ataxingmatter

Letting rates go up for the rich

When I was asked by the New York Times to write a brief op-ed to counter arguments made in the Washington Post that the economy would be helped by cutting taxes for the rich (so that they stay the same as they were under the Bush temporary provision), I jumped at the chance.  See Extending the Tax Cuts for the Wealthy--the discussion continues (ataxingmatter, with link to the New York Times Open Forum).  It seems quite clear that the "trickle-down" theory that assumes that if you help the rich, the world will be better off for all the rest of us has been clearly proven wrong by the four decades that it has held sway over economic, tax and social policy in the United States, starting with the presidency of Ronald Reagan.  We have not had the stellar growth in jobs and opportunities for the middle class workers that the "reaganomics revolution" promised for good reason--those policies simply give more to big business and the rich, and do nothing to assure that any growth that does occur is shared with the vast majority of ordinary Americans.

 Some of the comments to that post were from people who made more than $250,000 a year, complaining that they were not rich and why should their taxes increase.  As I noted in a comment on the Times website, this is a common occurrence.  We humans measure ourselves by those around us.  If you make $300,000 a year, you probably know lots of other people who make about $300,000 a year and then a few who are clearly even better off than you are, making a half a million or a million or more a year.  Certainly, many of the partners at the law firms in New York make a million or so a year, so that associates who made $200 thousand or so a year may have felt that they were "not rich" in comparison to the rich partners with whom they worked.  But the fact is, anyone making that much is in the very privileged set--just not necessarily in the absolutely most privileged set.  Being privileged to decide whether to buy private horsebacking riding lessons in Manhattan or whether to have a private in-ground pool in your back yard or whether to send your children to one of the ritziest colleges in the northeast is to be rich.  For those with average incomes, sending their children to any college at all is often an impossible dream, and all those "extras" that the well-to-do think of as "must haves" are pipedreams.

The New York Times article on the Definition of Rich Now A Tax Issue, New York Times (Sept. 30, 2010) spends a lot of time before it gets to that key point.  Sure, some families that make more than $250,000 may think they identify more with people who make less than with multimillionaires.  But odds are they haven't really ever focused on what life is like for the majority of Americans who make less than half what they do.  As Brad DeLong says in the article, those in the top 5% are comparing themselves to those in the top 2% rather than looking down at multitudes with less assets than they have.  To quote DeLong:

It is pathetic and embarrassing that somebody with five times the median household income, someone in the top 2 or 3 percent of the population, thinks of himself as just another 'average Joe.'  Why don't you ask someone who makes $40,000 or $50,000 a year if they have a lot in common with a family making $250,000.

 

Inequality as a critical cause of the financial crisis?

As readers know, this blog is premised on a concept that I have called "democratic egalitarianism." that This is the idea that sustainable democracy requires forces that push economic and other resources towards a more equal distribution rather than permitting resources to accrue more and more to the already powerful and well-resourced amongst us.  Redistribution, that is, occurs all the time in every economy.  Much of redistribution is redistribution upwards--power accrues power; wealth accrues wealth; and accordingly opportunity accrues opportunity.  Taxation is one of the mechanisms that society can use to counter the natural tendency towards redistribution upwards.  In a democracy, that mechanism is necessarily and appropriately limited, but it can be servicable on a small scale.  Thus, mechanisms such as income rather than consumption taxation, progressive tax rates, taxation of large estates passed to beneficiaires, exemptions and refundable credits sufficient to ensure a sustainable livelihood for those who have (and earn) least, and similar provisions can serve to switch the default direction of redistribution from 'redistribution to the have-mores' to 'redistribution to the have-nots' at least to some degree.

So how does that view of democracy and the need for "democratic egalitarianism" impact upon one's understanding of the causes and appropriate cures for the financial crisis that expanded into a deep recession bordering on depression?

In my own analysis of the financial crisis (to be published by the IMF, and currently available through SSRN here), I focused primarily on the deregulation/privatization/and tax cutting at the core of the reaganomics trickle-down ideology and the way that led to a predatory casino banking mentality that in turn was fed by the ease of speculation made possible by financial product innovations like naked credit default swaps.  Similarly, the risk inherent in this type of banking was increased as institutions consolidated, increasing in resources and in interconnections with other financial institutions (including through the use of new-fangled derivatives). 

I didn't focus, though, on a singular fact about our society that relates to our deepest economic woes during the Great Depression as well as our current Great Recession--the rapid growth of inequality, and the attitudinal changes that likely accompany that (e.g., rampant expansion of greed as a primary motivating factor for human behavior, acceptance of incredible differences in access to resources and influence over governmental decisions without an acknowledgement of corresponding obligations, predatory behavior by lenders and other businesses).  But surely it is noteworthy that of all the remedies that could have been taken to address the economic crisis that developed out of the financial institution crisis, the only one that would have kept more people in their homes and protected entire neighborhoods and cities from the blight of foreclosed properties--permitting bankruptcy adjustments of home mortgage loan principal amounts--was never a real option.  Banks ended up being more important than millions of homeowners (and the communities that were impacted by their homelessness and joblessness).

Raymond H. Brescia, at Albany Law School, has filled that gap, with an article titled The Cost of Inequality: Social Distance, Predatory Conduct, and the Financial Crisis (draft Aug. 17, 2010) (available on SSRN).  He starts with a pair of quotes that are noteworthy in themselves. 

An imbalance between rich and poor is the oldest and most fatal ailments [sic] of all republics.  Plutarch

The injunction of Jesus to love others as ourselves is a recognition of self-interest . . . We have to tolerate the inequality as a way to achieving greater prosperity and opportunity for all.  Lord Brian Griffiths, Vice Chairman, Goldman Sachs International

 In the abstract, Brescia explains that the "stunning increase in income inequality...was reminiscent of ... the years leading up to the Great Depression."   In the paper, this is illustrated with the following graph:  Table Three: Share of Total Income Going to Top 10%, id. at 14.

 

Brescia notes "several possible explanations for the potential connection between rising income inequality and the great strains on the economy it causes.  Did rising income for certain sectors lead to an ability to use that income to influence po,icymaking in such a way that favored those sectors?  Did such income inequality pressure politicians to promote policies that favored easy access to credit as a way to mollify lower income constituents who might otherwise grow frustrated with their own stagnating wages in the face of such inequality?"  He offers a third explanation--"that both income inequality and racial inequality created greater social distance and this social distance, in turn, led to greater predatory conduct... that turned a mortgage market into an economic killing field."  The abstract further notes critical insights from looking at the crisis from the perspective of inequality data.

1) the greater the income inequality in a state, on average, the greater the delinquency rate in that state.

2) the greater the generalized trust in a state, the lower that state's delinquency rate

3) the higher the social capital in a state, and the higher the level of volunteerism in a state, the lower its delinquency rate

4) the higher the median income in a state, the higher the delinquencyrate in that state

5) an index of indicators--income inequality within a state, the size of the African-American population in a state and the median income of the African-American population in that state--reveals a strong correlation between these indicators and delinquency rates...[suggesting that] middle-class Afircan-Americans were targeted for, and steered towards, loans on unfair terms, precipitating the foreclosures that are now concentrated disproportionately in communities of color.

 

 

 

Overpaying CEOs

The Wall Street Journal reports today on a study by three academics on CEO pay.  They are Streedhari Desai (Harvard), Jennifer George (Rice) and Arthur Brief (Utah), and their study is "When Executives Rake in Millions: Meanness in Organizations" (available on SSRN).  Here's the abstract:

The topic of executive compensation has received tremendous attention over the years from both the research community and popular media. In this paper, we examine a heretofore ignored consequence of rising executive compensation. Specifically, we claim that higher income inequality between executives and ordinary workers results in executives perceiving themselves as being all-powerful and this perception of power leads them to maltreat rank and file workers. We present findings from two studies - an archival study and a laboratory experiment – that show that increasing executive compensation results in executives behaving meanly toward those lower down the hierarchy. We discuss the implications of our findings for organizations and offer some solutions to the problem.

Trends in this country are ominous. 

• Wages for the middle class have stagnated, especially with the waning power of labor unions to demand an adequate share of corporate revenues (a result of the decades-long effort of neocons and multinational corporations to kill labor unions and make new unionization efforts in previously nonunionized industries very difficult through generous provisions for employer control and significant hurdles for union approval). 
• The middle class has therefore depended more on debt than it should, a dependency that has been encouraged by the financialization of the economy and the hunger of the financial institutions and shadow banking system for "product" from which it can reap multiple layers of fees and excess profits.  That easy flow of credit led directly to the financial crisis that caused the Great Recession.
• Meanwhile, those at the top have done well and those at the very top--the ultra rich in the top tier of corporate status and in the finance (and shadow finance) industry and its related hangers-on--have done exceedingly well by being able to keep a much larger share of the business profits for themselves.
• That inequality then has created a feedback cycle of disrespect for ordinary workers and greed for more profits and status and power that also led directly to the financial crisis that caused the Great Recession.
• And now we learn the capping blow (which common sense tells us anyway, given what we know about human nature and its frequent inability to handle the struggle between self-interest and altruism in ways that benefit all) those at the top who have been paying themselves exceedingly well (and their buddies when they serve on their boards of directors) are likely to treat their employees exceedingly poorly.  Greed at the top goes along with meanness towards those considered "beneath" them.

From my perspective this is just one more reason (i) to ensure that ALL compensation income is subject to payroll taxes (removing the Social Security cap) and (ii) to increase the tax rates on the income of the top by adding more rate brackets.  We should go back to the type of system we had before Reagan, when there were many more "rate brackets" under the income tax.  It's really not reasonable in a progressive tax system to fail to distinguish between incomes of a quarter million and incomes of $10 million--they should not be taxed at the same marginal rate.  And the hedge or equity fund or real estate partnership manager who makes more than a million a day as his compensation for managing (paid, of course, part as fee and part as "carried interest") should be taxed at a rate considerably higher than the CEO who makes "only" 10 million a year.  The wacky system we have right now lets that equity fund manager pay the preferential capital gains rate under a realization system--meaning with deferral as well as lower rates! 

So why is it that Congress--even in a period of high deficits and lots of talk about having to change the benefits under Social Security because of the GOP and blue-dog Dems' worries about the deficits (even though Social Security has actually been running a surplus) --couldn't bring itself to pass a bill that would treat carried interest as the ordinary compensation income that it is, so that fund managers would pay tax the same way that their firm's janitor does?   Talk about meanness.

Estate Tax--Kyl continues working for the ultra wealthy

Jon Kyl doesn't think much about the government helping the unemployed who have been laid off because of the financial crisis, triggered by greedy excesses at the nation's biggest banks and mortgage lenders.  He's afraid that providing additional unemployment compensation will keep people from working--as though it is laziness and not trying circumstances that has forced people out of jobs and on the public dole.  Kyl clearly doesn't get it.  He must not know the people I know, who were laid off from jobs here at auto supply companies in southeastern Michigan and have tried everything they could to find work, even trying to start their own businesses.  That last is hard, when banks won't lend and folks don't have the basic cash to do it. 

But Kyl does work hard for his friends.  He would like to repeal the estate tax, so the country's millionaires and billionaires wouldn't ever have to pay their fair share of the tax burden.  Most of them pay almost no taxes during their lifetimes--especially if their wealth is inherited and most of their income is financial.  They get preferential rates for the taxes they do pay, they devise all kinds of scheme to defer payment (using loans to monetize assets that need not be sold til after death), and yet are the primary beneficiaries of the governmental stability and economy that ordinary folks' taxes pay for.  The Republicans set the estate tax to return in 2011 at the pre-Bush tax cut rates and exemption levels. 

So what is Kyl spending his energies trying to do?  It's not trying to help the 8 million unemployed, that's for sure.  Nope.  He wants the Congress to pass yet another tax cut that benefits those extraordinary wealthy heirs who've done nothing to earn their inheritance.  He knows that with the fiscal stress this country is under, there's no way Congress would pass the repeal the GOP pines for.  And if nothing is done, we're back where we were pre-Bush (which is not a bad place to be--if only we could unwind Iraq and all the mess Bush made of the economy just like we can unwind the tax laws).  So Kyl plans a "compromise"--getting the extraordinary wealthy half the tax cut that he'd hope to give them, with the idea that the rest will be doable at a later date.  It is really the "death" tax--death of necessary government funding by a million cuts.  And the corporatist senators, with no guts to fight the wealthy "entitlements" appear to be heading towards agreeing to Kyl's ridiculous proposal--an exemption of $5 million with zero tax, and a measly 35% rate on the excess over that amount.  An earlier deal supposedly fell through in late May (thank goodness).  See FireDogLake, Bullet Dodged: Bad Estate Tax Deal Dead (for now), May 20, 2010.  But Kyl seems to think his "compromise" with a 35% rate on the excess over $5 million--i.e., a piddling 10% effective rate on an estate of $7 million (assuming no GRATs or other estate-tax avoiding techniques)-- will be resurrected from the dead with 60 senators willing to support this giveway entitlement for the ultra wealthy. 

Why can't Congresspeople act like grown-ups.  They bawl about deficits and say we absolutely have to cut Social Security benefits, even though we know that a very small tax increase (or even a very small difference from the conservative trustee estimates) can solve that problem (if there is one).  But we can't do any further stimulus, they say, even though we have millions out of work and ordinary people are hurting while bankers and shadow bankers continue to make millions off the cheaper cost of fuinds handed them because of the governmental bailout--because it would cost too much.  Yet at the same time that they whine about the deficit, cry crocodile tears over the cuts they so regretably find themselves forced to make in Social Security, they can contemplate another giveaway entitlement package for the ultra wealthy--one that will cost $15 billion a year.

Folks, get on your phones, your iPads, your computers, or hit the streets of DC or your local offices.  Tell your Senators that you don't want to pass another tax break for the ultra wealthy while this country is facing huge deficits and talking about cutting Social Security  for the elderly and vulnerable.  Tell them that their sense of fairness and sound economic policy is terribly scrambled if they think passing a tax cut for do-nothing spendthrift heirs of millionaires will do anything other than put more money offshore.  

The estate tax ought to be changed, all right.  Make the exemption amount $3 million if you must.  But also make the rate a graduated tax, so that estates worth $100 million are not taxed at the piddling rate that applies to estates that are just barely in excess of the exempt amount.   

More than fifty of Germany's wealthiest citizens have just asked the government to add a 10% "rich tax" surtax on them for ten years to clear Germany's deficit.  See Germany's Millionaires Volunteer to Pay Rich Tax, CNBC.com, Jun. 10, 2010.  The Senate should take a lesson from that as far as what to do with the estate tax.

The Deficit Commission

Ever since Alice Rivlin spoke here at Wayne about her role on the upcoming Deficit Commission and her belief that we must cut entitlements, I have been worried.  This seems like the same center-right coalition to undo the New Deal that has been rampaging in the country for four decades now--reaganomics, and with no heart. 

Digby, reprinted in the Huffington Post, commiserates, at "We (meaning you) Must Tighten Our Belts".  It is "interesting" to see that many millionaires feel quite at ease talking about the need to cut back on wages (blaming unions for the fact that owners have taken their businesses overseas where they can pay slave wages), delay social security benefits, tighten medicare requirements.  But if you talk about taxing the rich, the response is always that this will "kill competitiveness" and "make the country poorer because there will be less investment."  

Funny, the bigger businesses get, the less competitive they seem to be--they become more like monopolies able to extract whatever they want from the consumer.  Have you tried to order flowers for Mother's Day?  Every florist in a small town in Texas where my mother lives has the same national flower sales arrangements and pricing--so you can get an $8.00 azalea for $50 (plus $15 delivery).  What a scam.   It's the thought that counts, but that thought costs more and more every year.  Then look at the banks.  I have a savings account with not a little cash in it at one of the big national banks:  it pays so little interest that the bank probably spends more on tracking the interest than it does in paid interest.  But their spreads are good--we lend money to them for practically nothing, but they charge an arm and a leg to lend it to the community.  And Comcast--don't get me started on them. 

My problem, you see, is that I watched the movie Wall Street for the first time tonight.  Made in 1987, the Wall Street of Gordon Gekko's "greed is good" was full of evil blokes who broke up companies because they felt like it and could make more millions doing it, no matter what it did to the workers.  But that Wall Street, with the LBO guys tearing up firms, was tame compared to the Wall Street during the Bush regime where groups of smart traders lived to suck the lifeblood out of their customers to make themselves rich. 

I have a friend who married a Goldman banker.  When the crisis broke, she was terribly offended that people thought the bankers shouldn't get their huge bonuses. "We earned it" she practically screamed in her email to me.  "Why shouldn't we get it when we worked for it."  I remember thinking then, that something different had happened on Wall Street when even the relatively little fish in the big banks had that absolute sense of entitlement, but were quite ready to heap piles of scorn on the "welfare queens" and all those ordinary little people who had some sense of being "entitled" to Social Security in their old age.

Health care reform: surtax on incomes of rich or excise tax on health care plans won in collective bargaining?

According to this morning's news reports, "congressional leaders" have reached agreement on an excise tax on health insurance, the main revenue-raiser in the Senate version of the health care reform bill.  The Senate wants to tax at 40% the coverage amount of so-called "cadillac" policies (defined as $8500 for individuals and $23000 for families)--i.e., good health care plans that all of us would like to have and that union workers often have as one of the benefits of the power of collective bargaining.  The facts aren't really out, but the news says that there is now a deal on the excise tax to make it somewhat more palatable.  See Herszenhorn, Democratic Leaders Reach Compromise on Taxing Health Plans, NY Times, Jan. 14, 2010.

I oppose this means of funding health care reform.  It does not strike at the issue--which is the fact that many people have too little insurance and that even the insurance people have doesn't provide adequate health care benefits because of the privatized benefit to health insurance companies of taking a significant spread between the cost of the health care actually provided (which they seek to minimize through bureaucratic decisionmaking and jargonese that cheats the insured person) and the amount paid to providers (which they seek to minimize through clout based on scale).  Instead, it strikes at unionization (a reason that Republicans and right-wing Dems pushed for this version of revenue-raising).  Unions are the one way that employees have to gain some clout in bargaining with their employers.  With the decline of unions, wages and benefits for employees in the US have not kept up with the substantial benefits that employers grant themselves (many of them tax-subsidized).  Attacking unions and not providing better or even equal health care to union workers, by attacking the health care plans that unions have fought to provide for their employees, is a disastrous way to pay for even the little bit of health care reform that this package will provide.

The House version makes much more sense--the House bill calls for an income surtax on wealthy taxpayers--those who make $500,000 or more (individuals) or $1 million or more (couples).  That's a reasonable way to pay for the bill.  We have had much higher tax rates in the past, and had good, broad-based economic growth.  The four decades of reaganomics have moved us to a system that is hugely beneficial for the rich and bears down too hard on the middle class (which one could generally define as the middle three quintiles of the income distribution, all of whom make substantially less than $500,000 annually).  We need to raise the tax rates on the upper income distribution, to counter the trend towards harmful levels of income inequality while also countering the trend towards low effective tax rates on the upper crust.  Raising the rates through a surcharge to pay for health care reform makes sense--it doesn't take health care away from the middle class as the Senate bill does, but asks more of the upper crust which has enjoyed increasingly singificant benefits from the US financial system over the last few decades.

More on freshwater economics--

I just discovered (via Mark Thoma's Economist's View) an economics blog by Maxine Udall (self-styled "girl economist"--which just goes to show how much our image of economists is one of hirsuted males forging through the marketplace...oops, I meander) that may be worth a read.  I'll add it to my "progressive sites of interest" blogroll, which, as readers are probably aware, is rather selective.  One advantage of not trying to make money on my blog and of having a free hand because it is mine (and not my employer's or mine together with a bunch of friends) is that I get to recognize whomever I want.  So I'll indulge.

Anyway, the posting that drew my attention today is "The Price of Casino-Like Finance is Higher Than We Think (jan. 2, 2010), in which Maxine "marvel[s] at the disconnect between what her economics textbooks assert and the realities."  Markets are supposed to provide us efficient information about prices and wages, so that resources are allocated to the best use, improving individual and societal well-being.  But instead we see cyclical downturns from "irrational exurberance", "casino-like behavior aimed at capturing high short-term gains" which substitutes for "sober, sound, long-term business investment supporting long-term corporate growth and survival."  Part of the reason markets don't work this way, she says, stems from the economics profession itself.  This part is worth quoting.

[A]n entire cottage industry called the economics profession sprang up, firmly anchored on the shores of Lake Michigan, aimed at creating cultural narratives and myths about how “markets” (meaning some abstract aggregation of semi-rational, often ill-informed, but definitely self-interested points of light) would magically “know” and act rationally and with perfect foresight. In many ways, the birth of the cottage industry known as freshwater economics is a testimony to the power of markets. There was and is a lot of money to be made in that cottage industry, especially if one was willing to drink the “business as usual,” “just ignore the man behind the curtain,” “the business of business is business” kool-aid that until recently has characterized Maxine’s profession.

One under-recognized effect of distorted price signals in a frothy economy is the distortion of intellectual curiosity and endeavor. While a course correction, championed by Keynes, Robinson, JK Galbraith and others in the past and now led by such notables as Paul Krugman, Brad Delong, Joe Stiglitz, Mark Thoma and many others is underway, Maxine believes that considerable damage has been done. Not least because most non-economist Americans are unwittingly under the sway of several "defunct economists." The defunct economists have provided a convenient narrative in which government of, by and for the people can never act as a countervailing force against large corporations, but instead is viewed as promoting individual freedom only when allied with and strenuously promoting the financial well-being and increased power of those very same large corporations.

Note that phrase "convenient narrative."  That is an apt description of the facility with which economic models have been used to influence thinking.  I probably mentioned this in an earlier post, but it reminds me of the first year that I taught tax law after leaving practice.  I had a class of about 50 students.  They were still searching to make sense of the legal world and their place in it.  One of my students--a third year who was at first provoked and then, apparently, convinced by my discussions of fairness and distributional concerns as the fundamental question underlying how to tax to raise a certain amount of revenue--told me about his course in the fall of his second year in "law and economics."  It was an eyeopener, he asserted.  He had been at sea, trying to figure out what grounds underlay the legal world.  He didn't have any philosophy to tie it to, and none of the classes had given him any sense of what justice was all about.  All of a sudden in "law and economics"  he had found a theory that claimed to explain everything based on what was asserted as intuitively appropriate self-interest rationales--not just why markets are important, but also how tort law should work, and contracts--efficient breaches are fine, even if you do break your solemn word--, and even constitutional law (Gary Becker's unconvincing work suggesting that discrimination will disappear if one only trusts in markets).  With that theory in hand, he had stopped asking questions and just started applying.  It made it all so easy.  Greed is go; fairness is in the eye of the beholder; efficiency is king.  Wealth shouldn't be condemned; instead, condemn the lack of responsibility in the freeloaders who beg for handouts.  Bigness isn't a problem--corporations wouldn't get so big if the market didn't make it possible, and since they are big, the markets have spoken.  When this student had my class in tax, he suddenly found that there were bucket-sized holes in the dyke set up by free marketarianism.  For every ready one-liner response he'd learned from efficient market theory, I had another question.  (This often was in discussions we had after regular class, so sometimes we talked for a half hour about these ideas.)  Finally, by the end of the course, he had concluded that the law and economics theory that he'd been sold was, in fact, pretty much a sham--at least in terms of holding ready answers, with precise mathematical models to show how scientific it was, to every legal question.  A good tool for thinking about things from a particular perspective, but not God's Truth.

This is the problem we face today.  Free marketarianism has been accepted as God's Truth for decades.  And the financial crisis has shown it to be a bunch of hocus-pocus, with the rabbit up the magician's sleeve accounting for the magical interlude.  Complete focus on self-interest results in casino banking, corporate interests that ravage the environment for a penny more's profits, and managers/CEOs who are so out of touch with reality that they think, e.g., that it is absurd to suggest that a half a million for being an investment banker is sufficient pay.  So we've got a lot to do to counter this casino speculation.  Treasury and Congress putting my proposed New Year's resolutions into effect would help.  (See Jan 2 posting.)  Educators spurring students to think more deeply rather than accept trivialized views of human society would help.  And a stiff bill of financial regulation that takes the casino out and puts the safe back in would be a really important boost towards evening the balance between casino-thinking corporate powerhouses and ordinary people.

A quote from Amartya Sen, and my New Year's Tax Resolutions (for Congress and the Obama Administration)

The time between December 30 and January 4 seems to be filled with lists.  Along with the ever-present list of "to dos" that haven't been done and still are hanging around waiting for our attention, there are everyone's "10 best" lists (e.g., the ten best movies--regretably, I don't think I saw ten new movies in 2009, so can only say I thought Slumdog was a decent showing) or their opposite (e.g., the ten worst celebrities of the year, every one of them with Tiger Woods and Gov. Sanford firmly placed near the top).  And of course there are those New Year's resolutions that we are supposed to deliberate over and then deliver on when the New Year rolls around--mine is to join my hubby in his morning walk and to give up doughnuts completely.

Not being one to gather quotes all year just for this final celebration, here's one quote that I believe is worth thinking about as we head into the new year.  Amartya Sen writes, in "The Idea of Justice" (Belknap Press 2009), at 32:

Being smarter may help the understanding not only of one's self-interest, but also how the lives of others can be strongly affected by one's own actions.  Proponents of so-called 'Rational Choice Theory' (first proposed in economics and then enthusiastically adopted by a number of political and legal thinkers) have tried hard to make us accept the peculiar understanding that rational choice consists only in clever promotion of self-interest (which is how, oddly enough, 'rational choice' is defined by the proponents of brand-named 'rational choice theory').  Nevertheless, our heads have not all been colonized by that remarkably alienating belief.  There is considerable resistance to the idea that it must be patently irrational--and stupid--to try to do anything for others except to the extent that doing good to others would enhance one's own well-being."

In light of Sen's helpful clarity about the ridiculousness of 'rational choice theory', I also offer the following as the resolutions that I wish Congress and the Obama administration (and/or various administrative agencies thereof) would make (and follow through on) for this new year of 2010.

1) The Treasury should resolve that it will no longer provide special dispensation to the financial institution powers that be, such as its invalid notice indicating that it would not enforce the law on loss corporations for too-big-to-fail banks, thus allowing too-big-to-fail banks to become even bigger by buying loss banks, and then allowing them to use those losses in direct contravention of the law and avoid paying income tax for years (or perhaps decades).  A similar "notice" went out recently--Notice 2010-12--stating that Treasury will continue to fail to enforce the rules under section 956 regarding what constitutes an obligation and hence relieving US shareholders of controlled foreign corporations ( many of them possibly the same too-big-to-fail banks) of further US taxpaying obligations.  (This notice continued the nonenforcement decision Treasury had made in 2008, in Notice 2008-91.  Too bad decisions do not make a good decision.)

2) The Supreme Court should resolve to deal with the problem of financial institutions claiming patent protection for all kinds of financial software and financial engineering "solutions" and for others claiming patent protection for tax planning strategies by releasing a decision in the Bilski case that clarifies the "abstract idea" exception.  The Court should say that no patent can be granted for innovations that merely utilize the positive laws to assert that a transaction carried out in a particular way will have a particular legal result, or for other methods of conducting transactions or of organizing human activity that do not involve the technological arts, as understood under European patent law.

3)  Congress should resolve to end the preferential treatment of those few Americans who own most of the financial assets of the country by ending the capital gains preference.

4) Congress should resolve to eliminate the preferential tax treatment of the earned income of hedge fund and equity fund managers (the so-called "carried interest"), and any other "partners" that manage partnerships and earn a share of the partnership's gains as their compensation (such as real estate partnerships).

5) In order to restore some sort of balance between worker and employer, Congress should eliminate the business deduction for any compensation in excess of 20 times the average salary (about $1 million).  The cap on compensation deduction to apply to compensation in any form (stock, assets, cash), whether or not "performance related". 

6) In order to treat the gifts of ordinary Americans to charities of their choice the same as the gifts of multi-millionaires to charities of their choice, Congress should repeal the special rule that permits a charitable contribution deduction for the value of stocks rather than the investment basis in the stocks.  Will that limit contributions that are made?  Perhaps, though it is clear that contributors do so for many reasons and not merely for the contribution deduction.  

7) Congress should resolve to resolve the estate tax situation once and for all, before some do-nothing heir-to-be decides that 2010 is the right time for the wealthy person in his life to go.  Congress should enact a modest exemption of $2 million but should make the estate tax rates progressive (beginning at2009s 45%, but moving up to at least 65% for the largest estates). 

8) Congress should resolve to revisit the tax brackets.  We have an economy in which the average income is around $50,000, but there are individuals who make more than $500 million a year.  That spread is so large that it cannot be adequately addressed by brackets that focuse on the first $350,000 or so.  Those who make $200 million a year have incredibly more freedom of choice, and the few dollars they pay in taxes are merely peanuts compared to the precious funds from an average family.  We need to make the income tax more progressive by adding additional rate brackets--perhaps as many as 3 or 4 more.  That would still be a far cry from the income tax system before Reagan took office, when we had top rates more than double today's top rates.  But it would address the dire fiscal need of the country in a way that is doable without creating undue suffering.

9) Congress and Treasury should resolve to clean up the partnership tax rules so that they do not offer such extraordinary flexibility to partners to arrange their affairs to avoid taxation--for example, by eliminating the electivity permitted to partners in many places in the rules (make the remedial method the only method allowed for taking into account book-tax disparities in contributed property) and by changing the way that partners take account of partnership debt (such as being able to get distributions of nonrecourse debt that monetize partnership property appreciation). 

10) Congress should re-visit the rules on mergers and acquisitions, so that a tax-free merger becomes an unusual event.  Part of the problem we are facing today is that multinational corporations have grown so big that they wield enormous power globally and can sometimes appear to be able to order laws to suit them.  Witness the fact that we are well beyond the beginnings of the financial system crisis, and no single piece of legislation imposing new and better regulations on the banks have been enacted.  The size of corporations ensures that they will become as focused on raising rents for their managers as they will on making profits for shareholders, and that they will care not one whit for the ordinary American who is their customer, or their low-wage employee, or the resident of a town that they leave derelict when they move to sunnier shores.  We say that the rationale for tax-free reorganization provisions is to encourage efficient organization of corporations.  But efficiency is not God, and in fact focus on efficiency may leave democracy and fairness far behind.  We should give tax-free treatment only to shareholders who get no boot for any of their stock, and only in transactions where a high percentage of the consideration is stock (perhaps 80% or more). 

 

Progressivity and the Income Tax

Martin Sullivan's analysis of the progressivity of the income tax appears in the Dec. 14 edition of Tax Notes (at 1135).  Looking at 1007 data, he finds that the effective rate levels off between one and two million AGI at 24.1%.  Above that amount of AGI, the rate declines, down to 19.7% for incomes in excess of $10 million.  Effective rates increase graduatally for incomes below $100,000, but AGIs between $100,000 and $500,000 rise steeply to about 19.5%--just under the effective rate for the wealthiest multimillionaires.

What's the cause of the decline in the rate for the wealthiest taxpayers.  Sullivan concludes that it is the preferential rate that applies to capital gains and dividends.  Households with average AGI incomes between $50,000 and $75,000 receive only 2.3% of their income in a form that gets the preferential rate, whereas about 70% of the income is in that form for those with AGIs over $10 million.

Here's Sullivan's conclusion:

My casual impression is that some people favor progressive rates and about an equal number favor flat rates.  Very few openly endorse regressive rates.  Nevertheless, that is what we have in the United States.  The data in this article clearly show that high-end regressivity is largely the result of a preferential rate on capital gains.  The most straightforward way to restore progressivity to the U.S. income tax is to increase the capital gains tax rate.

More on the Estate TAx--the Heritage Foundation speaks gobbledygook

hat tip to Tax Prof and its commenters

The Heritage Foundation, I'm afraid I've concluded, is not a "think tank" at all--it's a propaganda tank.  And the propaganda it spews tends to be in support of ideas that may sound sort of okay if you don't probe them very deeply but are apparently intended to further the benefits of society for the elites who already enjoy most of the benefits of society.

Look at their most recent take on the estate tax.  Beach, Seven Reasons Why Congress Should Repeal, Not Fix, the [Estate] Tax (Nov. 9, 2009).  (Yes, I "corrected" the title--after all, the use of "death tax" is an attempt to use emotions about death to move people to hold particular positions about the tax.  And there's no such thing as a tax on death--death is not taxable income.  What is taxed is the estate left by the decedent to heirs or beneficiaries who did nothing to earn it.  So estate tax is the correct name, and death tax is a manipulative play on words.)

I've argued here, of course, that the current fiscal crisis (brought on by many of those people, by the way, whose estates will likely be big enough to be subject to the estate tax if we are not so foolhardy as to repeal it before they die) calls for rethinking the "tax cuts are always good" mentality that was set in motion with Ronald Reagan's "privatization, deregulation, militarization, and tax cut" dogma.  We do need to rebalance our budget once we are through this crisis, and a good place to begin is by getting rid of tax loopholes that don't make sense and retaining or even increasing taxes that make a lot of sense.  The estate tax is a tax that makes a lot of sense and should probably be increased, not eliminated.

(ASIDE:  Reagan is often treated as though he was a great philosopher.  What he was was a master of sound bites and a person with rigid views that were self-contradictory.  You can't increase military spending, privatize government function at great costs to the government, and cut taxes to pay for those new subsidies for private business and the military-industrial lobby without running up huge deficits.  So he had a big tax cut, and then tried to make up for it with a bunch of tax increases.)

So how does the Heritage Foundation seek to justify its proposal for repeal of the estate tax?  It provides seven arguments:

1) the estate tax discourages savings and investments

True, to some extent, but probably much less so than proponents of repeal would have us believe.  Any tax discourages what is taxed, so labor taxes discourage labor and taxes on capital income discourage savings.  But much less so in the case of the estate tax (compared to a tax on wealth as it is accumulated).  The estate tax doesn't have much effect on living accumulators, because their goal is to accumulate ever more--if anything, the estate tax may encourage saving so that they will have "enough" to leave.  So while the Heritage Foundation says that the estate tax sends a signal in favor of consumption, the fact is that estates are continuing to grow at phenomenol rates. IN fact, we might well want to encourage the wealthy to consume more and even say that this might be a very positive incentive effect of the estate tax, if only it were true.  Wealthy consumption would reduce the size of the estate and limit the windfall power of plutocracies.

Of course, the estate tax doesn't have any effect once the one who gathered the estate dies--the decedent can no longer be incentivized to save or not.  The estate tax doesn't have any incentive effect on the people who acquire the estate (heirs, beneficiaries) since they are getting a pure windfall, whatever they receive.

2. The estate tax undermines job creation.

The Heritage foundation is claiming that the tax money is kept out of the investment stream and therefore undermines job creation.  This is just a restatement of the same argument in item one.

Again, no empirical evidence here, of course.  Right-wing economists consistently claim that the wealth in estates would be the source of powerful job creation entrepreneurialism if only we would leave that tax money as well to heirs, so they could invest to create jobs, but there's no evidence to support that claim.  Entreprenuerialism doesn't ordinarily come from wealthy heirs to estates sitting in their effortlessly acquired empires.  In fact, again, it is more likely that dispersal of big estates would do more for job creation than letting heirs continue to horde the wealth set aside by their benefactors in hidden overseas bank accounts or invested in emerging markets or in other ways passively collecting income as most capital assets do.  Even if letting heirs receive that tax money to invest rather than giving it to the federal government might create a few jobs, it is equally true that government spending with the same money creates jobs and perhaps does it better.  Heritage's argument here just amounts to the same old saw that government is less efficient at using money than the private sector is.  And again, this is simply not an established fact.  In fact, we have evidence to the contrary in many instances--there are numerous examples that privatization is less efficient/more costly at getting the same job done.  Take subsidized student loans compared to direct student loans without banks as intermediaries.  The first costs the government money (to subsidize the banks) while the latter makes money for the government.  Take Blackwater (now Xe Company).  It's employees are paid 2 to 6 times what soldiers are paid for doing the same job.  Not more efficient, and in fact more costly. and fewer jobs because each job is paid so much.  There are numerous examples that privatization is less efficient at getting the job done and that government may in some, maybe many, instances be better at job creation than rich guys hording wealth or buttressing up under-utilized family ranch empires.

3.  Estate taxes suppress productivity and wage growth

This is just another version of two which was another version of one, since what the Heritage Foundation says is that productivity and wage growth are suppressed because there is less investment that keeps businesses from buying tools and equipment that keeps them from hiring new employees.   As noted, maybe some investment isn't made that would have been made, but also government spending takes place that wouldn't have taken place.  Hard to be sure where the tradeoff is in terms of productivity and wage growth.  To the extent that the estate tax repeal amount would be horded in unproductive, locked in investments, releasing it to the government, which spends it back out into the main stream of the economy might well multiply the productivty much faster. 

4. Estate taxes contradict the central promise of American life--wealth creation.

Folderol.  The central promise of American life is not plutocracy--it is the promise that everyone has opportunity to live a decent life--to acquire life's necessities and to live secure in their homes.  There is in fact a conflict between that true conception of the central promise of American life and the conception forwarded by the Heritage Foundation, because if the wealthy elite is able to continue consolidating their stranglehold over the wealth of this country without contributing to the common good through taxation (as the capital gains preference, nontaxation until realization, and repeal of estate tax would mean), we will end up with a have and have-not society, with the haves living in gated communities and the have-nots left to struggle in a very rigid and immobile class structure without opportunities for advancement. 

5. Estate taxes hurt those who have tied their savings up in land

This is the same old canard that the estate tax causes the loss of family farms and ranches.  It's simply not even true, as has been explained countless times (there are special provisions to provide an installment payment so that the limited taxes due can be paid out of the income). 

Then the Heritage Foundation seems to suggest we should pity those wealthy farmers and ranchers whose land value has increased astronomically so that their immensely grown wealth means they do have some tax to pay and  they might end up deciding to sell some small part to pay whatever taxes are due.  So?  just because they own it in the form of land, we are supposed to say--don't ever pay any taxes, just continue to accumulate immense wealth, and pass it on to your heirs so that they can become a plutocracy?  I don't think so.

6. Estate taxes hurt African American business owners

 The Heritage Foundation only talks about African Americans when it is attempting to co-opt a group and get them to support something against interest.  This is not about African Americans but about businessmen--an argument that people who have businesses ought to be able to pass them along without being taxed.

7.  Estate taxes hurt women business owners

Again, this hasn't got anything to do with women.  It's about business owners, just like number 6.  A

nd there is no real showing, by the way, that the estate tax hurts small business owners.  The estates of small business owners are almost always below the exemption level.  The estate tax gets the Bill Gates (Microsoft) and Waltons (WalMart) type business owners. And they can clearly afford to pay some tax.  The Heritage Foundation in items 6 and 7 is simply trying to pull on heart strings.  In fact, there is no reason at all to let the Walton billions accumulate and consolidate power once Sam Walton is gone. 

This is pretty much a garbage piece.  Although Beach, the author, has a title with the terms "data analysis" in it, there is no data analysis in this opinion piece. There are three footnotes. One presents a very incomplete picture about the politics behind the Bush Congress's ridiculous bill dealing with estate tax (gradual decrease in the amount of tax collected until 2010, when the tax would be repealed for one year, but then the tax would spring back into life as it was pre-2001 when all of the Bush Congress's tax cuts died their natural planned death).  One is a quote to the author's own work claiming that estate taxes "kill the economy" (hardly credible, since the economy actually has done much better in periods of history when it was much higher than it is now, and performed only weakly under the Bush tax cuts).  One is work by Holtz-Eaken and Cameron Smith where they "present an argument" that repealing the estate tax--ie "investing" (if it was invested) the taxes saved--would create 1.5 million jobs.  That's a very weak piece itself.

For more comments, look at the commenters on tax prof.  I particularly like an anonymous posting, where he notes (again substituting the correct term and providing only part of his comment) that

1) lack of [estate] taxes encourages investment lock-in and inhibits efficient allocation of investments

2) lack of [estate] taxes inhibits job creation (see 1)

3) lack of [estate] taxes discourages the real central promise of American life--that hard work and smarts, and not being born lucky, are to be rewarded

4) lack of [estate] taxes discourages the 19th century view that wealth comes from holding huge tracts of under-utilized land.....

And there's Chet Hardy's statement (an excerpt only here):

Its just amazing that the same people who decry deficit spending (Sen. Jon Kyl) turn on a dime and advocate repealing the estate tax. That's $20 billion per year folks. To put that in perspective, that's enough to provide health care to every child who doesn't have it. Its enough to build a new High Speed Rail line every single year.