Wisconsin's recent move to remove pesky environmental regulations protecting wetlands to support a mine owner, in the purported interest in supporting job creation, even when the mine is likely to cause long-term environmental damage and potentially devastating water pollution and destruction of wetlands.)
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