ataxingmatter

IRS Scrutiny of 501(c)(3)s

As most everybody is aware by now, the IRS has been under considerable strain for a number of years from budget and staff reductions that have left it underfunded, understaffed, and under pressure.  This is part of the right's effort to "shrink the government to a bathtub and drown it."  If the main organization for helping Americans understand their tax obligations is understaffed, it is likely that many people will become irritated with the agency and blame it (and taxes) for all their problems.  If the main organization for enforcing the U.S. tax laws fairly has too few people to audit the most likely scoflaws and too little money to prepare guidance and rulings to make it harder for scofflaws to scoff at the law, then many people will become irritated with the agency and blame it (and taxes) for their problems while many other people (especially the privileged rich) will continue to scoff at the law by overstating their basis when they sell capital assets, hiding assets in tax havens, and just hiring lots of expensive tax attorneys and accountants to come up with schemes for wiggling through the loopholes in the Code to avoid more taxes.

And of course, if the main organization for ensuring that tax-exempt organizations are not abusing their tax exempt status by using "dark money" to allow the domestic elite and foreign powers to influence and control federal elections and legislation, then odds are the rich and elite and foreign powers will wield more and more influence and control over who gets elected and what kind of legislation they pass.  Odds are we will see even more of the kinds of absurd legislation disenfranchising the poor and minorities by making it harder to vote, harder to get a State-issued I.D. card, harder to wait in line for hours at the polls (if you will be fired for not reporting to work), etc.

None of this is any surprise.

None of it is good government.

All of it is supported by the current radicalized uber-right-wing Republican Party hacks that are running many state governments and hold the majority right now in the U.S. Senate and House of Representatives.

As the New York Times editorial board noted, "[c]laiming a 'social welfare' tax exemption has become a tool for powerful political operatives like Karl Rove, the Republican campaign guru.  His Crossroads GPS group, which has 501(c) status, has spent $330 million on ads and candidates since it was created in 2010."  See Editorial,  Dark Money and an I.R.S. Blindfold, New York Times (Apr. 28, 2016).  And of course, with all the ranting about it being a problem to pick a group with "Tea Party" or "Progressive" in their name for closer scrutiny (when any common sense analysis will tell you that such a group is quite likely to be engaged in forbidden lobbying activities), "the IRS has groiwn ever more gun-shy about enforcement."

So the latest bill wreaking havoc on democracy, put forward by Republican Peter Roskam in the House of Representatives, would eliminate the current law that requires those who donate more than $5000 to a nonprofit to be disclosed to the IRS (though redacted for public versions of organizations' tax forms)..  See, e.g., Richard Rubin, House Republicans Seek to Block IRS Collection of Non-profit Donor Data, Morningstar, Apr. 28, 2016. That means a foreign corporation or a foreign sovereign power could contribute enormous sums to shape the legislative and regulatory regimes in our country, and there would be NO WAY TO POLICE THE PROBLEM. 

Further, it is hard to understand why any donor to a tax-exempt organization should be entitled to anonymity.  The organization is able to avoid paying any taxes on the funds received, and--especially under the current malevolent eye from Congress towards the IRS--the IRS is hamstrung in enforcing the law against political campaigning with 501(c)(3) funds.  What we should do instead of allow complete anonymity and the power plays that encourages is the opposite:  the name of every donor who gives anything more than some de minimis threshold amount to any tax-exempt organization should be publicly available, and the amount given should be publicly available.  After all, if money is "speech", "speech" is supposed to be heard.  Remember the old saying about the tree that fell in the forest and whether there would even be any sound if there were no eardrum available to hear it.  That's certainly the case with speech.  If giving money is a form of speech, than the gift and giver shouldn't be hidden under a bushel but should be broadcast far and wide for anyone who wants to know.

Note that the bill would also mean that the 'dark' groups under 501(c)(4) wouldn't even have to provide information about the number of large versus small donors that it has. 

By the way, if you have any doubts that Peter Roskam has no interest in the best interests of ordinary Americans, remember that back in November he was one of the gang of four that proposed pre-empting the rule expected from the Labor Department to impose a "best interest" standard on retirement advisers.  They were so worried (weepy face) that some professionals who handle money for retirees might refuse to do it any more if they weren't allowed to continue paying more attention to lining their own pockets rather than providing sound advice to their clients.  See Teresa Tritch, A New Threat to Your Retirement, New York Times (Nov. 19, 2015) (with a swarmy picture of Peter Roskam).

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Senate Finance Leaders push "blank slate" to tax reform

  Senators Baucus and Hatch, the Chair and ranking minority member of the Senate Finance Committee, respectively, launched a bid for completing a Code reform before Baucus leaves office with a letter to Senators telling them that they should get their bids in within the month for any tax expenditures they want to preserve.  See Letter from Baucus and Hatch (June 27, 2013).

At first glance, this doesn't sound like a terrible idea. There are, indeed, too many tax breaks in the Code for huge estates, owners of capital, Big Oil, Big Pharma, "Non-Profit" hospitals, and corporate executives' deferred pay.  Wiping them away and then thinking through things fresh might be a part of a process for real tax reform that makes sense.

But it isn't clear that this duo can possibly carve a better system this way.  They have both already bought into the idea that the US has to "lower rates" to let Big Business be "competitive", an idea that ignores business reality and sets Congress up for a series of lobbying "auctions" (this tax break for that campaign contribution) [hat tip Evelyn Brody ].  They are both therefore part of the avid group of Big Business supporters who want to cut taxes, not raise revenues to deal with infrastructure needs, safety net needs, climate change, and the many other challenges that face a nation that has spent 40 years in the thrall of bankrupt Chicago School market theories that support winner-take-all systems.  Both have touted the idea that taxes should be "simpler''--as though having language that two-year-olds could read would be a reasonable way to ensure that the most sophisticated legal minds hired by the wealthiest Americans don't scam the system!  Remember that most of the complications in the Code are there to do two things--to provide special tax subsidies lobbied for heavily by Big Business (with a few for ordinary folk) and to prevent sophisticated (rich) taxpayers from ripping off the system as much as possible.

 Worse, these two have both already made it clear that the group they really want to hit are those who benefit from Social Security and Medicare expenditures--their goal isn't to make our social safety net sustainable through the centuries, but to cut holes in it so that the money can leak out in tax rate cuts to line the pockets of the wealthy heirs, the overpaid CEOs, and the banksters that caused the worst economic recession since the Great Depression, at great personal cost to millions of ordinary Americans who have lost their jobs, their homes, and their prospects for the future because of it.

Not surprisingly, their letter to fellow Senators starts with their claim  that the current Code is "broken" "riddled with exclusions, deductions, and credits", with the result that "[t]he complexity, inefficiency and unfairness of the tax code are acting as a brake on our economy." 

Now, there are problems with the Code, that I won't deny.  But this litany of evils is just what the lobbyists for the corporate and wealthy ordered--it buys into the attempt by free marketarian/Chicago School economists to paint taxes as evil, as sources of anticompetitiveness, as such dragging anchors on businesses and entrepreneurs that it holds back the economy and "forces" Big Business to offshore its work to cheaper labor elsewhere.  And it sets the stage for an outcome that removes anti-abuse provisions and decimates progressivity in favor of the "identity theory" notion of fairness--that you have to have a flat rate that treats everybdoy the same to be fair.

Why is the identity theory of fairness absurd?  Because it ignores context.  It is like saying an Ant is as big as an Elephant, by ignoring the relativeness of size which is essential to the notion of bigness/smallness.  In other words, we can't talk about "fair" without some idea of the scale on which fair is to be measured.  And saying that "taxing everybody at the same flat rate" is inherently "fair" (as the right-wing proponents of a flat national sales tax tend to do) misses the point of what fairness is all about! 

Then Baucus and Hatch turn to their concept of the "blank slate" and the appeal for senators to name their favorite tax expenditures (ie, their favorite pet interest groups).

We need your ideas and partnership to get tax reform over the finish line. In order to make sure that we end up with a simpler, more efficient and fairer tax code, we believe it is important to start with a "blank slate"—that is, a tax code without all of the special provisions in the form of exclusions, deductions and credits and other preferences that some refer to as "tax expenditures. This blank slate is not, of course, the end product, nor the end of the discussion.  Some of the special provisions serve important objectives. Indeed, we both believe that some existing tax expenditures should be preserved in some form. But the tax code is also littered with preferences for special interests. To make sure that we clear out all the unproductive provisions and simplify in tax reform, we plan to operate from an assumption that all special provisions are out unless there is clear evidence that they: (1) help grow the economy, (2) make the tax code fairer, or (3) effectively promote other important policy objectives.

Of course, this "blank slate" approach is a call to arms for all lobbyists, who have already begun aiming their impressive resources at their selected targets.  See  Politico, Tax Lobbyists Spring Into Action . 

But beyond that, note what it says about the provisions--it will keep those that encourage economic growth, increase fairness, or promote other policy objectives.  We already know what lobbyists say about all of the provisions that they favor for Big Business and Big Money--that if you don't give favorable tax provisions to all those wonderful (purported) job creators, the economy will crash.  And we already know who will use the "make the code fairer" arguments to support their views--it will be the right-wingers who want to eliminate social safety net provisions from the Code.  They have lots of money from the Koch brothers and other right-wing wealthy individuals and institutions and lots of paid "scholars" like Cato, and Heritage and all the others to push their views.  Tell me--just who is going to lobby for the real concept of fairness in the Code--like (i) getting rid of the preference for capital over labor, (ii) getting rid of tax favorable treatment for any deferred payment or pension plans that are available only to the top managers of firms, (iii) instituting a decent estate tax that begins to eat into the oligarchic dynasties that we've allowed to be created by such limp excuses for estate taxation (including not only much higher rates with more rate brackets, but also elimination of most of the gimmicks using trusts and partnerships and purported discounts; or (iv) creating a much more discriminating rate structure for the income tax that recognizes differences of income in magnitudes as they exist today , with rates for brackets that include half a mil to a mil, a mil to several mil, several mil to 20 mil, 20 mil to 80 mil, 80 mil to 150 mil....and on to the two billion mark?   And who is going to make the pitch that we have to raise more revenues in order to meet the needs of the aging baby boomer population as they retire with savings decimated by the Great Recession, homes lost to the lack of banking oversight, and facing significant increases in medical care costs?

It's pretty clear that neither Baucus nor Hatch has any desire to deal with real fairness issues, since that would require INCREASING THE PROGRESSIVITY OF THE CODE.  Note what they say to their fellow senators about the task ahead.

The blank slate approach would allow significant deficit reduction or rate reduction, while maintaining the current level of progressivity. The amount of rate reduction would of course depend on how much revenue was reserved for deficit reduction, if any, and from which income groups.

This phraseology reveals perhaps more than they wanted to reveal--first, that they are not even contemplating increasing progressivity, in spite of the past 40 years of reductions in progressive features.  And second, they really aren't planning to use elimination of tax expenditures to raise more revenues to make up for the absurd Bush tax cuts that they both helped put into place--note that they say the rate reduction will depend on whether any money is reserved for deficit reduction, providing a pretty strong indicator that there will be no revenues used for government and all the "reforms" would go to another foolish round of tax cuts.

Kitty Richards at ThinkProgress has some similar concerns about this "blank slate" announcement.  See Richard, Why we should be wary of 'blank slate' tax reform, ThinkProgress (June 27, 2013).  First, using the analysis done for the Simpson-Bowles "zero" plan (which was actually more protective of the lowest income than Baucus-Hatch have declared themselves to be), it would be very difficult to maintain progressivity (much less increase it as I have suggested is required) if base reduction is used to lower rates, since those who benefit most from lowering rates are the taxpayers with the most income. 

 The Tax Policy Center estimated the effects of the plan and found that it would have disproportionately increased taxes paid by low-income and middle-class families, not even taking into account the expiration of the Bush tax cuts for taxpayers making more than $400,000 per year legislated in last year’s “fiscal cliff” deal. If you compare average federal tax rates under the zero plan and under current law, the zero plan looks even worse – it would actually cut taxes for the top one percent by 10 percent, while more than doubling tax rates for the poor and increasing taxes on the middle class substantially.

Second, she adds, the Baucus-Hatch letter "treats decisions about revenue as an afterthought."  Yet revenue-raising is THE PRIMARY REASON WE HAVE TAXES. 

Congress should not be engaging in protracted tax reform negotiations that ignore the fundamental problem with our tax code: It does not raise sufficient revenue to fund the operations of government at appropriate levels in a sustainable way.

If Baucus and Hatch are interested in reforming tax expenditures, they should start by scaling back the biggest giveaways to corporations and the rich and devoting that revenue to repealing the sequester, not reducing tax rates for these same corporations and wealthy individuals.

Richards is right on in her critique.  We need to recognize the commitments we have to institutions and people, from infrastructure needs like roads and airports to wildfire prevention to climate change action to NIH and other support for basic scientific research on which rests most of the "entrepreneurial" innovations that the self-appointed meritocracy credits itself with.  That requires money, and money requires either printing more of it or more taxes.  More taxes from the wealthiest corporations and individuals also serves a secondary objective of increasing expanding opportunity and countering, to some small degree, the tendency for most government programs to function as upwards-redistribution paradigms that shift more and more resources to an oligarchic upper crust.

So I cannot think this Baucus-Hatch initiative augers well for the country.  I wish Baucus had used his imminent retirement to step back and consider what his legacy could be for a better world, rather than continuing to lie in bed with the lobbyists of the corporate elite.  What we need to do first is very simple--get rid of the multiple giveaways to big corporations, revamp the estate tax to make it heftier, and eliminate the many tax expenditures that are mainly for the wealthy (deductions of mortgage interest on second homes, deferred compensation schemes, etc.  

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Orrin Hatch on tax reform at the ABA--a predictable right-wing rant

Why We Should Be Wary Of 'Blank Slate' Tax Reform

Why 'Blank Slate' Tax Reform Is A Bad Idea

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Stiglitz on globalization: the MNEs bought the law they wanted; it's time to take it back

Joseph Stiglitz has a new read-worthy article. Globalization isn't just about profits; it's about taxes, too, The Guardian (May 27, 2013).

As he notes towards the conclusion of the piece, the big MNEs aren't simply "applying the law as they find it" in order to minimize their taxes legally.  They were instrumental in making the law what it is today.

To say that Apple or Google simply took advantage of the current system is to let them off the hook too easily: the system didn't just come into being on its own. It was shaped from the start by lobbyists from large multinationals.

So what hope is there to fix the mess?  First, Stiglitz reminds us of the way American MNEs avoid paying taxes to support the very public goods that made their riches possible.

It's no surprise that a company with the resources and ingenuity of Apple would do what it could to avoid paying as much tax as it could within the law. While the supreme court, in its Citizens United case seems to have said that corporations are people, with all the rights attendant thereto, this legal fiction didn't endow corporations with a sense of moral responsibility; and they have the Plastic Man capacity to be everywhere and nowhere at the same time – to be everywhere when it comes to selling their products, and nowhere when it comes to reporting the profits derived from those sales.

Apple, like Google, has benefited enormously from what the US and other western governments provide: highly educated workers trained in universities that are supported both directly by government and indirectly (through generous charitable deductions). The basic research on which their products rest was paid for by taxpayer-supported developments – the internet, without which they couldn't exist. Their prosperity depends in part on our legal system – including strong enforcement of intellectual property rights; they asked (and got) government to force countries around the world to adopt our standards, in some cases, at great costs to the lives and development of those in emerging markets and developing countries. Yes, they brought genius and organisational skills, for which they justly receive kudos. But while Newton was at least modest enough to note that he stood on the shoulders of giants, these titans of industry have no compunction about being free riders, taking generously from the benefits afforded by our system, but not willing to contribute commensurately.  ...

It is not even true that higher corporate tax rates would necessarily significantly decrease investment. As Apple has shown, it can finance anything it wants to with debt – including paying dividends, another ploy to avoid paying their fair share of taxes. But interest payments are tax deductible – which means that to the extent that investment is debt-financed, the cost of capital and returns are both changed commensurately, with no adverse effect on investment.

Then he goes on to discuss what globalization really means and why it is time for the international community to band together to exact reasonable taxes from these global enterprises who use us to make profits but desert us when it comes to supporting continuing innovation.

It is time the international community faced the reality: we have an unmanageable, unfair, distortionary global tax regime. It is a tax system that is pivotal in creating the increasing inequality that marks most advanced countries today – with America standing out in the forefront and the UK not far behind. It is the starving of the public sector which has been pivotal in America no longer being the land of opportunity – with a child's life prospects more dependent on the income and education of its parents than in other advanced countries.

Globalisation has made us increasingly interdependent. These international corporations are the big beneficiaries of globalisation – it is not, for instance, the average American worker and those in many other countries, who, partly under the pressure from globalisation, has seen his income fully adjusted for inflation, including the lowering of prices that globalisation has brought about, fall year after year, to the point where a fulltime male worker in the US has an income lower than four decades ago. Our multinationals have learned how to exploit globalisation in every sense of the term – including exploiting the tax loopholes that allow them to evade their global social responsibilities.

 He has some specific suggestions about how to undo the mess that the MNEs' successful lobbying has gotten us into.  He suggests two actions that could work:

1. The US could lead the way with a "global minimum tax regime"  in which a corporation would be taxed on its net worldwide profits (treating corporate profits taxes paid to other regimes as a deduction, up to some cap) at a rate of about 30%; and
2. Countries would cooperate to deal with tax havens.

We've already begun to see some of Step 2 as the US stepped up its attempts to identify US taxpayers with hidden offshore bank accounts, leading to a crackdown in Europe as well and the first signs that banking secrecy jurisdictions like Switzerland will open up to information sharing practices.  We need to continue to work on those tax havens--Singapore, Caymans, Bermuda, Ireland, Netherlands--and the rules they have in place that make it possible for Apple to claim stateless income (to use Ed Kleinbard's term).

Step 1 will be much harder in this political climate.  Most of the radical right is intent on cutting taxes, in the 'starve the beast' mode of thinking that got us to debt ceiling fights, sequesters, pushes to "curb" earned benefits like Social Security and Medicare.  Legislators are particularly prone to listen to well-heeled corporate lobbyists who argue that if they would just reduce taxes on big corporations, all the tax avoidance gimmickry would go away.  That's pretty clearly not so--tax cuts just lead to demands for more tax cuts, as the "one time" repatriation provision in 2004 clearly demonstrated.  Max Baucus is also one of the "cut rates/broaden base" crowd that will pretend that the broadened base won't be shurnk again within a year or two even while rates go lower and lower.  Dave Camp belongs in that camp as well.  So getting Congress to consider deeply the possibility of a global minimum corporate tax regime won't be easy.  But hey, nothing is these days, so let's get started.  Letter campaign, anyone?

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Welfare Spending: Medicare vs Corporate/Business Subsidies (or does the GOP really support WalMart's behavior in Bangladesh?)

As most readers know, the federal government is currently in what passes for negotiations between the President's Democratic Party Senate and House members and the GOP members that control the House. 

The Tea Party and its right-wing rhetoric has of course had a radicalizing impact on the GOP positions, with members not only beholden to Grover Norquist and his anti-tax pledge (all strongly supported by various right-wing propaganda tanks like the Tax Foundation, Heritage, American Enterprise, and other organizations) but also to the anti-social welfare corporatists like David and Charles Koch, the Wal-Mart heirs, and other oligarchic families that constitute the top 1% of US income and wealth.  As a result of these two strong influences, the GOP now stands for

• tax-cuts-no-matter-what (and for tax cuts that benefit the wealthy most of all, as reflected in the rigid position in favor of the "carried interest" scam used by private equity profits partners and the extraordinarily preferential rate for capital gains and dividends included in the "net capital gain" definition under section 1(h)(11)); and
• so-called "entitlement reforms", by which GOPers generally mean reduction in benefits and/or privatization of social welfare programs including Social Security, Medicare and Medicaid.  (All of this is argued in terms of caring about "saving" the programs for the future, but the truth lies in the ways that the right proposes changes to the programs--not changes in costs related to profits taken out by Big Pharma and similar interests, but changes in benefits to ordinary Americans (such as raising the working age for eligibility even though those who work at the hardest labor need benefits earlier, not later, or lowering the cost-of-living-allowance adjustment to benefits for Medicare, even though seniors generally have a HIGHER cost of living because of their increased medical needs, including prescription drugs for diabetes, high blood pressure, and similar diseases particularly prevalent in the elderly population.)

The sum of those positions stands for a corporatist philosophy of benefitting the oligarchy and their business enterprises at the expense of everyday Americans who work for a living.

This is even more obvious when one looks at the same groups' position on government subsidies for business.  The New York Times recently ran an article on this issue, noting that governments typically pay out a lot of money to support profits of companies and receive very little benefit in terms of tax revenues received and jobs created!  Louise Story, As companies seek tax deals, governments pay high price, New York Times (Dec. 1, 2012).

Over at MauledAgain, one of my fellow tax professors Jim Maule has, like me, long criticized the hypocrisy of supporting tax breaks for private enterprise and opposing earned benefits programs for ordinary citizens and has repeatedly pointed out that the economics of the tax breaks for business don't work out for anybody but the owners and managers of the businesses.  They certainly don't work for taxpayers of the jurisdiction providing them.  As Jim notes:

 These tax breaks are nothing more than welfare payments to private enterprise. Opponents of social welfare spending defend these outlays with as much passion as they bring to their attempts to end government assistance for individuals in need of help.James Maule, The Hidden Government Spending Game, MauledAgain (Dec. 5, 2012).

Jim rebuts one of the sham arguments for corporate subsidies--that they are just "keeping what belongs to them."  Those special subsidies to one private enterprise sector cause ripple effects throughout the economy--higher taxes to the other taxpayers to make up for the lost revenues, or cuts in important programs that can no longer be sustained without the revenues.  Prices and wages may change as well.  Id.

What I want to focus on is the hypocrisy of claiming an interest in ending "entitlements" but applying that philosophy only to programs that are intended to help ordinary citizens and not to those intended to beef up the profits of corporations or their managers and owners.  This is especially hypocritical for today's right-wing, since they almost universally claim to ascribe to the view that competition is good and that businesses should fail when they cannot successfully compete. 

Look at two cases involving WalMart, a multinational enterprise that fights unionization of its employees (and supports right-to-work laws that weaken worker rights) in every way imaginable.

1) In Champlain Illinois (personal experience), WalMart had a huge spralling complex on one side of the road.  It had gotten various tax support for the complex.  It decided to move across the road and down the block into another jurisdiction.  It got new tax subsidies there.  It abandonned the old building and left whatever environmental pollution there.  Who gained?  Mostly WalMart managers and owners.  Not the town and counties.  Not the employees.  Not even the consumers who shopped there, who had to deal with the blight of the abandonned building and the multiplication of vast expanses of ugly parking lots.

2) WalMart in Bangladesh.   WalMart delivers cheap goods because it outsources its clothing and other manufacturing needs to impoverished countries where workers can be paid almost nothing and get almost no protections.  In Bangladesh last month, a clothing factory burned, killing hundreds of workers.  It was a WalMart supplier. See  Natasha Leonard, WalMart's Connection to Bangladesh Clothing Factory, Salon.com (Nov. 26, 2012), where a critic noted that:

"Wal-Mart is supporting, is incentivizing, an industry strategy in Bangladesh: extreme low wages, non-existent regulation, brutal suppression of any attempt by workers to act collectively to improve wages and conditions." Id.

This was a modern-day repeat of the Triangle Shirt Factory incident in the early nineteenhundreds in New York City:  workers unable to escape burned to death in factory rooms without fire exits and yet dangerously littered with lint and other debris that made their workplace a fire hazard. 

WalMart, in fact, has led the fight against workers' rights and spending on safety at that factory and others.  See Natasha Leonard,  WalMart wouldn't pay for Bangladeshi factory safety improvements, Salon.com (Dec. 6, 2012). 

These things are all tied together: hostility to workers rights to bargain collectively for some fair share of the productivity gains that their labor brings about, hostility to workers rights to a safe working place; hostitlity to workers rights to decent health care; hostility to ordinary people's rights to a sustainable lifestyle; and hostility to any effort to make the oligarchic uber-rich pay a fair share of the costs of the infrastructure to sustain an economy and a people.

Tax policy, spending policy, policy towards workers, policy towards the wealthy uber-rich--these are all closely intertwined and must be considered of a piece.  Tax policy needs to establish reasonable levels of contributions based on a progressive income tax that takes into account the marginal utility of the dollar.  Spending policy needs to set priorities based on something other than the lobbying by special corporate and oligarch interests for tax-and-spending provisions that privilege themselves.    Policy towards labor rights and workplace safety need to recognize that the worker is disemplowered within the workplace and needs some legal support to provide a reasonable share of productivity gains--minimum wage laws, unionization laws, workers safety laws need to protect workers rights against the all-powerful employer.

If the right succeeds in continuing to pass right-to-work laws (Michigan's lame duck GOP is trying to do that right now), if the oligarchs succeed in capturing all the profits from workers' labor--there will be social unrest on the scale of the Great Depression.  Everybody will suffer from that kind of austerity and class warfare policy.  Broad based economic growth that comes from workers sharing in the profits of their industry and those at the top not getting an unreasonable share of the productivity gains is better for all. 

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Walmart rejected safety upgrades at Asia factory where 100 die in fire

Five Wal-Mart Vendors Made Clothes at Burned Bangladesh Factory

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The Poverty of Nations: Wal-Mart Efficiency and The Destitution of America

Jon Takes On Wal-Mart, Hostess

Wal-Mart Said 'No' to Paying for Fire Safety in Bangladesh

Base Broadening as a means of tax reform

The Congressional Research Service recently released a report by Jane Gravelle and Tom Hungerford on The Challenge of Individual Income Tax Reform: An Economic Analysis of Tax Base Broadening (Mar. 12, 2012).  Tax Base Broadening is the proposal often put forward by those who say we can and should lower rates across the board (also reducing progressivity by limiting the number of rate brackets to two or three) and pay for it by removing some of the tax expenditures and subsidies in the tax system, such as the home mortgage loan interest deduction or certain health benefit provisions.

IHere's an excerpt from the summary of the report.

Congressional interest in a major reform of the individual income tax that would broaden the base and use the additional tax revenues to lower rates and/or reduce the deficit has increased. ...  One way to broaden the tax base is to eliminate or reduce tax expenditures, which have been in the tax code since the passage of the progressive income tax in 1913. An understanding of four complex issues surrounding tax expenditures is necessary for an informed debate over broadening the tax base. First, tax expenditures affect the economic behavior of taxpayers (efficiency effects). Second, changing tax expenditures will change the distribution of tax benefits, and the distribution of after-tax income (equity effects). Third, changes to tax expenditures could change
the administrative burdens on taxpayers and the Internal Revenue Service (IRS). Lastly, many tax expenditures are popular among taxpayers and voters. Each one of these issues presents challenges to broadening the tax base, which could be difficult to overcome.

There are over 200 separate tax expenditures, which are projected to total over $1.1 trillion in FY2014. The revenue loss of all tax expenditures, however, is highly concentrated in a relatively small number—the largest 20 tax expenditures account for 90% of the total revenue loss of all tax expenditures. This amount is equivalent to 74% of the total FY2014 revenue from individual income taxes....

[T]ax expenditures are divided into seven major categories: saving, business investment, consumption, owner-occupied housing (which is a combination of an investment choice and a consumption choice), labor supply, government programs (which in many cases would have no behavioral effects but are simply income transfers), and a category termed structural (which provides benefits based on family circumstances rather than affecting behavior). 

The analysis in this report suggests there are impediments to base broadening by eliminating or reducing tax expenditures, because they are viewed as serving an important purpose, are important for distributional reasons, are technically difficult to change, or are broadly used by the public and quite popular. Given the barriers to eliminating or reducing most tax expenditures, it may prove difficult to gain more than $100 billion to $150 billion in additional tax revenues through base broadening. This amount could have a significant effect on reducing the FY2014 budget deficit—reducing the projected $345 billion deficit by 30% to 43%. This additional tax revenue, however, is equivalent to about 6% to 9% of projected FY2014 individual income tax revenue, and, consequently, would not allow for significant reductions in tax rates (about a one or
two percentage point reduction for each bracket).

The conclusion of the report seems realistic given the current dysfunctionality of Congress--it would be highly unlikely that core reforms could be made to raise sufficient revenues to support a large rate reduction, though some elimination of problematic tax expenditures would be a good move towards reducing our structural budget deficits.  Let's eliminate the long-term subsidies for the extractive industries that have given subsidized profits for oil and gas barons and get rid of other provisions that haven't served the purpose claimed for them, like the research & experimentation credit (any business can deduct real research expenses; the credit is just a way to cut corporate taxes for heavily lobbying industries like Big Pharma, IT and others).  But let's acknowledge that the current  right-wing fad idea to reduce tax rates even more and pretend to pay for it with uny base broadening isn't going to work.

I find base broadening proposals for tax policy reform amiss for three other important reasons. 

• First, we already collect less tax as a percent of GDP than historically; thus,we need to raise more tax revenue rather than maintain revenue neutrality with the current too-low tax system, especially by increasing the take from corporate taxes (the 'tax shelter problem') and by reducing the ability of service partners to game the system (the 'carried interest' problem). 
• Second, most ideas for base broadening and rate lowering end up resulting in more rate lowering than base broadening, because the lobbyists get to work immediately on reinstating the provisions that have been eliminated to broaden the base while simultaneously arguing that letting the rates go back up would be a growth-killing tax increase.  Accordingly, base broadening won't work unless there is a firm will to maintain a broader base and take the political flack that the lobbyists will release.  This Congress isn't anywhere near having that kind of will, and if it does, it is more likely to reduce important social programs (Medicare, health care, education, etc.) and leave the notoriously inefficient subsidies for oil and gas, Big Pharma and other lobby-hard favorites in place.
• Third, much of the assumptions about tax efficiency are questionable--we actually understand the interactive effects of the tax system very poorly, and don't know when a tax change will affect a person's decisions to work, not work, spend, not spend, or otherwise respond to the tax change.  So it is more likely that ideology will drive the decisions, rather than an unbiased approach founded on reasonable research to determine which provisions really work to do what they were claimed to be enacted to accomplish.  And given the current lopsided representation of right-wingers in Congress (compared to the population at large), that means that right-wing rhetoric rather than considered policy determinations will likely drive any "base broadening" tax reform that does take place.
• Fourth, many of those who argue for base broadening may be planning to use this as one more way to reduce or eliminate spending on important safety net provisions like Medicare, Social Security, unemployment compensation and others.

 So my preferred reform involves a few simple ideas:  1) let the Bush tax cuts expire as they are slated to do; 2) reinstate the estate tax at the 2001 rates, except with a $2 million exemption that is indexed to inflation; and 3) eliminate the preferential rate for capital gains and all of the provisions in the Code that deal with capital gains rates; and then 4) wait a while till the system is back in better balance and do tax the right way--ask what we want our government to spend money on, figure out how much money that will take to do it, and then set the tax system so that it collects the right amount of money.

Common Cause Claims ALEC Violated Tax Exempt Lobbying Restrictions

The Common Cause organization filed a complaint with the IRS under 26 USC 7623, the tax whistleblower act,  alleging that the American Legislative Exchange Council violated the lobbying restrictions applicable to tax exempt organizations through underreporting and operating in furtherance of private corporate interests.   The complaint argues that "ALEC's primary purpose is to provide a vehicle for its corporate members to lobby state legislators and to deduct the costs of such efforts as charitable contributions. ALEC drafts “model” legislation provided by its corporate and legislative members, and lobbies for the adoption of that legislation. These goals are fundamentally inconsistent with ALEC's claimed tax-exempt status as a charitable organization."

The following paragraphs are from the introduction to the complaint.

This matter concerns the massive underreporting of lobbying by the American Legislative Exchange Council (“ALEC”). While ostensibly a nonprofit organization under Section 501(c)(3) of the Internal Revenue Code, ALEC's primary purpose is to provide a vehicle for its corporate members to lobby state legislators and to deduct the costs of such efforts as charitable contributions. ALEC drafts “model” legislation provided by its corporate and legislative members, and lobbies for the adoption of that legislation. These goals are fundamentally inconsistent with ALEC's claimed tax-exempt status as a charitable organization under 26 U.S.C. §501(c)(3), because (i) “no substantial part” of a charity's activity can be “attempting to influence legislation,” and (ii) ALEC's activities do not qualify under any of the enumerated purposes of Section 501(c)(3).

This scheme causes harm to taxpayers in two distinct ways. First, ALEC's activities constitute an abuse of its 501(c)(3) tax exemption, which is reserved for organizations “operated exclusively ” for a limited number of purposes, such as “religious, charitable, scientific … or educational purposes ….” 26 U.S.C. §501(c)(3). Second, ALEC's corporate members improperly deduct from their taxable income the dues and other contributions made to ALEC; such expenditures are non-deductible lobbying expenses under Section 162(e). In fact, because ALEC solicits very few contributions from individuals, its false claims of tax-exempt status appear driven by the desire of ALEC corporate members to deduct lobbying expenses as charitable contributions.

ALEC's primary, if not sole objective is to “influence legislation.” Its bylaws state that its purpose is to “formulate legislative action programs,” “disseminate model legislation and promote the introduction of companion bills in Congress and state legislatures,” and “[e]establish a clearinghouse for bills at the state level, and provide for a bill exchange program.” ¹ As recently as April 11, 2012, ALEC boasted that “for years, ALEC has partnered with legislators to research and develop better, more effective … legislation. ² Notwithstanding these claims, however, ALEC has reported ”for years“ to the IRS that it has not spent a single penny on lobbying or attempting to influence legislation. These tax returns are patently false.  (Complaint available here, on BNA's tax service)

 The complaint goes on to specify how ALEC develops legislation and works to get that model language enacted.  The following is an excerpt from this portion.

ALEC boasts about how frequently its bills are introduced in state legislatures to show its influence over the legislative process, publishing “scorecards” to demonstrate the high numbers of ALEC bills enacted. [Exhibit 9] In its 1995 scorecard, then-ALEC Executive Director Samuel A. Brunelli explicitly stated that corporations join ALEC to drive a legislative agenda in a cost effective way: “’This was a landmark legislative year in ALEC's history,’ said ALEC Executive Director Samuel A. Brunelli. ’With our success rate at more than 20 percent, I would say that ALEC is a good investment. Nowhere else can you get a return that high.’” [Exhibit 11] Similarly, in a brochure that ALEC distributed to recruit more corporations for its private sector membership, it claimed that “during each legislative cycle, ALEC legislators introduce more than 1,000 pieces of legislation based on these models, approximately 17 percent of which are enacted. ” [Exhibit 12] It is telling that ALEC expresses its success in corporate terms, as a good “return” on a corporation's “investment” in tax-exempt lobbying.

Beyond quantifying its influence by measuring how often its lobbying efforts succeed, ALEC trumpets how its Task Forces and other programs provide corporations with direct access to state legislators. In a near textbook definition of lobbying, the recruitment brochure states “ALEC provides the private sector with an unparalleled opportunity to have its voice heard, and its perspective appreciated, by the legislative members.” !d. The brochure further explains that “[t]his partnership identifies issues and then responds with common-sense, result- oriented policies. The two groups work in unison to solve the challenges facing the nation, with results that will define the American political landscape in the 21st century.” Jd. In other words, ALEC provides a network to influence the legislative process and deliver “results” to its private 13 corporate membership - namely, legislation favorable to corporate members' interests. These statements by ALEC belie any claim that it is engaged in “education” rather than lobbying . The ALEC Task Forces provide a venue for corporations to lobby legislators while deducting the expenses as charitable donations.

The complaint goes on to outline the way ALEC presses for legislation, including issue alerts and one-on-one contacts with key legislators, bill tracking documents, model press releases and talking points to assist legislators in getting its model legislation passed,  hearing testimony by staffers in support of the ALEC legislation, and even  luxury conferences three times annually to which legislators are encouraged to bring families for subsidized work/vacations.

Legislator members on ALEC Task Forces are also eligible for “ALEC scholarships,” which reimburse a legislator's accommodation, transportation and other expenses to attend the ALEC national conferences. Scholarships are also available for legislators to attend other events, including “ALEC Academies,” which are described as a “two-day intensive program on a specific issue;’ attended by invited members of both the public and private sector. Contributions to the ALEC scholarship fund are made by corporations who are solicited directly by legislators at the individual state level. See Exhibit 18 (a breakdown of payments to the ALEC in Ohio scholarship fund). According to the tax filings of PhRMA, the pharmaceutical lobbying group and ALEC private sector member, it provided $356,075 to the ALEC scholarship fund in 2010. ¹³ Many of these expenses are likely deducted from corporate taxable income. The ALEC conferences are nothing more than a forum for tax-subsidized lobbying. ALEC provides logistical support in the form of travel, accommodations, entertainment, and family services, in order to facilitate lobbying by ALEC's corporate members targeting ALEC's legislative members.

The complaint considers whether ALEC even qualifies as a 501(c)(3) organization.  Suggesting that the only possible qualifying purpose that might be claimed is educational, the complaint concludes that ALEC clearly fails to satisfy any concept of an educational non-profit.

[E]ven if a tortured interpretation of the regulations led to the conclusion that ALEC is not engaged in lobbying, ALEC would fail to satisfy the most basic requirement for 501(c)(3) status - operations that are exclusively for charitable purposes . ALEC's operations are neither charitable nor educational, much less exclusively so. They are pecuniary and political, and devoted to fostering the enactment of bills that will financially benefit and further the ideological goals of ALEC's corporate membership.

Why we don't need corporate tax "overhaul": GOP poormouthing on behalf of rich corporate allies(Part I in a series)

These days, one hears a great deal from politicians on the right about how a corporate tax "overhaul" is needed because our taxes are "too complex" and/or "too anti-competitive" or because our tax rates are "too high".  The same GOP politicians who whine and whimper about how huge the deficit is, and accuse President Obama of driving our country to ruin with the deficit are willing to lower the tax burden paid by highly profitable corporations considerably (thus increasing the deficit and adding to regressivity of the tax system)--so long as they are appeasing their multinational constituency, the huge corporations who are the new providers of campaign funds and the new decisionmakers in elections--even though the corporate entities have no vote.  Claims of revenue neutrality are generally little more than PR cover for corporate giveaways.

Just a couple of examples from a recent Bloomberg piece:

• Republican Senator Robert Portman says he will unveil a new proposal soon that will cut taxes for multinational companies' repatriated offshore profits--i.e., a permanent tax holiday for multinationalsm as a first step towards a very MNE favorable move to a territorial tax system--that will remedy "an inefficient and complex maze of tax preferences".   See, e.g., Kathleen Hunter, Portman Corporate Tax Plan to Include Low Repatriation Rate, Bloomberg.com (Feb. 1, 2012).   Portman claims this huge tax cut for the high and mighty MNEs (and their managers/owners) is needed because they "pay[] a very steep tax bill if and when they choose to bring their money home."  Ludicrous.  There is a very generous foreign tax credit provision that allows many MNEs to reduce their taxes to near zero anyway.  Further, the deferral they are allowed on active business income gives them the time value of money benefit.  Most of what foreign corporations want to do is allow their taxes on non-US income to reduce their taxes on US income--which is a kind of subsidy for offshoring that costs US jobs.  And of course, as I've noted in earlier posts on tax holidays and proposals for a territorial system to replace a worldwide system, corporations hold more money overseas when they think there is a good chance that their buddies (or "bought pols"?) will give them the tax break they have been lobbying for--so these proposals encourage corporations to engage in the activity that these proposals say they are addressing, thus giving them more ammunition to get the change they want.  Portman, of course, says he wants to "streamline" the corporate tax and lower the rate to 25%.  We have a statutory rate of 35% now and most corporations that pay taxes (which are not by any means all of the corporations that make significant profits) pay less than 25%.  If we lower the statutory rate to 25%, it is quite likely that most corporations that actually end up paying taxes will be a smaller number than with the 35% rate and at a much lower rate--probably around 10-15% instead of 20-25%.  Of course, what the result will be--as it was in the 1986 tax reform that lowered rates for ordinary income and ended a number of problematic tax preferences such as the capital gains preferential rate--is that the lower rates will stay, and all of the loopy tax preferences (and more) will be reenacted within a couple of years under heavy lobbying for the same by the corporations that benefit from this round.
• Dave Camp, Michigan Republicans and Chair of the House Ways and Means Committee, wants to exempt 95% of overseas profits. 

Is there merit in this drumbeat of (lobbyist-induced) calls for "corporate tax overhaul legislation"?  The simple answer is no.

On Complexity:

Most complexity in the code is there for one of two reasons.

The most likely reason for complexity is the creation of tax preferences heavily lobbied for by corporate lobbyists.  One example is the so-called "domestic production activity deduction" that lowers the tax rate by 9% for most industries (even ones that don't really produce anything) and 6% for natural resource extractive industries.  There are tax breaks on top of tax breaks for the resource industries, of course, that get numerous special benefits throughout the Code, while joining in various coalitions that lobby AGAINST even extraordinarily modest support for green industries (such as reasonably low cost loans for solar power). 

The second main source of complexity is the clear need for specific anti-abuse provisions to undo the harm done when corporations use what can most charitably be called aggressive and inventive interpretations of Code provisions--often ones that are hyper-literal in nature (the kind of analysis that allowed the Bush Treasury to redefine what "exchange" means in the reorganization provisions in order to allow taxpayers to manipulate the allocation of consideration to create a hitherto unrecognizable tax loss in the reorg transaction) or turn the Code's clear textual provision on its head (look at the briefs for the defendant--or for that matter the lousy statutory interpretation in the district court opinions-- in the Black & Decker contingent liability shelter case, where Black & Decker argued for application of a provision in section 357(c) (which says explicitly that it applies only where paragraph one of that provision applies) in a context where paragraph one did not apply).  As a result of the contingent liability shelters, Congress added various Code provisions, including section 358(h) (having to do with the basis for corporate assets in transactions with significant liabilities) and section 357(d) (having to do with calculating the amount of liability assumed).

Complexity, in other words, is not an evil in itself.  Sophisticated taxpayers aren't harmed by complexity, and in fact complexity is needed to provide sufficient detail to prevent sophisticated taxpayers (with the help of their tax advisers) from cheating.  There is generally less complexity in provisions that are relevant for unsophisticated taxpayers, though it is more clearly an obstacle to good tax compliance behavior there.

On Competitiveness:

Competitiveness is used so frequently that it seems doubtful that anybody really knows what they mean by it.  If one company destroys a union and is able to pay their workers lower wages as a result, then a company that produces a similar product will claim that "competitiveness" requires that they be allowed to do the same.  Of course, another approach would be for the company that retains an active union, and continues to provide pension and health care benefits could lobby Congress to enact stronger laws protecting worker rights to pension and health care benefits.  In other words, competitiveness is consistently used as an argunent, when it comes to corporations, for taking away benefits to workers, communities, states and the nation for the benefit of the corporations.  Competitiveness could just as easily be used to argue for maintaining programs, procedures and benefits for workers, communities, states and the nation by considering what would be necessary to buttress the system that supports those benefit levels.  And in fact that view of competition--that we are competing globally to create both profitable companies AND a secure and well-paid workforce that can support a healthy economy that can in turn support a quality of life in all dimensions--would lead to different decisions not only about taxation but also about anti-trust, excise taxes, trade treaties, environmental protection, and many regulatory projects.

Furthermore, competitiveness is often used as an argument in the abstract when the main competitors are both US based companies.  There, the argument for reducing taxes to enhance competitiveness is at its weakest, but few competitiveness arguments reveal just how the competititon is playing out even on a globalized playing field.

On Rate Structures:

The 1986 tax reform act is a frequent reference these days when people talk about amending the Code generally and specifically about amending the corporate tax provisions.  But the context for that act's passage was quite different.  Individuals were taxed at rates that were reasonably progressive--with a top rate at 70% (though the brackets could probably have been better defined to differentiate among top income recipients).  Further, the 1954 Code had built up a plethora of tax preferences (especially useful to the rich) and the Congress had realized that the preferential capital gains rate was wreaking havoc on sensible provisions because of the arbitrage opportunities it created.  Thus, there was room for "base broadening"  (removing ill-advised preferences spread throughout the 1954 Code) as a means of paying for "rate lowering" (lowering the fairly high rates about half, without costing the fisc because of the higher amount of income on which those rates would be charged).

We are not in the same situation today.  We have very high deficits because of an economic crisis caused by two interwoven problems--(i) the lax regulatory oversight of 40 years of Reaganism, which permitted the financialization of the economy and led to excessive incomes for people at the top (managers and owners, hedge fund and equity fund managers, and speculators generally) and excessive debt for banks and especially people not at the top (because of their stagnant or reduced incomes in the face of growing costs, caused in part by the relaxation of regulations and anti-trust activity coupled with the anti-union attitudees and activity); and (ii) the success of a radical right-wing fringe in characterizing government and business as having adverse interests and progressive programs supporting social well being (from Social Security to Medicare to Medicaid to (modest) heatlh care reforms intended to reign in the cost of medical care to unemployment benefits to efforts to reign in contracts of adhesion in the consumer credit markets) as "unmerited" "entitlements or costly and anti-competitive regulation of businesses that counters the "free market" that will ensure "growth and jobs".  The result of the rhetoric is a citizenry that is ignorant of the actual income distribution, tax burdens, and impact of government spending on jobs and the health of the economy.  The result of the 40-year "reaganomics" effort from the right to cut regulations, cut taxes, privatize and militarize is that this is no context for rate reduction but in fact a context in which those who can afford to do so--for sure those individuals and households in the top two quintiles of the income distribution that comprise the upper middle class and the upper class and all profit-making corporations--should be paying taxes at HIGHER rates, not lower rates.

It should be noted that President Obama--who is at best a middle of the roader on tax issues--also is said to plan to propose an "overhaul of the U.S. corporate tax system" in connection with his budget plan for FY 2013 that involves lowering rates and base broadening.  See Steven Sloan, Obama said to propose corporate tax overhaul next month, Businessweek.com (Feb. 2, 2012).   Again--lowering the rate is a bad idea.  Lowering the rate without base broadening is a stupid idea.  But the kind of base broadening that is included, if such a proposal eventually passes, matters an awful lot.  The problem is that if Obama proposes such a reform, the GOP won't support it unless the "base broadening" is essentially inconsequential and can be undone easily later or affects only little guys and not the big-monied lobbyists.  Thus this looks like another of those initiatives from the White House that play into the right's agenda and do little to advance any progressive idea.

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

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

***

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

***

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

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

***

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

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

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

More on Repatriation--WIN America corporatist lobbying group's strike back on Heritage

In a recent posting, I commented further on the lack of arguments supporting the corporatist lobbying drive for another "repatriation tax holiday" for multinational corporations that have stashed more than a trillion abroad (often through gimmicky transfers of intangible property such as rights to patents developed in the United States).  See  Repatriation Holiday Lobbying--Money Speaks (Oct. 3, 2011).

The reasons are manifold.  Corporations today are not cash-strapped--they've got lots of cash in the US too.   And even if they need cash that is currently offshore, they can borrow against that cash at exceptionally low rates today. So they aren't investing in expansion that would create new jobs for lack of cash--they are not investing in expansion for lack of customers.  The middle class is collapsing, after four decades of reaganomics have steadily worked to erode unions and the empowerment they offer workers, leaving worker wages in decline while their bosses roll into the ranks of the superrich on their newfound ability to take an undue share of the companies' productivity gains.  Even when money is actually brought back (rather than already resting in US bank accounts), it is most likely to be used to pay even higher performance bonuses to top managers and to pay for dividends and share buybacks for shareholders.  And those shareholders are most likely merely to use it to make new secondary market share purchases--resulting merely in a net change in their portfolios--not direct funding of new enterprises.  Much of those secondary market investments are likely to be in emerging markets rather than in the United States. 

Most telling is that the very fact of one tax holiday means that corporations will inevitably plan for and conduct business assuming future tax holidays.  It is ikely that planning for this current lobbying effort began on the day Congress passed the 2004 Jobs Act!  What that means is that the tax holiday itself encourages even more of the very offshoring activity it claims to be amerliorating.  Corporations will use gimmicks to move and stash away even more money offshore to avoid even more current taxes, in the hopes that there will be a further tax holiday that will allow almost zero taxation on those repatriated profits.  That certainly happened after 2004--the companies that had been good citizens and had regularly repatriated cash found themselves losers compared to the bad citizens that had used offshoring to avoid taxation.  More of the good citizens then became bad citizens, and the amount of offshore cash has grown much faster since the 2004 repatriation holiday than before.

And our experience with repatriation tax holidays was a telling one.  Corporate lobbyists worked hard to get the misnamed 2004 "American Jobs Act" passed with a very low tax rate for repatriated funds.  Yet it resulted in very little job creation. 

(This is not surprising, since (i) corporate tax cuts don't create jobs; consumer demand does and (ii) Congress didn't put any real teeth in the job creation end of the legislation, such as demanding that any corporation repatriating cash and expecting the low rate establish that it had created substantial new jobs with the repatriated funds that were not on the planning board at the time repatriation was first introduced or when it was passed and that those jobs were permanent full-time domestic jobs.) 

In fact, a new study by the Institute of Policy Studies addresses what it calls the "dangerous myth" that "corporate tax cuts create jobs" and the "disastrous results" of the 2004 tax holiday.  It reminds us that a government report found that 12 of the top repatriators brought home $100 billion (a third of the total repatriated under the earlier provision) and yet laid off 67,000 workers in the two years after the windfall.  Further, the 2004 holiday allowed 843 companies to use $312 billion in repatriated funds while avoiding $92 billion in taxes.  The worse factoid of all is the one that shows that U.S. taxpayers  "provided a huge subsidy to corporations that destroyed jobs":  58 corporations that accounted for about 70% of the repatriated funds  cut almost 600,000 jobs.  Report at 6-7.  See America Loses: Corporations that Take 'Tax Holidays' Slash Jobs, Institute for Policy Studies (Oct. 3, 2011) (summary, with link to full report). 

The report is clear in its description of the way US corporations shift profits overseas and then lobby for even lower taxes.

Drug companies — and many other companies as well, especially in the technology sector — don’t just make profits overseas. They shift  profits overseas. The process has become lucratively routine. One example:  A U.S.-based corporation begins the process by having a foreign subsidiary register its patents in countries like Luxembourg that do not tax income from intellectual property. The subsidiary then charges its U.S counterpart a high price for use of the patents. These high royalty fees, coupled with the costs of research, marketing, and management, allow the U.S. operation to report to the IRS an artificially small profit — or even no profit at all. With no appreciable profit to report, the U.S. operation has no appreciable corporate income tax to pay. The company’s actual profits sit undisturbed with the overseas subsidiary.  Report at 11.

The report also scorns the lobbying efforts of WIN America, which has spent more than $50 million lobbying for the tax break, which would cost the fisc around $80 billion in lost revenues.  Report at 9-11.   WIN America--a coalition of 18 publicly traded corporations and 24 trade associations, including the U.S. Chamber of Commerce--has "hired 42 former congressional staffers who worked for the House Ways and Means Commitee or the Senate Finance Commmittee".  Report at 9.  It goes on to rep9ort on the way individual members of the coalition have lobbied for the tax break (e.g., Pfizer's sponsoring a favorable section on 60 Minutes) and cut jobs (e.g., Duke Energy's cutting 10,000 jobs, probably as a result of its 2006 merger with Cinergy in the U.S., contributing to the North Carolina Democratic Party and then, shortly after getting support for repatriation from the Democratic governor of North Carolina and its Democratic Senator Kay Hagan).

For other commentary, see also John Carney, Corporate Tax Holidays Might Not Create Jobs, CNBC (Oct 4, 2011) (commenting on the IPS report as well as the Heritage Foundation report discussed below).

The WIN America coalition was undoubtedly taken by surprise when the right-leaning Heritage Foundation came out with its own report, a "backgrounder" on taxes that condemns the repatriation tax holiday idea as not doing much to create jobs: J.D. Foster & Curtis Dubay, Would Another Repatriation Tax Holiday Create Jobs? (Oct. 4, 2011).    The Heritage Foundation report acknowledges that "if another repatriation tax holiday were enacted, one should expect a similar result as last time: specifically, a surge in repatriations and little appreciable increase in domestic investment or job creation."  And it cites the reasons one would expect--today's multinationals that have money to repatriate are not cash-strapped:  any investments that they need to make for business expansion purposes (that would create new jobs) they can do readily without needing a repatriation tax holiday to grease the skids.

By the way, the Heritage Foundation is resisting repatriation because it wants the big prize--an overall cut in the corporate tax rate and a shift from our current system of taxing worldwide income (after tax credits for taxes paid elsewhere) to a territorial system--and it doesn't think repatriation will be treated as a step in that direction.  Those Heritage-supported tax policies would result in even more offshoring and even less corporate tax contribution to the fisc, which is already terribly low at around 2-3% of GDP.

For additional commentary, see Heritage Foundation Reverses Position on Repatriation Tax Holiday, Huffington Post (Oct. 4, 2011) (

Not surprisingly, the WIN America coalition struck back today, with a press release attacking its ordinary ally for not supporting the repatriation tax holiday drive: Fact Check: Heritage's Flawed Study Ignores Their Previous Support for Repatriation (Oct. 4, 2011).  The coalition has three arguments: (1) Heritage said something different back in December 2010, (2) other studies say repatriation will create millions of jobs, (3) the 2004 Jobs Act really did work in spite of what these other studies claim because the firms themselves say they created jobs, and (4) lots of people support repatriation.  None of these arguments hold water.

The coalition first complains that a December 2010 Heritage study concluded that repatriation would "provide additional liquidity" that would increase shareholder wealth allowing them to make "new investments" and would permit the firms to finance current operations, reducing their need to borrow working capital.  Let's parse this out.  The  primary reason that doesn't make sense today (if it ever did, which is dubious) is, as the Heritage Foundation's current report points out, that US firms are not cash strapped.  They don't need more liquidity to be able to make investments or finance their current operations.  They probably don't even want to reduce loans that are at historically low interest rates any more than they are doing.  And shareholders' "new investments", as noted above, are just a move from one portfolio investment to another--they are not investments that encourage entrepreneurs or go to the working capital of companies but just a result of secondary market purchases.  Very little of that does much for the US economy or anything for creating new U.S. jobs.

WIN America counters that the August 2011 study done for the U.S. Chamber of Commerce by Douglas Holtz-Eakin, The Need for Pro-Growth Corporate Tax Reform, claims that a repatriation tax holiday will "speed the pace of economic recovery, increasing GDP by roughly $360 billion and creating approximately 2.9 million jobs" because repatriation tax holidays are "a private-sector approach to stimulus."  That's quite simply balderdash.  These same kinds of pie-in-the-sky claims were made about the disastrous 2004 repatriation tax holiday, and they were proven wrong then.  They are based on the same bad economics now, the economics that says that "the high U.S. [corporate tax] rate harms economic growth, the amount and quality of U.S. investment, and the wages of U.S. workers."  That claim is simply unsupported--the U.S. is a tax haven, a reasonable amount of taxes will never discourage a business from expanding its business when it thinks that expansion is going to be profitable and it has the money to do it.  It is in fact this same school of economic thought that has given us the Laffer curve, the "rational man" calculations, and the rest of the Hocus-Pocus economics enterprise that treats rigidly unrealistic assumptions as God's Truth to justify an ever-increasing share of corporate profits going to managers rather than workers. 

WIN America then argues that 23% of the 2004 repatriated funds went to job creation and should be considered a great benefit to the economy.  That number is derived from a survey of tax executives--essentially self reporting on the result of the company-favorable tax repatriation holiday, so it is not only a very low return on the high tax cost of the repatriation tax holiday, but also one that must be evaluated with some acknowledgement of the fungibility of money and the ability of firms to claim that job creation and investment that they would have done anyway was done "because of" the repatriated funds.

WIN America concludes with quotes from lots of people (probably written by WIN America or one of its army of lobbyists, don't ya think?).  These quotes just repeat the desired sound bites -- "bringing the money home" will "create jobs and re-invest in America" (GOP representative Gregory Meeks, Sept. 9, 2011); "let's bring those dollars back"... and "companies outght to put it into workforce training or they ought to put it into research and development" (GOP Ohio Gov. John Kasich, Sept. 14, 2011).  And so on.

 

Repatriation Holiday Lobbying--Money Speaks...

We've discussed repatriation before--the tax break being pushed by multinationals who want to bring some of their offshore profits home without paying taxes, as they did in the 2004 "one time only" repatriation break. 

The reason they have so much money offshore is that they use gimmicks--such as transfers of intellectual property rights to offshore subsidiaries in low-tax jurisidctions.  These are pseudo transfers (to affiliates) of property they would NEVER really sell out of their companies to independent third parties.  Having the affiliate "own" the right means that the profits associated with the innovation carried out in the US go to the offshore company and aren't subject to US tax until they're officially treated as being transferred back to the parent.  "Selling" the IP to the affiliate is done solely to defer/avoid US taxes on those profits.  Of course, the transfer pricing for the intellectual property is gimmicky too--since no company would sell its main moneymaker, the idea of a comparable market price is foolish to start with.  So most of those profits should have been treated as US profits all along--and subject to tax.

A repatriation holiday would just mean more money in the pockets of the uberrich--the managers and some of the owners.   It's just another corporatist tax giveaway that pushes upward redistribution that moves us even more resolutely towards oligarchy.  It won't create jobs--companies already have plenty of cash to invest in this country if they thought they had customers to make money from. 

But the companies probably have a pretty good chance of getting the break, even though it is a stupid waste that adds to the inequality problem and does nothing for creating jobs.  Why? 

First, because some of the wealthiest and most powerful companies want it. And these days, what powerful companies want, Congress tends to be willing to give.  Google, Apple, Cisco, Oracal, and many other companies that depend on their outsourced IP are hoping they can avoid even the little bit of tax that they've paid in the past. 

Second, because those companies have hired as lobbyists people who were very recently staffers to members of Congress who will be writing the law.  The most notorious of these is Max Baucus's former Chief of Staff, Jeffrey Forbes. See Rubin & Drucker, Google Joins Apple in Push for Tax Holiday, Bloomberg.com, Sept. 29, 2011.  The piece notes that Forbes is part of an army of more than 160 lobbyists, 60 of which are former congressional staffers, who are pushing for the repatriation holiday.  And those aren't really all the lobbyists--they are just the "registered" lobbyists--i.e., the proverbial 'tip of the iceberg'.  Then there's the WINAmerica coalition and the firm working with it.  This army of lobbyists is out to rape the country, and the same congresspeople who moan and lament about deficits are likely going to give the multinationals an $80 billion (over ten years) tax break just cause their buddies ask them nicely for it.

Even though we have proof that repatriation doesn't create jobs--the 2004 tax holiday resulted in thousands of jobs LOST as companies fired workers even while repatriation millions--Congress is still contemplating another one.  Why?  The article notes that one thing that is being touted as an advantage is 'flooding the US with cash.'   Doubtful.  Much of that cash may already be sitting in US banks even though not repatriated through the company.  And what is actually brought over and then paid out to managers (in even bigger outsized bonuses) and shareholders (in buybacks or dividends) is perhaps more likely to be invested in Asian markets than it is to stay in the US.  Or it will be just more fodder for the rich managers and shareholders to use to buy shares in the secondary markets from their rich peers, that top crowd that owns most of the financial assets.  Lot of good that will do the carpentars and drill press operators and other ordinary workers.

One of Boehner's aides says that former staffers don't make policy.  Balderdash.  Those staffers are hired to lobby because they have access and they know their former colleagues.  They have access that ordinary Americans don't have.  They are pushing for legislative action on behalf of corporate giants.  None of them likely gives a damn that the policies they are pushing for don't make economic sense at all for ordinary Americans.  Why should they care?  They are lobbyists in it for their own financial rewards from "selling" an idea to their former colleagues that will benefit their current bosses.

Martin Sullivan has it right, as quoted in the Bloomberg article:

The proposed holiday would reward the companies that have most aggressively parked profits in tax havens such as Bermuda, the Cayman Islands and Switzerland, said Martin A. Sullivan, a former Treasury Department economist and contributing editor for the non-partisan Tax Notes.

“A lot of what companies report as foreign profit is really U.S. profit that should be subject to U.S. tax,” Sullivan said. “Those earnings didn’t get overseas by accident. Many of these companies intentionally put them there to avoid paying U.S. taxes.”