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

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

Background

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

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

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

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

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

Key Points from Dan Shaviro's Interview

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

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

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

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

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

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

 

Key Points from Timothy Smeeding's Interview

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

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

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

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

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

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

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

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

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

The Republican Party's Heartlessness--the Casualty Loss Provision of the purported "tax reform" legislation

The GOP is cruising towards passage of its class warfare tax legislation that continues the long trend of Republican tax policy to redistribute upwards to the very rich.  The legislation, however, is supported by a small minority of the American public (latest polls put support for the tax legislation at less than 30%). See, e.g., Allan Smith, Polls show key Republicans could get whacked by the tax bill, Business Insider.com (Dec. 4, 2017). That's astonishing when you consider that one provision in both the House and Senate bills that is used as a "revenue raiser" to pay for the huge tax subsidies to corporations and wealthy taxpayers will be especially hard hitting to lots of middle class and lower-income people, including many who voted for Trump.

The legislation will gut the "casualty loss" provision that currently allows taxpayers to deduct losses from hurricanes and fires and other accidents and forces of nature, to the extent those losses aren't covered by insurance (after a $100 per loss limitation).  Thus, people who were flooded by Harvey can claim casualty losses on their 2017 tax returns for amounts not covered by insurance.  People who lost their homes in the fires that raged earlier this fall in northern California can claim casualty losses on their 2017 tax returns for amounts not covered by insurance.  But, as Bob Cesca notes for Salon.com, As L.A. Burns, Republicans Vote for a Tax Hike on the Victims (Dec. 8, 2017).  See also Thomson Reuters Tax & Accounting News, 2017 Tax Reform: proposed individual tax changes in the 'Tax Cuts & Jobs Act' (Nov. 3, 2017) and Sally Schreiber et al, Details of Tax Reform Legislation Revealed, Journal of Accountancy (Nov. 2, 2017) (noting that the personal casualty loss is repealed, except, in the House version, for such losses associated with special disaster relief legislation--which requires congressional action for each one); Tony Nitti, Senate Releases Tax Bill: Here's How It Compares to Current Law & the House Plan, Forbes.com (Nov. 10, 2017).

You have to wonder just how the Republican Party and Trump administration became so completely heartless.  And why they think that Americans won't notice that they only care about multimillionaires in the "one percent".

Carried Interest -- a tax privilege for the rich whose end time has come

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.

***

...[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.' ...

...But even without a management fee offset, limited partners generaly derive an economic benefit from the activities of the general partner. ...  Sun Capital Court Ruling Threatens Structure of Private Equity.

 

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).

Related articles

Private Equity Is a Business: Sun Capital and Beyond

Carried Interest Tax Break Risks Being Undercut by Court - Bloomberg

A Chance to End a Billion-Dollar Tax Break for Private Equity

Are lower taxes on "savings" good for the economy? Heritage, CRS and the "Matthew Effect"

[Hat tips to Ann Murphy (for pointing out the Heritage release to the tax prof listserve) and to Calvin Johnson, Edward Kleinbard, and Martin McMahon for permitting me to build a post around their contributions to the interesting exchange on the listserve.  I hope they will forgive any error I may have made in those instances where I paraphrased rather than using direct quotes.]

The Heritage Foundation put out a press release just a few days ago contesting the results of a Congressional Research Service study about the benefits from lowering tax rates.  See Curtis Dubay, Congressional Research Service Wrongly Implies Lower Tax Rates Don't Strengthen Economy, Heritage Network "The Foundry" (Sept. 17, 2012).  The idea--clearly implied by the title of the release--is both to discredit the CRS, a long-admired non-partisan research organization funded by Congress, and to bolster the right's longstanding argument that tax cuts are almost always good for the economy.

The attempt to skewer the CRS focuses on the correlations the CRS report uses between top marginal income and capital gains rates and economic growth rates, from which the study concludes that lower rates do not in fact correlate with stronger economic growth.  (See extensive work in this area, looking at the correlation between rates, growth and party administrations, in Presimetrics, a book by one of my fellow Angry Bear bloggers.) 

 Heritage claims that the correlations "prove nothing" because of "the economy is more complicated".  To make any analysis, Heritage seems to be saying, you have to take the entire gamut of potentially influencial factors into account, and then you have to also be aware that no two eras are ever the same.  In short, Heritage seems to be arguing that there is no way to do an analysis, and therefore the rough correlations shown by the CRS study should be disregarded.  Even if that were true, it would amount to a pretty flimsy claim on the other side--i.e, it would amount merely to the claim that Heritage thinks the problem is so overwhelming that the conclusion that tax cuts have a harmful effect on the economy can't be considered completely substantiated.  A pretty flimsy excuse for a release with the title provided.

But Heritage goes further with its own statements. 

Of course, if you tax income, investment, and savings less you'll get more of them and the stronger growth that comes with the increase in these activities.  And if you raise tax rates on those most able to react, then the reactions will be that much more pronounced.  Upper-income taxpayers have the most capacity to adjust their behavior; by shifting the composition of their labor income to avoid tax, to shift the composition of their investments to avoid tax, or to shift away from work effort toward leisure.

It is vital that the public, the media, and, most importantly, policymakers don't fall for misleading analysis. ... the economy is in bad shape and will remain that way unless and until it gets better policy from Washington.  One of those policy improvements would be lower tax rates through tax reform.  Id.

Note that Heritage hasn't shown that the CRS conclusions are wrong, nor has it shown that the CRS methodology is so deficient that the conclusion isn't a useful, "rough justice" conclusion based on the emprical data that exists, even though it does not (and cannot) consider the entire universe of factors at play in the economy and even though no study can compare a tax year with such tax cuts to the same tax year without such tax cuts.  As Edward Kleinbard, Professor at USC's Gould School, notes, "The alternative to the 'weak' correlation that [Heritage] criticizes is no correlation at all. Why is that useful?" (quoted from an email exchange with permission). 

Calvin Johnson, the Andrews & Kurth Centennial Professor of Law at the University of Texas, notes that there are really only four reactions to cutting taxes on capital income (the main way generally proposed for reducing taxes on savings): 

1) reductions in savings as people hit their targeted fund levels for things like retirement, purchases, emergencies sooner;

2) increases in borrowings to fund investments that benefit from the cut taxes on investment income;

3) moving capital from other investments to the tax-advantaged forms of investment; and

4) saving more because of the tax incentive.

Heritage, Johnson says, wants to claim that item 4 is the typical response, but the evidence suggests it is mostly the first three.  And because of that, the economy goes "in the wrong direction"--"the private reaction is close to zero or negative" and "the deficit is dissavings dollar for dollar", so that "the overall impact is strongly negative."  Calvin Johnson (paraphrased and quoted from an email exchange with permission) .  Johnson has been writing about needed reforms to the tax system for some time, including comments on overly generous incentives for savings, through the "Shelf Project", a series of articles in Tax Notes that discuss potential ways that Congress could adjust the federal income tax laws to create a simpler, fairer and more efficient tax system and still raise the much-needed revenues for infrastruture and other programs.

There is pretty good evidence that Johnson's first item--targeted savings for precautionary needs and for targeted purchases and retirement--covers the main reason that people save.  The Federal Reserve underwrites a triennial survey of consumer finances.  The most recent study is reported in Bricker, et al, Changes in U.S. Family Finances from 2007- to 2010: Evidence from the Survey of Consumer Finances, Federal Reserve Bulletin Vol. 98, No. 2 (June 2012). 

The study shows that saving for "liquidity" (emergency expenditures, illness, etc.) ranked first in 2010,at 35.2% and saving for retirement ranked second, at 30.1%.  Saving for specific targeted purchases, homes, and education amounted to another 17.1 %.   In contrast, saving for investment was a piddling 1.2% and saving for "no particular reason" (which may be the kind of savings we would expect from high income families with more money to spend than they can easily spend) garnered only 1.4%.   Id. at 16 (Table 3).

Note, too, that Heritage only offers in substitute to the CRS's study the same tired and untrue economic theory it has always relied on (like the infamous Laffer-curve, a theory that essentially speculates about the great benefit from lower taxes based on "free market" assumptions).  Heritage is left with merely asserting a claim that "lower tax rates" in and of themselves will lead to a better economy.

Martin McMahon, the Stephen C. O'Connell Professor of Law at the University of Florida, notes that this is "poor theoretical economics at best."   Ed Kleinbard adds that these types of theoretical arguments are "like a biologist studying the mating rituals of butterflies along a highway median--likely as not, the new dance you observe is just a downdraft from a passing tractor-trailer."  (quoted with permission).

McMahon goes on to say:

[The Heritage release] incorporates only the substitution effect, and ignores the income effect.  It is based largely on what I refer to as an 'attractive nuisance' in tax policy analysis.  That [attractive nuisance] is a model of a commodity tax on which the purchaser is indifferent between apples and oranges until a tax is levied on one and the preferences shift because prices shifted.  The proponent then trades 'apples and oranges' in the model for 'consumption and savings' and 'leisure and work' [to reach] the conclusions that are reflected in the paragraph above [i.e., the first quoted paragraph from the Heritage release]. ... But in the translation, the income effect is ignored as are exogenous constraints on substituting consumption for savings and leisure for labor.  The data bears out the CBO and has for decades.

Heritage's real gripe is that the real world does not behave the way the model that it prefers to believe is true [says it should].  (quoted from email exchange with permission) 

Marty McMahon has also been writing about this topic for some time.  A good place to start your reading is "The Matthew Effect and Federal Taxation,  45 Boston College L. Rev. 993 (2004) (available on SSRN, here), for which the abstract notes:

This article first examines in detail the increasing concentration of income and wealth in the top one percent, and particularly within much narrower cohorts near the top of the top one percent, that has occurred over the past twenty-five years. It demonstrates the strong Matthew effect in incomes in the United States over that period. The super-rich are pulling away from everyone by so much and at a rate so fast that the fact that incomes of many households at the bottom and in the middle have stagnated, or even fallen in constant dollars, has been obscured by ever increasing per capita income.

The article then examines changing effective federal tax rates over the last two decades of the twentieth century. By the close of the twentieth century the tax system was not raising revenue as fairly and was doing less to mitigate inequality than it had in the middle of that century. Tax legislation in the twenty-first century continued this trend by providing tax cuts very disproportionately in favor of those at the top of the income pyramid with very small tax cuts going to everyone else.

The article then demonstrates that economic theory does not support the argument that the tax cuts were necessary to spur incentives to save and invest and to work, and that the empirical evidence of the effect of tax cuts on savings and investment clearly contradicts the claims made by supporters of the tax cuts. It examines the rapidly growing body of economic literature supporting the thesis that economic inequality impedes economic growth rather than fostering it, and concludes that because the tax cuts increase inequality, they probably impede economic growth.

This is worth repeating:  tax cuts to spur savings (such as preferential rates for capital gains and other tax programs that reward investment) don't really work.  They tend to increase inequality.  Inequality tends to impede economic growth.  So tax cuts to foster savings tends to do more harm than good. 

In fact, in a review of the research literature and empirical studies regarding taxes and savings (see id. at 1080-89, in particular 1084-89 on savings), McMahon shows that "an increased yield to capital might actually decrease household savings.  Over the long term, the United States personal savings rate has varied inversely with the yield to capital."  Id. at  1086 (emphasis added).  And even investment increases from tax cuts only help the US economy if they are invested domestically--a proposition that is highly uncertain given today's international financial markets; otherwise "the benefits of increased wealth ... would inure only to savers, the owners of capital" and not to U.S. workers.  Id. at 1087.

 

Graphs Show It Clearly--the richest are much richer and most of us are poorer

David Cay Johnston has employed a couple of key graphic images that tell a significant story about the way that US laws have favored the rich--including tax administrative procedures that have reduced real audits of the rich and tax laws that have cut the top rates significantly and cut the rates on the "favorite" form of income of the rich to extraordinarily low rates.  See David Cay Johnston, The rich get richer, reuters (Mar. 15, 2012) (noting that the figures he uses here, in 2010 dollars, are from an analysis of IRS data by Emmanuel Saez and Thomas Piketty). [hat tip Francine Lipmann and Tax Prof]

The 1934 economic rebound was widely shared, with strong income gains for the vast majority, the bottom 90 percent.

In 2010, we saw the opposite as the vast majority lost ground. National income gained overall in 2010, but all of the gains were among the top 10 percent. Even within those 15.6 million households, the gains were extraordinarily concentrated among the super-rich, the top one percent of the top one percent.

So while the Great Depression acted as a leveler, the cascading impact of tax and other fiscal policies that are extraordinarily favorable to the rich was little influenced by the Great Recession.  Here're the two telling graphs from the article.

Johnston notes that the story in numbers for adjusted gross income is discouraging: 

Saez and Piketty show that the vast majority’s average adjusted gross income, of which wages are just a part, was $29,840 in 2010. That was down $127 from 2009 and down $4,842 from 2000.

Most shocking? The average income of the vast majority of taxpayers in 2010 was just a smidgen more than the $29,448 average way back in 1966.

At the top, the super-rich saw their 2010 average income grow by $4.2 million over 2009 to $23.8 million. Compared to 1966 their income was up on average by $18.7 million per taxpayer.

The graphic illustration shows just how much the inequality we see today is from the richest of the rich getting an indecent proportion of income growth. 

Is this a problem that needs fixing?  Yes, it clearly is.  We have long recognized the importance of a society where everyone takes part and everyone has at least the minimum essentials for a decent life and a chance for improvement. 

A society where a very few "elite" at the top garner all the benefits of the system and more and more of the income for themselves is not a sustainable society--the top becomes predatory, willing to take gains no matter what the cost to everyone else.  It is the kind of attitude that many who are familiar with Wall Street banks have criticized as endemic to Wall Street culture--and one that was revealed even more starkly by the resignation from Goldman of a star banker who publicly criticized the current culture at Goldman that believes in profits for the firm at the sacrifice of the good of the customer.  See Greg Smith, Why I am Leaving Goldman Sachs, New York Times Op-Ed (Mar. 14, 2012).  Shareholders obviously agree with Smith that the "profit for the firm above care of the client" mentality is wrong.  See Christine Harper, Goldman Roiled by OpEd Loses 2.2 Billion for Shareholders, Bloomberg (Mar. 15, 2012). 

[Goldman is worried--I got a release from a PR firm suggesting that Goldman's profit-making is a boon to the economy and gives its clients great trust in the firm.  I read it and thought--hmm, misses the point.  Smith isn't condemning profit-making per se.  He is condemning profit-making at all costs, and in particular the "greed is good" type of profit-making that creates conflicts of interest with the client that is purportedly being served but would as soon eat a client as eat a steak, if money could be made for the firm (and the trader's bonus) that way.]

If we want the kind of society that gives everyone a chance to have a decent education, we have to quit running down public schools and diverting public monies to support private religious schools.   Hold schools accountable, but quit the wasteful focus on testing and assessment.  Do a little assessment and a lot more teaching.

If we want a more equal society, then we have to change our tax laws so that they don't favor the rich over everybody else.  Reduce the interest deduction, so that leveraged buyouts aren't a way to take a stable working company, make a huge profit by borrowing, and then dump it (either in bankruptcy or out of it, but nonetheless yoked with the debt that got the private equity firm rich).  Get rid of provisions that are primarily beneficial to the wealthy--reinstate a hefty estate tax, eliminate the preferential rate on capital gains, reinstate the phase out of deductions at high income levels, increase the top income tax rate (let the Bush tax cuts lapse in toto or at least for the top earners), phase out the accelerated depreciation schedules, bonus depreciation and expensing provisions, and otherwise return our tax system to a saner progressive model that can support the important basic research at universities and basic public infrastructure development that are the real keys to economic growth.

The right has bamboozled the public with its tiresome but endless class warfare rhetoric pushing corporatist policies that claim that tax cuts for wealthy corporations and wealthy individuals are the way to boost growth and help the majority of Americans have good jobs and decent wages.  It's a lie.  The way to do that is by moving to a more progressive tax system and providing more government funding for basic research (NIH, NSF, etc.) and for public infrastructure (mass transportation, rails throughout America and its inner cities, urban development).  
 

Thinking about Inequality and Fairness in Tax Policy--Part I

As most of my readers know, the underlying theme of this blog is democratic egalitarianism--the idea that institutions within our society should pay attention to inequalities and that policies to redress inequalities are supportive of true democracy.  It is not that we will achieve perfect economic equality--that is not possible and likely not even a desirable end.  But we do need to counter the tendency of human systems to concentrate desirable attributes in a tiny powerful elite.  That is, human systems tend to redistribute desirable attributes upwards.  Income, wages, wealth, health care, housing, natural resources, human capital opportunities--all these things that people need to live a decent life tend to be redistributed and allocated to those who already have more of them.  Property begats property, and putting the owner class first begats a situation in which the owner class owns even more of whatever is valuable to own, and therefore commands, even more, the ability to keep the majority of the population in a state of quasi-servitude.  In a democratic society with a primarily capitalist economy, one of government's primaryh purposes is to enable individual freedom for all by countering the brute power of the capital-owning elite and redistributing those resources downwards.

One way that a majority of Americans has favored for achieving this necessary justice result is progressive taxation policies--taxing the wealthy/higher income at a higher rate (or even on a broader base--to wit, the corporate tax).  When there is progressive taxation, the gains that the elite have made merely because they are in the elite and hold the keys to power are marginally restrained.  But more importantly, those revenues then can be used to fund government programs that expand public goods and create opportunities for the vast majority with significantly fewer resources, through programs like unemployment compensation, health care, public education from K-12 to university, public transportation, etc..

So we need to ask a few questions about our system today.  Is it working or is the tendency for income, wealth and other favorable attributes to accumulate at the top overpowering the means of redress that exist?  And does the population have a clear understanding of the democratic egalitarian principle, so that people will vote in the best interest of the continued functioning of a democratically premised society?

I fear the answer today in the US is no, to both questions.  The US has long used its military might to support its wealthy elite and their multinational corporations.  Today, that seems even more exaggeratedly so. 

Think about the invasion of Grenada, Iraq, Afghanistan and the continuing erosion of human rights (read--the rights of ordinary Americans to go about their lives freely choosing how they will live and where they will go and what they will do) which has inevitably fed the military-industrial complex of arms manufacturers, private mercenary outfits, natural resource extraction, financialization of the economy and general globalization trends, all of which are part and parcel of the corporatist agenda for ensuring continuing power to Big Business and its owners and managers. 

And the populace is ill-informed about the true mechanisms of individual freedom.  They have been sold a bill of goods by the right-wing so-called "think tanks" supported, by and large, by wealthy owners of Big Business and the multinational corporations that benefit most by keeping the population ignorant.  The fantasy concept of a "free market" has been pushed as the answer to all ills, even though there is no such thing as a free market.  (And in fact the wealthy elite and Big  Business have benefited from scores of policies designed to provide them distinct advantages, from CIA and military support against popular leftist regimes in Latin America that threatened multinationals grip on natural resources and labor there, to tax and spending policies in the US that favor large corporations over small, localized businesses.)  The people have been told that if only the government will support the "competitiveness" of its multinational corporations, jobs and good fortune will eventually trickle down to them, even though of course the immediate observable result will be additional wealth to the owners and managers of the multinational corporations.  The jobs and good fortune don't trickle down, however.  With no commitment to place or people, multinationals and their owners and managers take the rentier profits and shove them into their own safes (often more investment in exploitative industries in third world countries and private equity ventures that exploit workers by dividing and conquering to eliminate unions).

Think about the current focus of the ultra-right House leadership and Senate minority and the ultra-right governors in many of our states today.  They use divisiveness to turn private workers (long deprived of any real rights to associate in unions by law and practice, and therefore suffering through a decades-long diminution in both their wages/incomes and their general welfare  from health care, pension rights, and job security) against their public counterparts who have generally maintained somewhat stronger unionization and and benefit rights, in order to justify even further curtailment of public employee unionization and benefit rights.  They argue deficits (after supporting costly militarization and warmongering in Iraq and Afghanistan, privatization, deregulation and other legislation intended to push us into the greatest deficits ever) in order to stifle all government programs existing to aid the non-elite classes, such as Social Security, Medicare, Medicaid, and unemployment compensation.  They suddenly find a problem with increasing the debt limit, after borrowing trillions to come to the aid of their bankster cohort, without imposing conditions that would require the banks to treat ordinary Americans fairly.  They argue for the elimination of the little progress made from 2008-2010 in enacting a weak form of health care reform (weak because it favors the Big Insurance companies and their managers and owners' continued rent profits rather than including some form of single-payer, such as the "public option" in the national exchanges) and financial reform (weak because the Dodd-Frank legislation failed to create a fully independent consumer financial protection agency and failed to restrain sufficiently banksters' ability to gamble other people's money to make windfall profits out of a proprietarily managed system that operates to their favor and results in privatization of gains with socialization of losses).  They stand at a line in the sand against all tax increases for the wealthy, on the claim that the wealthy are the people who create jobs (see Eric Cantor on the position that no debt limit increase is possible without a guarantee protecting the wealthy from tax increases), even though the wealthy are not entrepreneurs, have sufficient wealth to invest in their businesses even with high tax payments, and don't do it. 

New jobs will be created when there is a broader middle class with extra money to spend on things that make life better, not when the wealthy have even more money to sock away somewhere because they can't possibly spend all they have.

So if we ask the question--what, then, is a fair tax policy, isn't the answer fairly straightforward?  In any context, it is the policy that favors the most redistribution from the elite to everyman while raising sufficient revenues to provide adequate investment in public infrastructure that moves everybody forward and human capital development (like public education).

Readers, what say you?

If not, why not?  Readers comments welcome.

Fundamental injustice: Charles Hugh Smith's Take

 Yesterday I commented on Robert Reich's book, After Shock, in which he urged us to recognize the fundamental cause of the 2007-2008 Great Recession lay in our imbalanced economy in which income and wealth is becoming more concentrated and consolidated in the hands of wealthy elites, while the vast majority of Americans are stagnating or struggling just to hold even.  Others have noticed the long-term consequences of such substantial income and wealth inequalities.  For example, Charles Hugh Smith writes, on of two minds.com, Apr. 20, 2011, about "The Fundamental INjustice that is Poisoning the Nation."

There is a fundamental injustice that is poisoning the soul of the nation, and if it is not openly addressed then the nation will face the explosive consequences of institutionalized injustice. (bolding in original)

Simply put, it is this: those responsible for the nation's financial crisis and its catastrophic after-effects are not paying for the consequences of their actions--it is the innocent, those who were not responsible, who are paying the price.

You can call it whatever you want: the Anarchy of the Super-Rich (as per Paul Farrell), the Financial Power Elite, the financial Oligarchy, Plutocracy or Corporatocracy, or the unprecedented concentration of financial wealth and political power in a financialized post-industrial economy. Whatever you call it, we all know this class of financiers and its minions got away with high financial crimes.

The biggest quibble I have with this is that it limits the "crime" to the "financiers and its minions."  In truth, the guilty are the entire upper crust--CEOs, CFOs and other high-priced managers of multinational corporations and the wealthy elite who own most of the stock, municipal bonds and other financial assets--who continue to benefit extraordinarily from the low cost of borrowing, offshoring, de-unionization, privatization, deficit-focus, and "entitlement narrowing" mentality that has been pushed by right-wing think tanks who still proclaim that just getting government out of the way (including by use of the favored three: deregulation, privatization, and tax cuts) so the free market decides winners and losers will create jobs and stimulate growth.  Of course, in this age of "truthiness" rather than truth-telling, none of the pushers bother to acknowledge that the favored three policies have apparently had exactly the opposite effect throughout the four decades of the reagonomics experiment--more concentration of wealth and income at the top; puny economic growth; and fewer jobs (and especially fewer good jobs) for the overwhelming majority of Americans.

 Smith goes on to make the point that I have been hammering with my focus on democratic egalitarianism--unless we ride herd on the forces that are consolidating wealth at the top, using tax policy and other policies to do so, we face the rapid deterioration of the institutions that make possible a democratic society.

[T]he really catastrophic losses are to the foundations of democracy and the economy. Democracy has been subverted--...--and the economy has been incentivized to favor poisonously addictive financialization and the shadow institutions of corruption, fraud, embezzlement, favoritism, collusion and misrepresentation of risk. This might be summarized as the protection of vested interests, engineered and overseen by the partnership of the ever more intrusive Central State and the nation's Financial Power Elite.

There is a second part to this fundamental injustice: look who will pay for the bailouts, guarantees and the interest on the borrowed trillions. ... Those who the Central State can easily tap: taxpayers who earn most of their income from wages, and those politically weak players dependent on government payments.

Now that the bills of the bailout are coming due, the State isn't going after GE for more taxes.  ...  No, the politically easy thing to do is raise taxes on wage earners and trim entitlements, because all the government needs to do is send down the orders and it is done: the taxes are withheld and the bennies trimmed.

Not on the President's Budget or the House GOP's rampage against ordinary folks; On the Inequality Gap in the US

I'll write soon on the Obama budget proposal, I promise.  Right now I am trying to let my snarkiness fume off, as I wonder how anyone could think Obama is a liberal when he has so bought into the right wing's propaganda-heavy effort to use their (fake) concern about the deficit to justify the destruction of the progressive state established under FDR.  What they are aiming for is the complete dismantlement of Social Security and Medicare, while they satisfy Big INsurance in the dismantling of the modest effort we've managed towards heatlh care reform.  They want to freeze public worker pay for years and support efforts by states to renounce their obligations towards public employee pensions and health care/  They've already voted for increasing the tax burden on the working poor when they passed an extension of the absurd Bush tax cuts (primarily benefitting the wealthy and big corporations) while refusing to extend the Obama Making Work Pay program (primarily benefiting the working poor): that tax increase for the poor/tax cut for the rich bill passed in December meant a significant tax increase for 51 million Americans in the bottom of the income distribution was used to pay for more and more egregious handouts to the filthy rich (people and corporations) such as the extension of the 2003 dividend tax rate at 15% and the extension of the Bush tax cuts, and the ridiculous extension of the R&D credit, the section 179 expensing, and similar provisions. 

Meanwhile of course, the House GOP is planning to cut funding for all those things it has hated through the years because it represents what the liberal half of America thinks is just ordinary American caring for one another.  They plan to zero all funding for family planning--that isn't because those services aren't needed, it is because their aim is to target all the stuff they don't like.  See House GOP Declares War on Planned Parenthood, Mother Jones, Feb. 9, 2011.   They want to cut things they count as wasteful--let's see, that would be pollution control and environmental safety--probably including banning the EPA from regulating deadly carbon monoxide (that stuff that makes the air a killer for us, which of course must not be a pollutant since Big Business is the main producer of it, in the GOP unscientific model of the universe), food safety, law enforcement, education spending, high-speed rail (see Samuelson's ridiculous op-ed in the Washington Post today), nutrition support for poor pregnant women (can't have an abortion before birth on federal dollars, but you can't get food so your baby will be healthy either!).  For more than you need on all this, see Challenging Obama, House GOP calls for deep cuts, Espo & Taylor, AP, Feb. 9, 2011. They want to force the entire country to abide by their moral set--a kind of establishment of fundamentalist religion via the House's funding provisions.  And remember, this is the same group that passed a $1.3 to $1.6 trillion tax cut during Bush's first year that was entirely financed by borrowing, so that they could give a huge tax cuts to the wealthy.  This ain't got nothing to do with the deficit.  It has everything to do with seizing a moment of public ignorance to use to undo worthy programs and keep spending on the Reagan misguided bloated and continually over used military budget.

So folks, after my snarkiness recedes a little, I'll try to write about the budget, the House's idiocy, and the typical commentary on it.  Right now, I can't bring myself to say a word about them.

In the meantime, here's something worth looking at.  Before It's News, "9 Pictures of the Extreme Income/Wealth Gap", Feb. 14, 2011.

The writer claims that if people only understood the enormous concentration of wealth in this country and its deletrious impact on  politics, democracy and people, they'd stand up and demand (a la Tunisia and Egypt?) that our politicians do something about it.  I suspect that is true.  That is the main reason that the mainstream media--especially the Fox News and Rupert Murdoch Wall Street Journal type right-wing propaganda centers make sure that they talk all about the 'entitlements" that (they claim) are breaking the fiscal back of the country as those socialistic things we do for public employees and poor people etc, and fail to mention the far greater number of "entitlements" for the wealthy that are what is really breaking all our backs (from the huge proportion of the benefit of the tax expenditures in the Code to the way we build roads, situate police, and service needs of propertied people). 

Here's a noteworthy paragraph from the article.

How Much Is A Billion?

Some Wall Street types (and others) make over a billion dollars a year – each year. How much is a billion dollars? How can you visualize an amount of money so high? Here is one way to think about it: The median income in the US is around $50,000, meaning half of us make less and half of us make more. If you make $50,000 a year, and don’t spend a single penny of it, it will take you 20,000 years to save a billion dollars. . . . (Please come back and read the rest of this after you have recovered.)

What Do People Do With SO Much?

What do people do with all that money? Good question. After you own a stable of politicians who will cut your taxes, there are still a few more things you can buy.

Remember that we had some fund managers with multiple billions of profit in one year.  And we have typical MNE corporate CEOs making 7 or 10 or 20 million annually.  The CEO with a $20 million annual salary makes more in a day than his average workers will take home in an entire year.  Does the CEO really add that much--is it true that the enterprise couldn't exist, couldn't function without that person in that office, that the productivity of the workers would stagnate?  One has to doubt that, since what we hear is that CEOs are often the causes of huge losses, as they over-acquire and over-leverage their enterprises to up the ante on their own performance pay.

And of course we have had fund managers getting compensation (in their "2 and 20" or "5 and 50"--20% or 50% of the profits of the partnership they manage) with both deferral and capital gains preferences, in the case of private equity funds and real estate partnerships in particular but also in many cases with the hedge funds.  My My, that's a nice perk for the very wealthy.   But do they contribute so mightily to the US economy as to be worth this kind of excess?  No way.  Paulson--remember, the guy that garnered all the praise for having foreseen the mortgage loan crisis and shorted those CDOs that he talked a bank into filling with bad loans, making $20 billion for his fund in the year of the breakdown?  That naked short is no service to the economy.  The demand for bad loans drove the production of them, and the bad loans are at the heart of the mortgage loan meltdown that has millions of ordinary Americans out of their home looking around them wondering what happened to their own American dream.  Naked short speculation was nothing but devastating and Paulson is no here.  (See Yves Smith, Naked Capitalism, for more, among others.)

So what kind of things can these oligarchs who reward themselves at our expense afford, according to the website?  A billion'll buy you, for example:

• a thousand expensive Maybachs, a car costing $1 million apiece
• 137 years of nights in the Burg Al Arab in Dubai at $20,000 to $30,000 a night
• ten $100 million yachts
• 25 Gulfstream G550 private jets, at  about $40 million a pop
• 40 private islands, castles included (at about $24.5 million each)
• 125 estates at $8 million each 
• 200 watches that cost $5 million each

The point of all this is that these prices themselves are ridiculous, fostered by the huge wealth now available to America's super-elite, the result of the "inequality bubble" that has put more and more of the product of millions' of people's hard labor in the hands of an oligarchic few.   There are people at the top who "are amassing multiples of billions, paying very little in taxes and using it in ways that harm the rest of us."    Resources are concentrating, heavily, at the top, in ways that are fostered by the tax policies and the spending policies supported by the GOP. 

"Between 1979 and 2008, the top 5% of American families saw their real incomes increase 73%, according to Census data. Over the same period, the lowest-income fifth (20% of us) saw a decrease in real income of 4.1%. The rest were just stagnant or saw very little increase. This is why people are borrowing more and more, falling further and further behind. (From the Working Group on Extreme Inequality)."

***

[One of the bad results of such inequality is the psychological effect.] People need to feel they earned that they have earned what they have, and develop theories about why they have so much when others do not. Bizzare and cruel explanations like Ayn Rand's psychopathic theories about "producers" and "parasites" take hold. Regular people become little more than commodities, blamed for their misery ("personal responsibility") as they become ever poorer.

 

 

Tax Bill's "Active Financing" Giveaway to Multinationals

Notice to Readers:  A Taxing Matter will be online sporadically through the holidays.  Regular postings will return on January 10.

One of the provisions of the $858 billion tax cut bill passed in the lame-duck session is another two-year extension for the "active financing" exception to the subpart F rules for taxation of the passive income of foreign controlled corporations.  See Eggen, Active Financing Exemption to Cost Taxpayers $9 Billion, Washington Post, Dec. 23, 2010.

The beneficiaries of this provision are big banks with multinational operations and  other big businesses who use the creation of their own financing subsidiary as a way to lower even further their already low US taxes.  Remember that although the US statutory rate for corporations is somewhat higher than the norm at 35%, the effective tax rate is in fact lower than the norm, with US corporations among the lowest taxed of all the OECD nations.  That means that the US is effectively a tax haven for corporations.  Part of the reason that is so is that there are so many exceptions and special provisions worked into the corporate tax regime--exceptions like the "active financing" exception.

The active financing exception was supposedly eliminated some time ago.  But lobbyists worked hard to get a transitional extension of the provision.  And every year since then they've worked hard to get Congress to push through yet another extension and they've increased their efforts to get Congress to make the exception to Subpart F rules permanent.

This is similar to the way the research credit has worked.  There is no question that research expenditures need to be taken into account one way or another in figuring a company's tax liability--new products depend on somebody doing the research.  But there is a big question about HOW those costs should be taken into account.  Under a conceptually rigorous tax system, research expenditures would likely be capitalized.  But our system has long permitted a deduction.   The credit for R&D is quite a different thing, and not at all justifiable economically and certainly not justifiable as a subsidy that will be worth the price by stimulating growth.  INstead, it is a pet project of corporate lobbyists granted an extension each year by Congress that is essentially a pure giveaway--reducing dollar for dollar the corporate tax liability by the amount of money spent on whatever counts as R&D.  The problem with that, of course, is that it generally is not growth-stimulating basic research (stuff that is more often done by university or government researchers than by corporate labs) but instead merely profit-enhancing fiddling with a product that allows the company to extend already overly long patent protection (and enjoy monopoly-like profits for even longer) or develop something that differs little from its predecessor product but can be labeled "new" for marketing purposes (and enhance monopoly-like profits for even longer).

Those proponents of lower corporate taxes--who have been lobbying Congress steadily on these issues for decades--have gotten Congress to pass a large number of corporate-friendly provisions with the purported purpose of stimulating economic growth that are really just subsidies for the biggest multinational corporations from Big Banks to Big Oil.  So we have seen accelerated depreciation, and first-year partial expensing, and percentage depletion and "bonus" depreciation, and complete expensing--all much more generous than the true economic depreciation and all profferred as a way to stimulate growth. 

There is not much empirical evidence to support that this kind of tax treatment results in growth.  It correlates instead with increasingly steep increases in compensation levels for top managers (moving from 20-40 times the average worker to 200-400 times the average worker, with some CEOs being paid in a half a day what their average worker makes in a year) and with bigger payouts (either through stock buybacks or dividends) to wealthy shareholders (taxed now at extremely preferential rates compared to the rates of tax paid by ordinary workers on their income and, in the case of wealthy managers and shareholders, likely invested in offshore gambits rather than plowed back into the startup of new enterprises in the US).

The active financing exception fits right in with these others.  It is a boon for companies like GE, that use their controlled foreign subsidiary to serve as a financing arm for foreign sales and thus avoid US taxation.  But wait, you say.  Doesn't that do just the opposite of what is claimed?  Wouldn't that make foreign sales easier, cut tax revenues in the US, and do nothing but encourage GE to increase its foreign manufacturing and sales rather than increase its manufacturing in the US and exports from here?  Of course.  Moreover, by giving companies an exemption for this type of foriegn income AND by having done one almost tax-free repatriation program in 2004 that was supposed to increase domestic investment but instead went to share repurchases (good for wealthy shareholders) and often correlated with huge worker layoffs, the policy is likely to be more associated with domestic corporate decline than with domestic corporation expansion.  When one considers in addition the fact that the Great Recession is a direct result of finance-friendly policies gone awry, leading to too much interconnectedness among financial institutions, too much speculation in derivatives like naked credit default swap, and too much of a casino mentality generally among financing entities, the idea of providing a $9 billion bonus to offsore financing bogles the mind.

This Congress (and regretably this President) are too corporate friendly to see the problem.  Mark my words:  corporatism and all that it implies in terms of increasing social inequality and growth of an influence-heavy, uncaring wealthy elite that can call the shots in its own favor is the single most important topic that every American should be considering in making decisions about how to vote, who to support, what kinds of institutions we should support and how to interpret what people (especially judges) say about justice, fairness and equal opportunity over the next five decades.  We should all make a New Year's Resolution to write one letter to Congress every week dealing with some aspect of this issue.  If we don't shift this ship of state to at least treat ordinary workers equal to the corporate oligarchs, the democracy we all take for granted will cease to exist.  Anti-trust, unions, and democratically egalitarian tax policies are all needed in this effort that should break up the megalithic multinational corporations (especially the "too big to fail" banks), permit workers to form unions more easily rather than being harassed by their employers (a majority of American workers want to unionize but very few are in unions because of the way our national laws have shifted to favor employers' efforts to keep unions out so that the company managers and shareholders can harvest all of the productivity gains for themselves), and eliminate the many tax provisions that continue to redistribute income upwards to the elite (including most of the mortgage interest deduction, the charitable contribution deduction, expensing provisions, and of course the preferential rate for capital gains and the nontaxation of much of the income of the wealthy).  Although not the biggest item, the international taxation provisions like the active financing exception that permit large corporations to defer taxation of their income need to be eliminated.

If Dems go Down--outlook for taxes, financial industry, military and war, unions and public employees...

I voted this morning in the mid-term elections.  Did you?  I am nonetheless a frustrated citizen who is deeply worried about the future of my city, my state, and my country.   And while I am deeply disappointed in the Dems' ability to translate progressive ideas in to working legislation and change, I am even more deeply disappointed in the loss of a moderate GOP voice and the way most of the GOP candidates embrace the corporatist agenda.

While I understand and even empathize with some of the anger and frustration expressed by the Tea Party groups, I am very worried about their impact on this election in light of their apparent lack of comprehension about the essential problems facing us and their failure to understand that it was the four decades of Reagan-inspired policies of deregulation, militarization, privatization and tax cuts that got us deep into these problems culminating in the Great Recession of the Bush Administration and the too-lax TARP bailout provisions for banks.  (The bank bailout was, I believe, necessary by that point, but it could have been handled--as I argued at the time--by methods that would have exacted a much higher price from bank managers and shareholders, without the Paulson-originated, bank-friendly provisions that allowed bankers to retain (privatize) their gains while casting on us (socializing) their losses.) 

The Tea Partiers, in other words, have muddled ideas that forecast wrong-headed policies on taxes, finances, income inequality, the role of unions in protecting the U.S. middle class, and the role of the big multi-national corporations in influencing government to favor their own businesses and the rich who own or manage them (via lobbying and especially since the Supreme Court's Citizens United case, via the use of huge sums of money to influence elections and essentially buy legislation made to order).  The Tea Party groups in particular misinterpret the corporatist agenda that pits large corporations and their wealthy managers and shareholders against the vast majority of hard-working, middle class Americans and that casts unions (in spite of their undeniable flaws and failures)  almost as evildoers, rather than what they actually are--the only successful means that the middle class has to create a level playing field so that workers can get their fair share of productivity gains mostly produced by them.  Further, the Tea Party groups seem incapable of recognizing that their visibility and influence is being bought by those very powers that consistently work to suppress middle class gains--the anti-tax, anti-union, pro- "free market" purported think tanks and lobbyists and wealthy businessmen and the right-wing media empires of huge corporations such as the Sinclair stations, the Murdoch media empire (Wall Street Journal, Fox News, etc.)-- such as the Koch brothers and Dick Armey's so-called Freedom Works. 

"Free market" is in quotes because there is no such thing as an absolutely free market: to the extent that we shift the balance too far towards business "freedom" and too far away from consumer--and environment--protecting restraints, we take away everyone's freedom to live decent lifestyles in a sustainable economy within a sound environment.  Markets are wonderful, but the ability of businesses to compete "freely" in fact requires a number of restraining and opposing influences to avoid the inevitable development of self-perpetuating monopolies and oligarchies from asymmetries of information combined with the natural biases and follies of humans (including the corruption from money and power, the self-interested actions that can cause significant detriment to others from sheer greed), not to mention the vulnerability of ordinary people left to suffer from the brute-force harms of such "free" markets.   Government regulation/remedies (administrative and judicial) and worker unions are two necessary restraints on unbridled corporatism. 

So let's hypothesize that many of the right-leaning GOP and Tea Party candidates are elected.  Here's my prediction of the policies that will be pushed by this right-wing coalition. 

1. Taxes:  likely passage of various bills reducing corporate taxes either temporarily or permanently, including 100% expensing, repeat of the 2004 almost tax-free repatriation of foreign profits, further extension of tax-free restructuring provisions (the Bush Treasury through regulations practically gave away the store, and there appears to be a wholesale commitment to continuing the rush to make gain recognition as a part of a tax-free reorg a thing of the past, and make loss recognition as a part of a tax-free reorg a thing of the present); likely attempt to make the Bush tax cuts permanent for everyone including the wealthiest amongst us or at least to extend them for another 2 years until the 2012 election possibly restores a GOP president to make them permanent; likely renewed attempt to repeal or sharply reduce the estate tax that even in its pre-Bush form was paid by a tiny minority of estates each year and paid at a very low effective tax rate by many of those few that paid it; discussion of tax cuts by the GOP/Tea Partiers won't address the role these cuts play in creating deficits or in reinforcing a harmful level of income inequality that threatens the very heart of democratic governance.  We definitely won't get legislation cutting the carried interest entitlement out of a right-dominated Congress--the capital gains and deferral advantages that private equity and hedge fund managers glean through their interpretation of the partnership rules for "profits-only" interests would be allowed to continue, generating multi-million dollar low-taxed income and encouraging a continuing distortion of the allocation of endeavor towards this high-income, low-tax-producing work and away from other endeavors that would be better for the economy (such as engineering rather than financial engineering, etc.).  In other words, we can expect a resurgence of the many-times-now-proven-wrong-"freshwater"-economic-free-marketarian and Laffer-style budget and tax ideas, carried out even more extremely!
2. Dodd-Frank financial institution regulation:  attempt to undo or deeply eviscerate many of the protections for the financial system disliked by the Big Banks, particularly the (limited) ban on proprietary trading, potential for naked credit default regulation, and  the existence and powers of the Consumer Financial Protection Agency (which is the primary part of the bill that addresses the way that big banks use their clout to collect from customers at every opportunity while making it enormously hard for customers to fight back when they are treated unfairly by the banks)
3. Social Security:  drive to dismantle post-war protections for the poor and elderly, through partial or whole privatization and reduction of benefits; use of the worries about the deficit as the power for wielding the ax cutting old age security benefits (in spite of refusal to forego any of the Bush tax cuts which will cost $5 trillion over ten years, if extended). Job creation will be touted as a rationale for most of this, though it is a very unlikely outcome.  (There will be no further stimulus package of public infrastructure spending which would have a decent chance of saving, creating jobs.)
4. Health care:  drive to dismantle the progress made towards a fairer health insurance system out of a distorted understanding of the way that non-insured individuals require insured individuals to cover their expenses and a failure to comprehend the way that health insurance companies benefit from the ability to arbitrage 50 states' rules to select those that serve them best and serve ordinary Americans least
5. Environmental and Global Warming Efforts: drive to dismantle anything already done to address the significant harms from global warming and environmental pollution (including toxic chemicals in our land, air and waterways); attempt to open the Arctic National Wildlife Refuge to oil drilling; attempt to give all the rest of the US reserves to the oil companies along with even more tax cuts for the natural resources extractive industry (which will be touted as "incentives" for development); attempt to peel back protections for endangered species, particularly wolves and small creatures whose protections are seen by the right as "threatening" lucrative developments in wilderness settings; attempt to ensure that the National Forest Service serves the forestry industry with even more roads and cheap sales, rather than putting forest and wilderness protection goals above commercialization/privatization of the national forests
6. Gun laws:  attempt to peel back gun registration provisions--moving even closer to the absurd "wild west" model apparently sponsored by activist right-wingers on the Supreme Court providing for open carrying of handguns in bars, coffee shops, stores and public meeting places
7. Unions/public employees:  attempt to ensure that the corporatist agenda succeeds in the workplace by continuing the process of distorting American's views of the role of unions in protecting workers from corporatist power and by weakening even further American workers' ability to organize and by giving employers even more "rights" in the context of a union drive; in particular, at the state level we can expect drives to cut public employee pension benefits and cut state funding of pension plans, and at the national level we can anticipate continued demonization of federal employees as lazy bureaucrats protected by public employee unions from merited discipline and firing
8. Elections:  refusal to pass laws forcing full disclosure of all corporate donations related to elections on the corporations' financial statements, SEC filings and on publicly available filings of all 501/527 organizations receiving corporate donations; refusal to write disclosure rules forcing public information regarding major individual or other noncorporate donors to organizations engaged in election campaigning
9. Military/war:  little or no commitment to removing the impediments for gay servicemen and women;no commitment to cutting military expenditures and even likely some support for pushing the Pentagon to continue with expenditures that it has already determined are inappropriate and wasteful; little commitment to pushing for a pull-back from foreign invasions/occupations and even possible push for renewed "surges" in Afghanistan; likely commitment to increasing military support for Israel in spite of its continuing violation of international law on colonization of occupied territories; likely push for aggressive response to Iran, including warmongering

Worth noting:  if the election results in the GOP controlling the House and the Dems the Senate (and presidency, of course), we will likely have gridlock.  The GOP agenda won't be likely to be enacted because of that gridlock.  Accordingly, everything above is in terms of where their attempts, commitments will be, not what they will succeed in doing.  But what will they actually do?  Mark Thoma, Economist's View, Gridlock? Not in Politics (Nov. 2, 2010), speculates that they will "take advantage of this by introducing legislation they know won't pass but scores political points by forcing Democrats to vote against it...then use the noise machine to talk about how terrible this is for America.  We'll see Tax Cuts for Working Americans (where you give a few pennies to the masses, much, much more to the upper echelon, then, since there are so many people getting small breaks, claim that the majority of the tax cuts go to the middle and lower classes), the Deregulation of Apple Pie Act (which somehow turns into an attack on the FDA, financial regulation, etc., etc.,), we'll see poison pills attached to legislation that must be passed to operate government...."  Thoma also castigates the Dems (appropriately, I think) for failing to "take its arguments to the public and convince them that they were, in fact, fighting for their interests. ... Instead, they allowed the other side to take the initiative and demagogue the policies without much of a challenge."  When will the Dems ever learn?