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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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tax breaks for wealthy; corporate tax shouldn't be reformed away; seed patents are a real scandal

No time for lengthy commentary today, but worth calling attention to some noteworthy items.

(1)  The CBO released a new report detailing the income groups that benefit most from the various tax expenditures in the internal revenue code. No surprise that it finds that those in the highest income brackets receive an enormous amount of (not-needed) money from these tax subsidies.  

As one blog put it: "a whopping $2 trillion of that goes to folks who make more than $450,000 a year. In other words, 17 percent of all tax breaks goes to the top 1 percent. $2 trillion is about double the 10-year cost of the sequester." Bill Scher, $2 Trillion Wasted in Tax Breaks for Wealthy, Campaign for America's Future.org (May 30, 2013).

The wealthy enjoy tax breaks that have no relation to anything they produce but do relate to the fact that they are the primary owners of financial assets, such as the preferential rate for capital gains and the preferential rate for corporate dividends.  They also benefit much much more from any tax break they get than others do, especially when it comes to the mortgage interest deduction, the charitable contribution deduction or the exclusion for interest on tax-exempt bonds.  That's because they have more expensive homes, get bigger mortgages, have more financial assets that they can contribute to their pet projects for a FULL deduction of value (not just, as with most other property contributions, for their actual investment), and are about the only purchasers of tax-exempt bonds (the rates for which are generally set to attract the wealthiest buyers) and always itemize, whereas 70% of Americans just take the standard deduction. 

This $2 trillion is an economic waste--for some, its just more money to "invest" in offshore bank accounts and tax scams; for others, it just feeds Wall Street's private equity funds and "private banks" with more cash for casino capitalism bets and takeover gambles. As John Kominitsky, a commenter on the blog, notes "This is the "capital" Wall Street sucks up to fuel their Speculation Casino of derivatives (CDO's) high-speed computer trading, outsized "executive bonuses", and tax dodging off-shore accounts."  So the tax breaks for the wealthy (costly to ordinary Americans who have to make up the tax money needed) feeds the Wall Street casino capitalism monster (costly to ordinary Americans who lose their homes and livelihoods as Wall Street banks require bailouts and private equity firms make megaprofits off firing people).

 (2) The New York Times is on a roll on tax issues, seemingly reading more deeply than it had been doing for a while.  Today's editorial makes the valid point that there is no justification in today's economy for abolishing corporate taxes even if they were replaced with something else.  See editorial, No replacement for corporate taxes: the system needs to be reformed, not abolished, New York Times (May 31, 2013).

The editorial calls the "tax cut crowd" out on one of the arguments I've lambasted here for years--the idea pushed by corporate lobbyists (and people like Tim Cook in his recent congressional testimony) that since there is a good deal of corporate tax avoidance, we should just cut corporate taxes way back or even eliminate the corporate tax altogether, since we'll "obviously" never get sophisticated companies to pay more.This is wacky.  Rewarding tax avoidance by eliminating the broken corporate tax system altogether gets it backwards, as the Times notes.  The editorial makes six important points.

1. the corporate share of taxes has steadily declined, while corporations' use of the good things that the nation provides--the "social and economic foundation on which corporate success is built"--continues apace.
2. Ending the corporate tax just rewards the wealthy even more (who own most of corporate stock) and results in heavier burdens on everybody else

And, I would add, everybody else will carry that burden either by paying a larger share of taxes paid or by suffering from reduction in government services of particular importance to them, such as lower funding for education, for aid to the poor, for research, etc.   The wealthy can buy themsevles whatever they want, so are now more willing to let government shrivel.

3. cutting out corporate taxes means increasing the deficit

4. There's no justification for cutting out corporate taxes in order to replace that system with another one, like a value added tax.  That implies that it is reasonable to favor publicly traded corporations with all the benefits of US government without any of the obligations to pay for that benefit.

This is particularly unreasonable given the Supremes' decision that corporations have a right to spend their money to influence election campaigns for real people, and the right-wing's attempt to make a scandal out of the IRS scrutiny of groups that use 501(c)(4) status to conduct politicking in order not to have to reveal their donors, frequently major corporate owners like the Koch brothers and MNEs like Exxon Mobil. The idea of eliminating corporate taxes and passing the burden to less able to pay individuals is just another piece of the corporatist, class warfare agenda.

5. It also doesn't make sense to scrap corporate taxes if we decide to get rid of the preferential rate for dividends.  There is ample reason for raising the tax rate on capital investment income--it mostly goes to the wealthy, so the preferential rates for the wealthy exacerbates the growing inequality in this country, though, as the article notes, there is little political will even among Democrats to set the system aright.  But even so, eliminating the capital gains preference doesn't support eliminating the corporate tax--corporations don't have to pay dividends and shareholders get to choose when to realize taxable gains. Getting rid of the corporate tax would exacerbate the problem of corporations and shareholders controlling tax revenues through personal decisions.

6. We do need to reform corporate taxes--to prevent the ability of MNEs like Apple, Google and GE to pay ridiculously low or no US corporate taxes.  And that needs global cooperation.  So in the meantime we should require country by country reporting of profits and taxes.

 (3) This last item isn't a tax item, but it is something that is just about as pervasive as tax issues in our lives--the question of whether corporate giants should be allowed to "own" patents on living organisms, especially on self-replicating living organisms like seeds. 

I think the Supreme Court's recent decision in the Monsanto case is wrong. The current policy represents corporatism gone viral: it leaves farmers dependent on the few chemical giants that own the original genetically modified seed and all seeds that plants that sprout from it make.  It rips profits from farmers' hands and puts them in the hands of managers and shareholders of Monsanto and companies like it--a kind of class warfare by proxy. It leaves our agriculture, and our environment, at the mercy of a big corporation that has been steadily pushing us to overuse poisonous pesticides and herbicides that ruin our air, our water, and our land.  Congress needs to act to undo this patent determination.  See Kristina Hubbard, Monsanto's Growing Monopoly: what the Supreme Court got wrong: patents on self-replicating seed are unethical, dangerous and anti-competitive, Salon.com (May 30, 2013).

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Charitable Contribution Deduction--Camp Hearings Feb 14

Rep. Camp's Ways & Means Committee held hearings today on the charitable contribution deduction. To watch the hearings, you can go to this website. Camp is planning a tax code rewrite, which he says is intended to lower rates, simplify the code, and curb some tax breaks. 

Regarding those Camp objectives--they are not generally the right ones.

• Lowering rates is the wrong objective.  We already have very very low tax rates, especially when you consider that we do not have a VAT alongside the income tax as most European countries do.  The primary motivation for lowering rates appears to be to cut revenues even more, in another ratcheting up cycle of the GOP "starve the beast" game.  Lowering rates allows wealthy taxpayers and corporations to retain more of their profits, when they already garner a higher share of that income than average Americans who toil in their businesses as regular employees.  Lowering rates also results in less revenues and increased borrowing, resulting in higher deficits and higher debt, contributing to the right-wing demand for cutting safety net programs like unemployment insurance, Medicaid, Medicare and Social Security.
• Simplifying the Code is the wrong objective.  About 70% of US individual taxpayers do not itemize, meaning that their tax returns are quite simple.  For the 30% of taxpayers who do itemize, the complexity is necessary to prevent scams, manipulation and unreasonable subsidization of those who don't need it.  A tax system intended to cover the many complex transactions of today's globalized economies cannot be simple without being naive.
• Curbing some tax breaks is a good idea.  But it should be more than "some" and it should be vigorously done to shift the tax burden towards the upper class and business and away from those in the lower and lower-middle income distributions.  The tax breaks that should be curbed are the ones that are most regressive in nature--i.e., the ones that provide the majority benefit to the very rich.

The hearing today included lots of representatives of charities who were arguing their interest--keeping the tax-incentivized flow of money coming.  The typical argument from charities is that the tax deduction is necessary to incentivize the transfer of money to charities.  If it weren't there, the argument goes, rich people might not give at all, or at least not nearly so much money. 

There's not a whole lot of empirical evidence to back this up.  On the one hand, there are studies showing that  non-rich people give much more of their limited assets away, proportionately, than the richest people (though of course it amounts to much less in absolute dollars), and many of them don't get any break at all because they don't itemize. Furthermore, rich people like the names-on-gold-plates-on-opera-house-chairs a heck of a lot, too.  Maybe they give most of the money they give because of the status, the recognition, the remembrance-in-perpetuity, and to get to attend the events they've sponsored, which are usually the kinds of cultural events that they enjoy (opera, ballet, elite art museums, etc.).  Does what a rich person says about why he gives hold a lot of weight in this debate?  I'd argue it should not, since those who give typically want to be thought of as important philanthropists and not as status-greedy opportunists who are just giving the minimum amount to get their name and face plastered all over the New York Times.....

Does the tax incentive come into play in determining how much a person will give?  Indubitably.  But it isn't clear that people who want to give $20 million to their alma matter wouldn't do so even without the charitable contribution deduction!  All that put together suggests that the deduction is highly inefficient.  Most rich people would give money anyway to the things that bring them prestige and status and recognition and that accomplish what they want to accomplish now that they are rich and can afford to spread money around.

In addition to the inefficiency of the charitable contribution deduction--at least in amounts above some reasonable amount to allow to those who are NOT in the top quintile (say, 10%  of  adjusted gross income), there is also the problem that the deduction is primarily beneficial to the very wealthy.  They pay tax at the highest rates (well, except when the system doesn't work well because they have mostly preferentially taxed capital gains) and they get the most bang from the buck for the dollars they contribute.  They invariably itemize, whereas most lower-bracket taxpayers do not.  They give in ways that gives them prestige (there is really a quid pro quo for much of their giving, though it may not be financial).

Another complaint from charities and wealthy donors is that the absence of a charitable contribution deduction will result in the government just taking all that money that would have otherwise gone to the charity, because of higher taxes.  The implication is that such a result is disastrous, putting the recipients of the charity's charitableness at risk.  But the truth is otherwise.  The government may be more likely to support the poor and downtrodden than the wealthy are through charitable donations.  How many wealthy are making contributions to Museums and Opera Houses and Elite Universities, versus a local homeless shelter or similar programs for the needy?  And the decision of what to support, when made by a democratically chosen government, should more accurately reflect the will of the people than the decision of the one (wealthy) donor who gets the tax benefit of a deduction (though of course in these days of partisan gridlock and GOP obstructionism, that is regretably less true).  Shouldn't democracies favor taxation and redistribution via program selection over subsidizing the wealthy's favored charities?

So some new, reasonable limits on the charitable contribution deduction make a lot of sense from the perspective of democratic egalitarianism.   My suggestion would be to limit the deduction to  10% of the adjusted gross income reported on the tax return. (Ideally, such a modification to the deduction would be accompanied by a rethinking of the estate tax, to limit the amount that can be passed on to heirs without tax to an amount that more or less approximates the average estate of a taxpayer in the fourth quintile of the distribution.)

What about other changes that would be easier to pass and make lots of sense? 

• Prime amongst them would be the elimination of the fair-market-value deduction (rather than basis) for contributions of certain properties.  This is a sheer giveaway to the wealthy that cannot be justified.  It allows zero basis stock where there is no remaining unrecovered capital investment to be contributed and yield a deduction for the full value, whereas if the person sold the stock, they would at least have to pay capital gains tax on the value.  This provision should simply be deleted from the Code.  That's one simplification that would actually result in more fairness.
• Another area to tighten is the rules governing private foundations, to prevent the kinds of abuses (where 20 family members receive exorbitant salaries) that give charities a bad name.
• And Congress should eliminate the tax giveaway to large corporations (enacted in the Tax Reform Act of 1976) that permits them an enhanced deduction for donations of excess inventory--a deduction in excess of their cost basis and for more than the value of the inventory.  It's not clear that the deduction incentivizes any additional donations--if a corporation has excess inventory, it will either give it away (which can serve a significant PR function) or sell it at fire-sale prices (which can serve a negative PR function).  IN most cases, it would likely give it away without the enhanced deduction.  Of course, instead of urging Congress to eliminate the large busienss excess inventory special treatment, small businesses (mainly, S corporations with wealthy shareholders) are whining about how tough a time they have and arguing that they should be given a "level playing field" by letting them get the enhanced deduction too.  See NAEIR President Gary Smith's comments, below (in email).

  Congressman Schock and Mr. Smith agree that the bill [H.R. 2592, introduced in the 112th Congres by Schock] would greatly benefit the small business community by establishing parity for S corporations and other small businesses and as such a level playing field with larger regular corporations.  In addition to the principle of fairness inherent in this legislation in the tax benefits it extends to the small business community on par with larger corporations, Mr. Smith notes that “The impact of this legislation must be understood on the grassroots level: promoting greater collaboration between businesses and charities at the local level.”  In brief, several million struggling small businesses and millions of individuals served by our nation’s charities would benefit through previously unavailable access to a wide variety of free donated products.  (NAEIR email release Feb 14, 2013)

Not surprisingly, NAEIR is busy promoting the "enhanced" tax deduction (for up to two times the value of the excess inventory) to businesse--see here.

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Feeding America Urges Protection Of Charitable Giving Incentives

Romney's CRUT Tax Shelter

The Bloomberg press has looked further at Romney's use of trusts and other arrangements to avoid taxes, using Freedom of INformation Act requests to obtain more information than was released by Romney in his meager tax return release. Romney established a charitable trust in 1996 of a type that Congress cracked down on in 1997 (regrettably, a crackdown that grandfathered existing arrangements, which is the way so many rich people get to keep using abusive shelters). See Jesse Drucker, Romney Avoids Taxeds via Loophole Cutting Mormon Donations, Bloomberg.com (Oct. 29, 2012).

So what did Romney do.  He used a "charitable remainder unitrust" (CRUT) in a way that alllowed him to use the tax-exempt status of the Mormon Church (his primary charitable beneficiary) to defer taxes for more than 15 years.  The trust benefits Romney considerably, by letting him benefit from the tax-free treatment that the charitable beneficiary has when they sell assets for a profit.and leaves the church less than current law requires for a trust.   And it favors Romney over the church, because he gets a guaranteed payout from the trust (which converted most of its assets to cash in 2007) and the church only gets what's left at the end, if anything.  Current trends suggest there won't be anything left for the charity at the end. 

“The main benefit from a charitable remainder trust is the renting from your favorite charity of its exemption from taxation,” [Jonathan] Blattmachr [, a trusts and estates lawyer] said. Despite the name, giving a gift or getting a charitable deduction “is just a throwaway,” he said. “I used to structure them so the value dedicated to charity was as close to zero as possible without being zero.”

When individuals fund a charitable remainder unitrust, or “CRUT,” they defer capital gains taxes on any profit from the sale of the assets, and receive a small upfront charitable deduction and a stream of yearly cash payments. Like an individual retirement account, the trust allows money to grow tax deferred, while like an annuity it also pays Romney a steady income. After the funder’s death, the trust’s remaining assets go to a designated charity.

Romney’s CRUT, which is only a small part of the $250 million that Romney’s campaign cites as his net worth, has been paying him 8 percent of its assets each year. As the Romneys have received these payments, the money that will potentially be left for charity has declined from at least $750,000 in 2001 to $421,203 at the end of 2011. Id.

Under the 1997 change to the law, Congress required that the present value projected to be left for charity must equal at least 10% of the initial contribution. Romney's CRUT doesn't satisfy this requirement but was grandfathered in.  The principal of the CRUT has dwindled to about half what it was.  In the meantime, the Romney's have enjoyed considerable tax savings due to the way the CRUT works.

This information is revealing for two reasons.  First, it demonstrates yet again that the Romney's are eager to use whatever mechanisms they can to reduce taxes, even though their millions are due in no small part to the way taxpayers make business possible (from courts to roads to police to the military to "rule of law" to relatively low funding costs for borrowing in the United States, etc.).   One suspects that the reason Romney has stonewalled the public on his tax returns is that there is lots more of this nature shown therein, including possibly his participation in voluntary disclosure regarding offshore accounts (that otherwise might have resulted in criminal tax evasion charges).

 Second, it shows that Congress recognized that CRUTs didn't make sense.  So we have to ask why Congress didn't eliminate CRUTs altogether, rather than continuing to allow the gambit, and why, if it were going to continue to allow the gambit, it didn't terminate the favorable treatment of any existing CRUT that didn't satisfy the minimal funding requirement the new law included (10% of the original contribution has to go to charity before the donor can enjoy the immense benefit of the capital gains deferral thereby).   Congress should allow the estate tax to lapse back to the pre-Bush levels, and it should then buttress the estate tax by legislating the end to the many different devices used by estate lawyers to get around the tax while still providing most of the benefits of the assets to the estate planners--CRUTs and similar estate-planning trusts are prime targets for action by Congress.

 

Tax Policy Center on Cutting Tax Preferences to Lower Tax Rates (aka Romney's "plan")

As the campaign heats up and the Congress continues its inability to set partisanship aside to consider the well-being of the country, we can expect continued emphasis on tax rhetoric without much tax substance. 

On the one hand, Obama appropriately argues for higher taxes on the well-to-do, but doesn't seem to be making much use of the bully pulpit to help Americans understand the importance of that approach.  Obama  ought to be arguing for elimination of the capital gains preference across the board, but he is already losing out on fundraising amongst the banksters, so that argument is not likely to be made. 

On the other hand, Romney says he is going to solve all of our problems by lowering taxes even more on his peers, the wealthy, while paying for it by eliminating unnecessary tax expenditures.  The tricky thing about "lowering rates, by eliminating tax preferences" is that you have to decide (1) who gets lower rates and (2) which tax preferences get cut.  Without that info, you've just got an abstract theory about tax reform, not a real proposal.  And of course, if you cut tax rates at the top, thus favoring the wealthy, while not eliminating the tax preferences that are most beneficial to them, you upend the progressivity of the income tax system at the same time.  So specifics really matter here.

Thankfully, there's a new study that sheds some light on the tax preferences/rate cut scenarios.  The Tax Policy Center issued a new report , prepared by Hang Nguyen, James Nunns Eric Toder and Roberton Williams, on July 10 entitled "How Hard Is It To Cut Tax PreferencesTo Pay For Lower Tax Rates?"   The abstract makes clear that this is not the easy solution so often claimed.

 

Some political leaders have proposed to lower individual income tax rates and make up the lost revenue by eliminating tax preferences. To help inform the discussion of such proposals, we examine illustrative revenue-neutral combinations of lower rates and cuts in tax preferences and their effects on the distribution of tax burdens. We conclude that paying for lower rates would require substantial reductions in broadly-used and popular preferences. In addition, requiring that changes maintain the current progressivity of the federal income tax would make it much harder to find a politically acceptable mix of preferences to curtail.

 

The article starts out with a typical "efficiency" oriented statement about taxes.

 

"High tax rates reduce incentives to work, save and invest, encourage tax evasion and avoidance, and magnify the distortions caused by the myriad tax preferences in the current income tax. An enduring goal of tax reforms has consequently been to broaden the income tax base to pay for lowering tax rates."  Id

 

But guess what.  That statement isn't clearly true.  The idea that taxes "reduce incentives" to work, save, invest" and "magnify distortions" and therefore an appropriate goal is to lower tax rates rests on  economic models about market efficiencies that are, quite simply, unproven.  If taxes are so terrible, we should have terrible economic results in periods of high tax rates and much better economic results in periods of low tax rates.  Of course, we can't ever undertake an experiment to prove or disprove this, since there are many other variables--including how those taxes are spent in furtherance of a more vigorous and sustainable economy-- and those are impossible to control.  But we can look to historic evidence to see if high tax rates have correlated with poor growth and low tax rates with high growth, which would tend to prove the statement.  MIke Kimel's book on Presimetrics examined a wide range of correlations, and showed the statement doesn't hold--high tax rates, in fact, have correlated with good growth.

That doesn't mean that broadening the base by getting rid of wasteful or distributionally unfair tax preferences wouldn't be a good idea.  Many of these preferences are of the most value to the wealthy, and mean very little to ordinary taxpayers--such as carried interest capital gains rate for private equity fund managers.  Many of them are outdated, representing old industrial policy that should have given way to newer ideas long ago--such as the various subsidies in the system for natural resource extraction (favoring Big Oil).  Many of them are examples of the worst of crony capitalism, such as the charitable contribution deduction for the value (not investment) of stocks that only the very rich receive much benefit from (because they own most of the financial assets).  Some of the worst tax preferences are those that favor the wealthy--the capital gains preferential rate, that provides a tax break to the wealthy who can structure their income in ways unavailable to ordinary folk and who own most of the financial assets (and so get the lion's share of the capital gains rate benefit).

The Tax Policy Center study suggests it would be fairly hard to get more than a trillion out of eliminating tax preferences if tax rates are cut at the same time, for the following reasons:

1) if you lower tax rates, the savings from eliminating tax preferences is reduced, since the biggest cost of preferences is to those at the top of the rate scale.

2) even if you know that a tax preference "should" be eliminated, you are likely not going to be able to eliminate it because the interest group benefited by it will protest, loudly (the charitable contribution deduction for stock contributions, for example), or because it is administratively impractical to impose tax on the preference item (home rental value, for example)

3) if you eliminate a tax preference and lower the rate, you may shift more of the tax burden to groups that shouldn't bear it (the lower income classes, for example, in the case of the Earned INcome Tax Credit or the Child Credit)

4) If you repeal existing preferences without transition rules, you change economic outcomes in ways that may be resented, but if you transition in gradually over time and without complete repeal, you will likely not get the revenue gains desired to support cutting rates.

The report looks at three scenarios: 

• "current law" (in which the Bush tax cuts end at 2012 year-end--39.6% on ordinary income and dividends and 20% on capital gains and where the personal exemption phase out and limitation on itemized deductions increase revenues from higher-income taxpayers);
• "current policy" (in which the temporary rates in effect today--35% top rate on ordinary income and 15% preferential rate on capital gains and dividends and the AMT exemption indexed for inflation); and
• "current policy with reduced rates" (in which ordinary rates are cut further to a top rate of only 28%, the capital gains and dividend preferential rate is retained at 15%, and the AMT is repealed--i.e., Romney's tax proposal as to rates, except that he would also repeal the estate tax, reduce the corporate tax rate, make the corporate tax system territorial, and have a zero rate on capital gains and dividends for those with incomes below $250,000--though he has not identified which tax preferences he would eliminate in order to make such a drastically reduced tax intake revenue neutral). 

The report notes that the differences in rates under each of these approaches is significant. 

 

The difference between effective tax rates under Current Law and under Current Policy and Current Policy with Reduced Rates generally increases as income rises (Chart 4). For example, the difference in ETRs for the lowest quintile under Current Law and Current Policy is 2 percentage points, while the difference for the highest quintile is 3.4 percentage points and that for the top 0.1 percent is 4.5 percentage points. That increasing reduction in effective tax rates across income categories indicates that the tax system becomes increasingly less progressive across the three tax laws.

 

 The report considers the 173 tax expenditures in four groups based on prevalance of proposals for repeal and limitation and administrative feasibility:

(a) itemized and above-the-line deductions, non retirement fringes and small credits;

(b) investment and retirement income (items that favor saving by individuals);

(c) child, work-related, and social security benefits ("provisions that primarily help low-income households, families with children, and low-to moderate-income Social Security beneficiaries");

(d)  Other preferences (various exclusions from taxable income such as capital gains at death and on home sales; imputed rent; cash benefits for low-income families; veterans' benefits; inside buildup of life insurance). 

The report doesn't consider business tax expenditures and doesn't consider payroll taxes.

 

They conclude that

Current Policy with Reduced Rates could meet the Current Policy revenue target with a significant curtailment of some of the largest tax expenditures, such as mortgage interest, charitable contributions, and employer-provided health insurance. However, these are widely used and popular provisions, so sharply limiting their value could prove difficult. Further, this combination of lower rates and a broader base would cut taxes substantially for high income taxpayers, resulting in a less progressive tax system than under Current Policy.

 

With sufficient base broadening, tax rates under both Current Policy and Current Policy with Reduced Rates could raise the same amount of individual income tax revenue as Current Law. However, meeting that goal under Current Policy would require a sharp curtailment of mortgage interest, charitable contributions, and employer-provided health insurance. Hitting that revenue target under Current Policy with Reduced Rates would be even harder. It would require curtailment of these same popular tax expenditures as well as substantial reductions of additional tax expenditures, such as the special rates for capital gains and dividends, the exclusions for retirement contributions and earnings, and possibly such items as the earned income tax credit (EITC), the Child Tax Credit, and the exclusion of some or all Social Security benefits for low- to moderate-income beneficiaries. From a political perspective, matching Current Law revenue would be difficult, if not impossible.

 

 

ASIDE:  Meanwhile, Romney continues to clam up about his failure to release more than one tax return and the fact that even tax experts cannot get much of an idea why he has put so much of his fortune in offshore tax havens (Bermuda, Caymans, Swiss banks).   Then there's the question of how an IRA got to be worth $102 million in such a short time--without seeing 10 years of tax returns, it is hard to say how that could be and easy to question whether there some slippery manipulation of asset values at the time of putting them in, so that it looks to have gotten super-extraordinarily splendid returns.   One of the problems of having a presidential candidate with so much wealth is that he (1) is great friends with the banksters and thus able to use all the tricks of the trade --which may or may not be legal but one has to question their advisability for a president; and (2) is so accustomed to getting his own way that he is tone deaf to the justifiable interest that Americans have in how he made so much money and what he chooses to do with it. 

Not to mention, of course, his inability to explain away his signing off on SEC and other federal forms as sole shareholder, CEO and manager of Bain Capital through 2002, while claiming to have exited Bain in 1999 so as to avoid blame for the even worse leveraging carried on by the private equity firm, which resulted in a good deal of outsourcing and US job losses.  His way of dealing with that was to call Obama a liar by raising the issue, but that doesn't fly, since the issue is there and should be dealt with head on by releasing tax returns, among other efforts towards transparency.

 

 

 

 

One in 189 of those with $200,000 or more in AGI paid no federal taxes in 2009

[edited 5/30 to correct "one in four" goof]

 The IRS recently released another "statistics of income" report.  This one has news that should make most ordinary Americans think twice about the GOP agenda of reducing taxes for the rich while cutting back on all kinds of programs that serve ordinary Americans--the fact that a large percentage of the upper crust--one out of every 189 Americans with $200,000 or more in income --pay no federal income taxes whatsoever.  See Rubin, IRS Finds One in 189 High Earners Paid No U.S. Taxes in 2009, Bloomberg.com (May 29, 2012).

  How does someone with $200,000 or more in income pay no taxes, when ordinary folk with jobs who make $50,000 to $75,000 pay 15% to 25% of their income in taxes? 

• As I've often discussed here (see items under charitable contribution deduction), rich folk can easily afford to give away more to charity and they get a tax bonus that is much more than that available to poorer folk when they do so.  They get an especially big break if what they give away is appreciated stock that they bought a while ago--and rich folks own most of these financial assets, so they are the ones that get almost exclusive enjoyment of this lucrative loophole:  they get to deduct the full value of the stock they donate, without having ever paid taxes on the appreciation.  That's one of the boondoggles in the Code that Congress can and should get rid of, no matter what else it does about taxes. 
• Another way rich folk pay less in taxes is by ensuring that the income they earn is of a type that isn't subject to tax.  Big CEOs generally have rich pension plans and other forms of deferred tax compensation that facilitate lowering their tax bills.  Rich folk are the buyers of municipal bonds, which again enjoy a specific tax break in section 103 of the Code that excludes the interest income from the owners' tax returns.  This is supposed to help municipalities, since the tax break gives the wealthy an incentive to buy the bonds even though they pay lower rates, since all the interest is tax free.  But it is a costly break that provides an advantage only for the rich.  Wouldn't it be better to eliminate it and tax wealthy people on all of their interest income at ordinary income rates?  Maybe the tax money could also fund programs for important municipal projects--like intracity rail transportation in Detroit, a much needed idea whose time has come.....
• A third way that rich people avoid taxes is by having so many deductions--high-end medical "equipment" (like swimming pools for arthritic patients), lots of interest on mortgages on high-end homes, and other deductions of special value to those who would otherwise pay tax at a higher rate.

 As the Rubin article notes, the IRS announced that for 2009 there were 10,080 households with "adjusted gross income" of $200,000 or more who paid no US or foreign income taxes. Adjusted gross income is not economic income--AGI does not reflect items that are excluded from the calculation of income for tax purposes and is reduced by certain "above the line" deductions that are especially beneficial to the wealthy. "Using an expanded concept of income that includes some nontaxable items and looking only at U.S. income taxes, there were 35,061 households, or 0.88 percent, that paid nothing."  Id.

The Alternative Minimum Tax was initially enacted to deal with the general unfairness of having extraordinarily well-to-do people be able to avoid tax entirely.  As it was modified over time, it came to function as a way to ensure that those who accumulate lots of different deductions nonetheless pay tax, by treating some of those deductions as unqualified preferences for AMT purposes.  But the AMT has lost a lot of its punch as Congress has eviscerated its provisions, such as the limitation on foreign tax credits.   This is one of the reasons that many progressives have supported two things--elimination of the preferential rate for capital gains (a type of income especially enjoyed by the ultra rich) and adoption of a new type of minimum tax on some high level of gross income (the Buffett Rule).  This new information about the number of rich people who end up paying nothing in federal income taxes should result in more people telling Congress that it's time to pass these two proposals.

Comparisons of charitable giving among presidential candidates

[Hat Tip to Tax Prof]

Len Burman, now a professor at Syracuse but still affiliated with the Tax Policy Center, wrote a blurb for Forbes on Stingy Rich People, Santorum-Gingrich Edition, Forbes (Feb. 20, 2012), which was a followup to Caron's comparison of presidential contender giving based on "Romney and Obama vie for title of most charitable; Santorum gave least to charity," Washington Post (Feb. 16, 2012). 

Romney gave about 13.8% of his income to charity in 2010, and Obama gave about 14.2% of his in 2010.  The Gingrichs (with about $3.1 million in income) gave only about 2.6% of theirs in 2010 and the Santorums (with about $0.9 million in income), only about 1.8% of theirs in 2010.

Burman professes his surprise at Gingrich and Santorum's relative stinginess, given their avowed commitment to religion (and their open claim to religious merit) and the Christian doctrine of tithing 10% of one's income to the church.

But Burman finds that the relative stinginess of the two candidates is about on a par with members of their respective income classes.  The group of people making between half a million and a million give an average 2.6% in 2009 and the group making between $2 and $5 million gave about 3.2% on average.  Conclusion--Santorum and Gingrich are "in the middle of the pack" in terms of generosity for people of their income level.

Personally, I've always thought candidates should keep their religious faith  to themselves.  I don't think we have any business at all taking into consideration whether a presidential candidate is a Mormon, a Baptist, a Muslim or an atheist.  But if they do make a point of their religious faith and present it as a worthy attribute qualifying them for the presidency, then it is rather revealing when those who openly "brag" about their religiosity  don't comply with the most fundamental concept of sharing and  generosity in the bible, the tithing requirement.

Nature Conservancy hijinks, yet again

Most of us who have contributed to the Nature Conservancy were disgruntled, to say the least, when it ws revealed several years ago that trustees of the environmental land protection organization were getting sweetheart deals in terms of possession of some wonderful wilderness lands that were contributed to the Conservancy. 

Now the group is in the news again for related matters.  In Marshall and Judith Cohan, et al., v. Comm'r, T.C. Memo. 2012-8, the court sets out a deal between the Nature Conservancy and parties donating certain properties that was structured as a bargain sale to provide tax benefits for the parties and a less overall consideration to the Nature Conservancy.  At the same time, a Conservancy benefactor stood to gain in terms of being able to develop a piece of the valuable property for himself.

In short, a donor sold property to the Conservancy for what was purported to be a below-market price, entitling the donor to a charitable contribution deduction for the part not paid for.  The IRS contested the deduction, and the court ruled that there was indeed hidden consideration--consideration of which both sides were aware but which was obscured in the deal documents in an effort to 'play the audit lottery' so that the donor could receive a larger deduction than the one to which he would be entitled.  See Cohan v. Comm'r, T.C. Memo 2012-8 (available on BNA).

Briefly, three generations of Cohans owned land through a partnership formed as a limited liability company, refered to as HCAC.  One parcel of land (Herring Creek Farm) included about 175 acres that were owned by the Wallace Family subject to a right of first refusal (at a stated price) of the Cohans (assuming they still owned the adjacent lands) if the Wallace Family were to sell the land, agreed to in 1969 and with an expiration date of Jan. 1, 2010.  The value of the land "so significantly exceeded the set price that the rights of first refusal would be expected to be exercised."  The Wallaces had reciprocal rights on the Cohans' properties.  The agreement also provided personal rights to use of beach property.  When the Wallace families wanted to develop the farm, the Cohans formed HCAC to which they contributed their protect their rights of first refusal under the 1969 agreement.  The Wallaces sued to invalidate the 1969 agreement but lost. 

The Cohans were concerned that the right of first refusal would expire and the development would take place without their being able to stop it, so they wanted to find a buyer that they could approve.  The Nature Conservancy expressed interest.

TNC executes its mission by acquiring land or interests in land that may be used to manage biological diversity. A conservation buyer is someone who acquires property subject to conservation restrictions. At all relevant times, TNC was a section 501(c)(3) organization eligible to receive tax-deductible contributions under section 170.

HCAC agreed to sell the rights of first refusal to the Nature Conservancy (TNC) in 2000, for various consideration including specified lots, reimbursement for legal expernese, leases on the barn, beach rights and certain other reimbursements and indemnifications.  TNC agreed to impose conservation and development restrictions on the land when it was acquired.  IN addtion TNC agreed to convey certain limited devellopment rights to HCAC and other parties (including TNC's benefactor, Roger Bamford, who would receive a right to build a house on a parcel of the farm).

Meanwhile, the Wallaces went ahead with subdivision development on the farm. TNC negotiated with the Wallace family, on condition that a farming institute be allowed to purchase part of the farm for its use.  Eventually the Wallaces and TNC reached and agreement on a sale for about $64 million (allowing more development that the agreement with the Cohans had contemplated),and the HCAC received a fee for the time extension that took.  Bamford and the Farm institute were included in the agreement. 

TNC and HCAC had to renegotiate the agreement to account for the additional development authorized in the Wallace/TNC agreement.  The rights were valued at about $14 million. This was where the idea of having a "bargain sale" treatment that permitted a charitable contribution deduction came in.  Since TNC would have to reimburse HCAC for any tax it paid on the transfer of the rights of first refusal to TNC, it was to TNC's advantage to minimize the amount of taxes that needed to be reimbursed.  The final agreement included reference to a  "bargain sale gift" and noted that tax savings from a charitable contribution deduction for HCAC would benefit TNC by reducing the make-whole payment it would owe HCAC. 

The Tax Court's opinion (at 40) shows the relative amounts for these calculations.  HCAC's tax return claimed consideration paid of about 9.96 million.  The Notices of deficiency claimed consideration paid of about $15.38 million.  Left out of the HCAC return were any values for beach rights, leases of a horse barn and other property, an option on a lot, a right of way relocation, and land bank fees.

In discussing whether HCAC would be allowed a charitable contribution deduction, the court notes that a taxpayer generally can rely on a contemporaneous written acknowledgment from the charity regarding the value of goods provided to the taxpayer by the charity.  But this rule does not apply if the taxpayer knows (or has reason to know) that the estimate is unreasonable (citing Reg. section 1.170A-1(h)(4)(ii)).  TNC's gift letter disclosed some of the items of consideration received, but not all (including those listed in the prior paragraph). 

TNC aspired to structure the 2001 transaction to minimize or to eliminate the portion of petitioners’ tax liabilities that TNC agreed to pay, and TNC (through its officers and attorneys) knew that any decrease in the value of consideration that HCAC received would reduce those liabilities.  In addition, after the transaction was structured, TNC had an incentive to exclude from the gift letter part of the consideration that TNC received because the less consideration disclosed in the gift letter, the more the gift letter would on its face support the reporting of a greater charitable contribution deduction (and thus lesser reimbursement).

 The court concluded that "the parties actively negotiated the details and the contents of the bargain sale gift agreement (and hence the gift letter) with TNC's goal in mind."  Later, the court states:

In fact, the record strongly suggests that representatives of TNC and HCAC made a conscious decision to exclude items of consideration received in the 2001 transaction in calculating the amount of the bargain sale gift and to play the audit lottery with the hope of minimizing the tax indemnification amount. Therefore, the lack of disclosure of those items prevented any charitable contribution deduction because of lack of an adequate written acknowledgment.

The court concluded the letter was not a good faith estimate and that the taxpayers could not reasonably rely on the letter.  Further, the taxpayers could not take the charitable contribution deduction by claiming substantial compliance.

Much of the rest of the opinion deals with valuation methods and experts.  The court then considers whether the taxpayers are liable for underpayment penalties.  It applies the "reasonable cause/good faith" affirmative defense to some of the underpayments, finding that taxpayers reasonably relied on counsel.  But for the remaining portion of underpayments, it found that they did not act on professional advice but in fact knew that they had received additional unreported consideration.

This case, of course, deals with the particular taxpayers that were working out a mutually satisfying deal with TNC for proteciton of the wilderness attributes of land they occupied while allowing TNC to take possession of a large tract of land that needed to be preserved.  The problem came when the parties worked together to come up with a tax reductive scheme that would provide a generous charitable contribution deduction to the donors and hence less of a tax reimbursement payment obligation to the charity.  Playing the audit lottery is not something that respectable charities should be doing.  And acting as an accommodation party to facilitate tax breaks for wealthy donors is not the kind of thing one wants to see happening.  Shame on TNC for its willingness to "tweak" its gift acknowledgment letter here to accomplish those tax savings goals.  And one cannot really savor the idea that a TNC benefactor like Bambord gets a choice development right on the property out of the deal.....

Romney's Wall St. J. Interview with Gigot--Protecting the Rich

[edited to rephrase and correct typos 12/26/11 5 pm]

Joseph Rago and Paul Gigot interviewed Mitt Romney on his 'vision' for America--"On Taxes, 'Modeling', and the Vision Thing", Wall St. J. Dec. 23-24, 2011, at A13.  In it, Romney reveals the way patrician wealth has affected his values, casting President Obama as a "European social democrat" and suggesting that contrasts with his own belief in a "merit-based opportunity society--where people earn their rewards based upon their education, their work, their willingness to take risks and their dreams."  

Now everybody likes the idea of people being able to advance based on merit, rather than on crony capitalism, improper influence or whatever.   The problem with suggesting that America is a 'merit-based opportunity society' is that it isn't much of one anymore: America in this second Gilded Age is primarily a wealth-and-status-based opportunity society. 

• Education:  Even Romney admitted (obviously unintentionally) that wealth makes a real difference, since he noted that rewards depend in part on education.  People with wealth receive the finest educations from pre-K through post-graduate, getting preferences at the best children's academies in Manhattan and at the highest ranked universities like Harvard and Yale.  People without wealth lose out from the very beginning, with inferior schools that are no longer fully supported by the public, as charter and for-profit schools take over offering inferior educations that no patrician family would ever accept.  The poor and middle class take on enormous loans and work loads to finance even their public university educations, since state support has slipped down to a mere 20-30% of the cost of that education.  That makes study and grades and success much more difficult for them. 
• Working hard (with Contacts/Influence/lobbyists):  The wealthy are introduced early to the most important people of influence in society, like the Vanderbilts and the Astors of old, the private equity fund managers and the Wall Street bankers that can smooth their way through all the trials and tribulations of their 'work' careers--i.e., becoming owners of major league baseball team when you have no relevant experience (George W. Bush, with the aid of his papa and his papa's influential and rich partners) or setting up a venture capital fund (like Romney's Bain Capital). These connections ultimately permit the wealthy to mingle in a monied society that offers the right contact for every venture to succeed--including lobbyists to help a wealthy entrepreneur get his business going and ability to 'invest' in politicians who are willing to risk alienating the middle class to support preferential taxation of the rich. 
  • By the way, lots of the not-rich work quite hard, often at thankless jobs that provide no cushion to deal with life's difficult blows or at a job that, at minimum wage, still leaves their family below the poverty line.  Without the contacts and influence that smooth the way of the rich, there chances of moving up are much more limited.  If they persevere, have an entrepreneurial idea, and catch a break, they may be able to move beyond where they are, but they have to do a lot more than just 'work hard.'  
• Taking Risks (and Getting Subsidies and Preferential Tax Provisions):  The poor take a risk every time they get up in the morning--will their health hold out so they can keep working? will they be able to make it to their job in that car that needs a new starter? can they manage to arrange for someone to take care of their kids while they work or will they have to be "latch-key kids" yet another day?  But they don't usually have the kind of capital nest-egg to take a risk with in the way that Romney means it--the excitement of opening a new business demands from the poor and near-poor Herculean efforts to pull together family, friends, and workers to support their business ideas.  Those with money, on the other hand, have a head start on all of this.  Bill Gates' parents offered him an educated life of relative ease; he could 'play' in the garage on that dream of his rather than running heavy machinery or working behind a counter at a McDonalds.  And those with contacts and money are able (and willing) to hire the best lobbyists to ensure that they get all the tax-advantaged benefits and subsidies that they can finnangle (or buy) from local, state and federal legislators for their activities.  That includes favorable tax provisions that allow them to keep a significant percentage of their wealth (and to fight for even more favorable provisions), such as the carried interest provision that gave Romney a preferential rate on almost all of his compensation income, the preferential capital gains rate that gives all the wealthy a low tax rate on their income from trading stocks and bonds with each other, and the various ways that the tax code subsidizes the kinds of personal deductions that provide the most benefit to those with money--from the charitable contribution deduction (including the ability to give away stock and claim a deduction for its value rather than for your actual basis) and the mortgage interest deduction (for interest on home loans up to a million plus $100,000) to all of those provisions that allow the wealthy to retire well--pension plans, exclusion of life insurance benefits, etc.  Then there are the many subsidies they get various governments to provide for their businesses, presumably by using those long-term family/status connections to wine, dine and influence.  They include low-cost loans such as those enjoyed by Romney's Bain Capital for various businesses that Bain Capital was 'turning around'.  (Handily, they can make low-taxed profits for themselves even when their turnarounds fail, with all those subsidies, so that the taxpayer sometimes ends up paying  for their losses along with the fired workers.)  See the links provided in the posting yesterday on Romney's reluctance to release his tax returns, which discuss some of the subsidies and other benefits to Romney's business. 

That's not a merit-based opportunity society:  it's an influence-based society, where the poor and even most of the middle class are working against long odds to make headway. 

And there's not much evidence that Romney recognizes this fundamental difference in existence of the well-off and the not-so-well-off here in America.  Take the Gigot story's discussion of tax policy and what kinds of "reforms" Romney supports.  The Journal apparently thinks Romney is too timid on 'risk-taking' because he didn't espouse the kind of tax agenda that the Journal supports--moving to a consumption tax--like the national sales tax-- that shifts most of the tax burden to ordinary folks (since they will pay tax on most or all of their  income since they spend most of it on food, shelter, clothing and other necessities) and leaves a zero percent tax rate on the capital gains, dividends, and other income from capital that makes up most of the income of the wealthy and little of the income of everybody else.  Why, the Journal notes, Romney's plan merely calls for extending the Bush tax cuts, cutting the statutory corporate tax rate from 35% to 25%, and eliminating capital gains and dividends taxes only for those who make $200,000 or less.  Romney won't even say he supports a consumption tax til he's studied it more, though he likes the purported "simplicity" of a flat tax.    Romney also says he likes "removing the distortion in our tax code for certain classes of investment".  This means that Romney does not understand the real economics of the consumption tax and the so-called 'flat tax', both of which result in taxation of 100% of the income of the poor and near poor and most of the middle class while leaving the rich with a minimal tax burden.  Any system for alleviating that burden (such as a low-level exemption at the bottom of the income scale) would thrust a truly burdensome recordkeeping requirement on those least able to cope with it.  Especially for versions that merely zero out the tax rate on income from capital, distortions would be magnified: the categorization of income into different types is one of the primary distortions in our system, and any plan to eliminate taxes on one type of income while retaining them on another increases distortions rather than removing them!

What about Romney's saying he won't propose cuts in individual tax rates for those making more than $200,000?  The Journal seems to think that is rather cowardly, since such a proposal accepts President Obama's linedrawing on where rate cuts might be reasonable.  Now, aside from the failure to consider dropping the entire bunch of Bush tax cuts and letting all the rates go back to the level that they were when Bush took office (which might well be the best tax reform the Congress could do at this point), Romney should be commended for at least recognizing that the wealthy have gotten a fistful of tax gifts from the Bush individual tax cuts (and, indirectly, from the various corporate tax provisions that have allowed companies to pay less and less into the federal fisc) and for not wanting to proffer even more. 

But here's the rub.  Romney doesn't recognize the damage from the wealthier among us continuing to get even wealthier while the vast majority suffers stagnation and decline:  as the concentration of income increases at the top and inequality becomes the defining characteristic of this society, opportunity for all is threatened as is democracy itself.  Tax policies that could serve as a deterrent to that wealth buildup at the top--e.g., a stiffer, progressive estate tax, a financial transactions tax to discourage trading and capture a tiny amount in connection with those secondary market trades amongst the wealthy, and bracket expansions that would create a more progressive set of tax rates for the highest income that would distinguish between those who have $400,000 a year and those who have $2 million a year--aren't even on Romney's radar screen.  He's content with the current system's distribution, one that is highly favorable to the wealthy.  As a recent FED Finance and Economics Discussion Series article made clear, inequality has made permanent inroads and tax policies haven't done much to dampen them.  See Jason DeBacker et al, Rising Inequality, Transitory or Permanent? New Evidence from a U.S. Panel of Household Income 1987-2006.

Romeny's made it clear that he isn't about to challenge the status quo of an easy tax life for the wealthy.  Here's what he said to the Journal on the question of making sure that the wealthy never see any kind of a tax increase.

"My intent is to simplify our tax code and create growth, and so I will also look to see whether the top one-half of 1% or one-thousandth of 1% or top 1% are still paying roughly the same share of the total tax burden that they have today.  I'm not looking to lower the share paid for by the top."  Wall St. J., Dec. 24-25, 2011, at A13 (quoting Romney).

So after a decade of cutting taxes on the wealthy and passing more and more provisions that benefit the wealthy in particular either directly or indirectly, Romney declares today's status quo as the perfect state for things to be in--the current low taxes on the wealthy, in perpetuity, are his goal.  And while we may applaud him for not intending to lower taxeds further on the wealthy, it is hard to see how continuing current tax policy towards the wealthy makes sense for the fisc or for democracy.   Carried interest--won't be taxed under Romney as the ordinary compensation that it is.  Mortgage interest deduction on million-dollar loans--won't be pulled back to a more reasonable amount such as the interest on a loan that is 80% of the value of the median-priced US home.  Charitable contribution deduction for value rather than basis in stocks contributed--won't get rid of that one.  Establishment of new brackets to recognize the drastic expansion of incomes at the top so that those with progressively more income are paying progressively more in taxes--won't happen under Romney.  Why?  Because he is going to make sure that the top 1%, the top 1/2%, the top 1/1000% don't pay less, but also don't pay a bit more in taxes than they are paying now, this perfect state where the GOP wants to cut people off Medicaid to save money, turn Medicare into a 'premium support' system that will shift more and more of the burden of health care in one's old age to the vulnerable elderly with a pension they can't count on and a Social Security system that the GOP is trying to ensure that they can't count on.

Most tax "simplification" promoted by lobbyists won't create growth--it is much more likely to result in tax loopholes that the wealthy can drive a truck through.  Refusing ever to increase taxes, even on the ultra-rich who can clearly afford to pay more (without really noticing the difference in spending power) won't create growth--it most likely will result in a stagnant economy where the burdened middle class gradually falls into the ranks of the New Poor. 

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).