ataxingmatter

Everybody's Talkin' 'Bout Taxes--especially Wealth Taxes and Mark-to-Market of Capital Gains

Not surprisingly for those of you who are members of the ABA Tax Section, there is a meeting of that group next week in Florida when a thousand tax lawyers (give or take a few) will be talking about everything from basis to wealth taxes; GILTI, BEAT, Dual BEIT, to EITC.  Yours truly will be on a panel of the Tax Policy and Simplification Committee, meeting Friday morning, to discuss how the tax system should respond to the wealth gap.  Joining me on the dais will be Roger Royse (moderator and panelist), Rich Prisinzano from the Penn Wharton Budget Model, and Dan Shaviro, Wayne Perry Professor of Taxation at NYU and a blogger at Start Making Sense.  We'll talk about the income and wealth gap data, including the different perspectives of  Saez & Zucman, serving as wealth tax advisers to Senator and Democratic presidential candidate hopeful Elizabeth Warren; Penn Wharton Budget Model, applying a more standard budget model to determine harms and benefits of the Warren Wealth Tax; and Cato INstitute.  We'll also discuss Sen. Ron Wyden's proposal for a mark-to-market system of capital gains taxation (including a lookback charge of some kind for hard-to-value assets, Prof. (and former Cleary partner) Edward Kleinbard's Dual Business Enterprise Income Tax proposal, and other means of making the regular tax system more progressive such as rates, removing the capital gains preference, and reinvigorating the estate tax that has been the object of a GOP murder squad for the last 20-30 years at least.

Meanwhile, today in Florida there was a Tax Policy Lecture at  the University of Florida on Taxing Wealth, with Alan Viard, resident scholar at the American Enterprise Institute, David Kamin, Professor at NYU School of Law, Janet Holtzblatt, Senior Fellow at the Tax Policy Center, and William Gale, Arjay and Frances Fearing Miller Chair in Federal Economic Policy7 at the Brookings Institution. 

Last fall, the Tax Policy Center held a program on Taxing Wealth (webcast recording available at this link) with Mark Mazur, Ian Simmons, Janet Holtzblatt, Beth Kaufman, Greg Leiserson, Victoria Perry, and Alan Viard.  Sony Kassam from Bloomberg Tax served as moderator.  The link has a series of power point presentations from that meeting as well, for your edification.

Ian Simmons, for example, includes the letter from billionaires dated June 24, 2019, asking that "[t]he next dollar of new tax revenue should come from the most financially fortunate, not from middle-income and lower-income Americans."  Such a tax "enjoys the support of a majority of Americans--Republicans, Independents, and Democrats."  It's not a new idea, since all those millions of middle-income Americans who own their home "already pay a wealth tax each year in the form of property taxes on their primary form of wealth--their home."   The billionaires are asking "to pay a small wealth tax on the primary source of our wealth as well"--such as Elizabeth Warren's proposal, which would tax "only 75,000 of the wealthiest families in the country" (those with assets over $50 million) and would generate an estimated $3 trillion over ten years to "fund smart investments in our future, like clean energy innovation to mitigate climate change, universal child care, student loan debt relief, infrastructure modernization, tax credits for low-income families, public health solutions, and other vital needs."  All this is necessary because of the wealth gap: "[t]he top 1/10 of 1% of households now have almost as much wealth as all Americans in the bottom 90%." The signatories support a wealth tax because:

• it's a powerful tool for solving our climate crisis
• it's an economic winner for America through increased public investments
• it will make Americans healthier, addressing the difference in longevity (15 years) between the richest and the poorest Americans
• It's fair -- "[t]axing extraordinary wealth should be a greater priority than taxing hard work."
• It strengthens American freedom and democracy, since high levels of economic inequality lead to political power and pluotocracy and higher levels of distrust in democratic institutions
• It is patriotic -- 'The richest 1/10 of the richest 1% should be proud to pay a bit more of our fortune forward to America's future."

Janet Holtzblatt discussed whether wealth should be taxed, with a set of powerful powerpoint charts.  As she notes, there are a number of reasons to think taxing the wealthy is a good idea because it (slide 4) :

• curbs the accumulation of power that comes with the accumulation of wealth--and, I will add, this is power to get laws and regulations written in your favor, including tax laws, as well as power that allows pollution, rent-seeking, on-demand schedules for workers and other 'evils' that come with plutocracy
• ensures that the wealth pay their fair share of taxes
• finances new initiatives (child care, student debt relieve, climate change policies, housing initiatives)
• provides better data for research on wealth inequality

Those not supportive (or, as JH puts it, "less optimistic") suggest that (slides 5, 7)

• even with a wealth tax, the rich remain the richest and the most powerful
• incremental changes to current tax system would be more easily implemented
• wealth taxes would have a negative impact on savings, investment, entrepreneurship
• wealth taxes won't raise as much revenue as claimed
• OECD countries with wealth taxes haven't been all that successful (in 1990 12 had them, in 2018 only 3 still retained wealth taxes: Norway, Switzerland, and Spain)

There are lots of issues with wealth taxes: (slides 8-20)

• on what assets
• at what rate (tax burden will depend partly on rate of returns on investments
• using what exemption threshold (liquidity constraints at lower thresholds; taxing  middle income instead of wealthy)
• using what means to prevent tax avoidance (dependents' wealth with parents? include assets in family-run foundations? restrictive limits for trusts? exit taxes?)
• and tax evasion (enhance IRS enforcement, enhance penalties, enhance IRS access to third party data--but the wealthy have resources to battle IRS claims)
• assuming what actual amounts of tax revenues could be raised ("street fights over revenue estimates...among top public finance economists") (Slide 15)
  • how much wealth is there?  JH notes several 2016 estimates between 86.9 trillion and 101.2 trillion (slides 16-17) {Zucman  says just under $115 trillion]
    
    • Fed Reserve Survey of Consumer Finance ( 3 year intervals; leaves out Forbes 400 and some pension wealth)
    • estate tax data (adjusted for mortality probabilities and population)
    • income tax data (capitalized using assumed rates of returns)
  • how is that wealth distributed between the top 0.1% and the rest?  Bricker 2016 study estimates range from about 15% to 22%  (Slide 18)
  • how much wealth is hidden by "tax net misreporting rates"?  IRS 2016 misreporting: farms 71%; nonfarm proprietors 64%; CGs 27%; PS/SCorps/Estates/Trusts 16%  (slide 19)
  • how much tax revenues?  between 815 billion and  1.098 trillion between 2021-2030 (slide 22, Urban-Brookings TPC Microsimulation Model [ with lower thresholds and rates than those proposed by Warren]
  • who pays?  40,000 tax units in the top 1% minus the top 0.1%; 127,000 tax units in the top 0.1%,with those in the top 0.1% paying between 97% and 100% on the different options considered

Greg Leiserson discussed the idea of mark-to-market taxation (an idea that Ron Wyden has endorsed), in "Taxing wealth by taxing investment income: An introduction to mark-to-market taxation" (Sept 11, 2019).  The key to MTM taxation is that a tax is assessed annually on investments, whether or not they are sold or otherwise disposed of ('through a transaction that results in "realization" for federal income tax purposes).  The burden of such a tax falls predominantly on the wealthy, since those are the primary owners of bonds, stocks, real estate empires, and pass-through businesses that produce investment income, as well as the appreciation of those assets that is taxed currently as a capital gain on disposition.  Leiserson provides a chart (below) showing the nominal investment income of US households and nonprofits including an offset for inflation.

As he notes, much of this income is taxed at preferential capital gains rates, and much of the income tax is deferred because capital gains and losses are generally taxed only when the asset is sold.  Deferral amounts to a reduction in taxes paid under time-value-of-money principles.  But yet another way in which owners of investment assets escape taxation is the estate tax: appreciation in property in the estate (such as unrealized capital gains from stock that has appreciated in value significantly over decades) is never taxed, since the heirs get a step up in basis to market value, so that if the asset were then immediately sold, there would be no gain remaining.

MTM taxation eliminates the deferral advantage.  MTM taxation combined with elimination of the preferential rate for capital gains would  eliminate the preferential treatment of capital gains that exists in current law.  Leiserson notes the difficulties for a MTM system: which assets are covered, rate of tax applied, and whether there are special rules for volatility. Further, "[i]f a comprehensive system of mark-to-market taxation is enacted, then there would be no unrealized gains at death going forward, because gains will have been taxed on an annual basis, including in the year the person dies" so long as the system applies over some transition period to gains accrued prior to enactment.  Otherwise, the system would have to tax gains at death (repealing step-up in basis rule) or at any other disposition, including gifts, to ensure fair and equal treatment.  He suggests other measures--such as limiting the home sales capital gain exclusion or requiring mandatory distributions of pension account balances above a threshold, that would be reasonable in a MTM context.

One difficulty with MTM taxation is valuation of assets that are not regularly traded.  Ron Wyden's proposal suggests a lookback charge--an additional tax payment for assets not subject to MTM taxation that is collected upon disposition to account for the deferral value while still relying on realization as a trigger for taxation. Wyden and Leiserson suggest different possible methods.  One is to take the gain upon sale and allocate it ratably to each year between purchase and sale, compute the tax on each year's income at the rate applicable in that year, and then calculate interest on those unpaid taxes for the years til payment. Unrealized gains would be deemed realized on death or gift and taxed accordingly.

Three key ideas here:

• To protect lower and middle income taxpayers from the tax, there could be a lifetime gain  exemption threshold ($0.5 million, say) that has to be reached before the rules apply or an asset value threshold ($2 million; $10 million, etc.).  Under the latter, taxpayers would fall into and out of the MTM regime as assets fluctuate.  (The asset approach is suggested by Wyden.)
• The revenue raised is significant though it depends on the particular model.  Leiserson suggests MTM combined with elimination of the preferential rate on capital gains "could easily raise $1 trillion over the next decade--and potentially much more."  He notes that just eliminating the preferential CG rate gives a much lower estimate--that's because of "the ease of tax avoidance under current law such as the ready opportunity to defer tax by not selling assets and potentially avoid tax entirely through step up in basis--all while simply borrowing against these same assets to finance any spending."
• "The wealthiest 1 percent of families holds 31 percent of all wealth, and the wealthiest 10 percent holds 70 percent of all wealth."  "The highest-income 1 percent of families receives 75 percent of the benefit of the preferential rates for capital gains and dividends under current law." The wealthiest 10% would bear the burden of MTM reforms.

 

Of course, while everybody is talking about taxes, some of that talk is the same old endless market fundamentalist myth (Reaganomics) about how tax cuts are what make the economy grow and will actually pay for themselves -- in spite of near 4 decades of evidence to the contrary, where highest growth rates have generally been in times of higher tax rates, with some consideration for stimulus impact of tax cuts after periods of recessions.  See, e.g., NY Times editorial, There's No Such Thing as a Free Tax Cut (Jan 22, 2020).  The op-ed notes that Treasury Secretary Steven Mnuchin "repeated the risible fantasy that the Trump administration's 2017 tax cuts will bolster economic growth sufficiently for the government to recoup the revenue it lost by lowering tax rates" [in the 2017 tax legislation] even though 2 years in, the "budget deficit has topped $1 trillion." This is because, as most of us who haven't drunk the Laffer-curve tax cut kool-aid know and the Times op-ed reiterates, "businesses responded to increased demand more than they did to the lower tax rates."  Nonetheless, we should not be surprised that the Trump Administration is talking about two "big ideas" for taxes if the man gets reelected:  1) cutting Medicare and Social Security: see, e.g., Trump Opens Door to Cuts to Medicare and Other Entitlement Programs, NY Times (Jan 22, 2020) and 2) passing another tax cut bill: see Steven Mnuchin Confirms Trump's New Tax Plan is Imminent, USNews (Jan 23, 2020).  Those two ideas go hand in hand. 

Though Trump doesn't dare state what he is really doing to his base, who he has deceived with typical right-wing rhetoric into thinking that he is trying to rightsize the economy to serve them when he instead engages in class warfare to stuff his own pockets, he is hip to hip with Newt Gingrich's desire to "starve the government" to create a huge deficit (we are up to $1 trillion in our new "gilded age economy") that then provides cover for the wealthy to suck in even more of the country's wealth by downsizing Medicare and Social Security, programs essential for those who are not among the wealthy. 

 

What is the GOP goal? A return to the "gilded age" (or worse)

When right-wing Roy Moore said that the time when America was great was during slavery, he revealed something key to the current GOP members of Congress and state legislatures--their primary goal is to return to a time when owners of property held all the keys to the kingdom and workers were just serfs expected to do as told and whose lives didn't really matter much to the boss capitalists.

Historian Nancy MacLean suggests that this is the reason for the tax bill's largesse to corporatists and the wealthy, the reason the GOP wants to undo Medicaid, Medicare, Social Security and essentially all the progressive programs introduced in the twentieth century to form the basis for a thriving middle class and surging democratic union.  See Cahuncey DeVega, Historian Nancy MacLean on the right's ultimate goal: rolling back the 20th century, Salon.com (Dec. 13, 2017).

Here are some key points from the article.

1) "[T]he Democratic Party is terrible at translating complex questions of public policy into simple narratives that evoke emotion and, in turn, action from the American people." Id.

Indeed, having an able, sympathetic messenger who can translate the issues that truly matter into terms that make sense to ordinary people is something the Democratic Party lacked in the last election.  The tone deafness of Debbie Wasserman Schultz and, much of the time, Hillary Clinton, meant that ordinary people didn't understand that Trump is merely a blowhard capitalist who doesn't care if he cheats or lies or exploits other people so long as he gets notoriety and money, while the Democrats have been the party working for a decent sustainable economy, environmental protection and preservation, protection from pollution and diseases, and working wages for ordinary folk.

The GOP, on the other hand, has mastered the art of lying to the point that they can pat themselves on the back for fooling the majority of the people the majority of the time, while blaming anything that goes wrong on Democrats (even when it is--most of the time--entirely GOP policy that the 'wrong' occur).  So a tax bill that enriches the oligarchs and ultimately raises taxes on the ordinary people is exactly what they have in mind, but they rush it through without any public hearings and discussion because they don't want people to realize it.

2) The GOP tax "reform" bill is intended to create a deficit that will justify "huge automatic cuts to Medicare, Social Security and Medicaid", to be followed by a "push for a constitutional convention, at which the No. 1 agenda item will be a balanced budget amendment" with the goal ultimately of privatizing Social Security.

MacLean calls this Ayn Rand-brand of hateful thinking followed by GOP House majority leader Paul Ryan "economic eugenics".  Since the GOP right-wing libertarians believe that only people who are successful have any merit, they are comfortable "inflict[ing] harm on other people.  At its most basic, this libertarian moral system says that it would be better for people to die than to get health care financed by government from taxes paid by others."

3)The GOP emphasis on voter fraud (and consequent efforts across the country to make it harder for people to register to vote or to actually vote) allows the oligarch-led anti-democratic movement to disregard the will of the people because they have "gamed the system to maintain power."

The majority of Americans opposed the tax bill that almost every single Republican representative and senator voted for (no Democrat voted in either house of Congress to support the GOP tax scam).  But the GOP legislators think they can ignore what the voters want, because they have held discussions behind closed doors, and are "using the power of national government to prevent voters in more progressive lcoalities and states from being able to choose more progressive policies" by enacting a bill that penalizes voters living in high-tax, progressive states that actually already send more money to low-tax, economically suffering "red" states.

MacLean notes that George Mason University's Mercatus Center, funded by Charles Koch, has been leveraging universities for their political project of undoing progressiivism for decades.  They think people will be "absorbed with Facebook and binge-watching Netflix" so will disregard the way that the GOP and their oligarchic allies are using the national government to return to the late 19th century when oligarchs with property had all the power.  That's what is the "stealth nature of this tax bill."  Returning to a world where "only the wealthy were doing well and everybody else was screwed", a world preferred by James Buchanana, who "devised the playbook that the Koch network is using."

This tax legislation is, indeed, class warfare.  It represents a huge blow in favor of wealthy corporatists though creation of a gaping $1.5 trillion deficit hole that will be used by the GOP to decimate New Deal and Great Society programs on which most ordinary Americans depend --Medicaid to pay for nursing homes in the last years of life, Medicare to help afford needed medical care, Social Security to make up for the gap between the meager savings in retirement plans and the increasing costs of living after retirement.  These wealthy people in Congress just don't give a damn for ordinary working Americans, whether black or white, rural or urban, "conservative" or "liberal".  All they care about is making sure that people with property have even more property.  It has nothing to do with creating or promoting a sustainable economy that will lift ordinary workers stagnated wages.  It has everything to do with appeasing the top one percent.

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The Republicans' proposed tax legislation--whether the House or Senate version--is despicable.  It will exacerbate the already devastating income and wealth inequality in this country, leave the federal government without adequate funds for real infrastructure and social safety net needs, and place in almost inviolable power the wealthiest oligarchs of the country (and even the good ones exert a power that no one should possess in a democracy).

My previous posts on this so-called "tax reform" "simplification" package (it is neither) have outlined a number of pernicious provisions in the bills.  There are a few I haven't mentioned, such as the likely inclusion of taxation of tuition benefits to undergraduate and graduate students.  That will have an immediate impact on education and on basic scientific research.  Not surprising, given Paul Ryan, Donald Trump, and Mitch McConnell's aversion to fact-based science and intellectuals, but nonetheless devastatingly harmful to the country in loss of prestige for our universities, loss of the top minds to other countries, and loss of entrepreneurial and innovational thinking that will hamstring commerce and productivity.  Another is the "new" talk in the House of lowering the tax rate on the weathiest bracket by as much as two and a half percentage points--adding to the largesse for the wealthy otherwise larding the legislation and making it even more obvious that the only Americans the Republican Party sees itself as serving are those with at least millions and probably billions of net worth.  The Republican charade of right-wing "alternative facts" (shown most clearly by the Treasury Secretary's inability to provide a supported rationale for the absurd corporate and oligarch-favoring tax cuts) would have a destructive impact on the entire U.S. economy.  And it is not simplification--it is a huge complication that is ripe for tax abusers to abuse the complicated categories of differently taxed income.

But today there is a ray of hope that this tax scam might just not get passed --or might get turned around very quickly if it does get passed.  Doug Jones' defeat of constitutional scofflaw and likely multiple-sexual-predator Roy Moore should cause any thinking Republican in the House and Senate to take a step back and listen to the views of constituents across the country, where dislike of this tax legislation is the majority view.  The #MeToo movement and its impact on powerful media and other industry harassers, together with the fact that Democrats and Independents got out the vote in Alabama and defeated Roy Moore -- and another 20,000 likely lifelong Republicans decided to  write-in another Republican name other than Roy Moore--should tell current GOP congresspeople that "the times they are a changin' ".  Reaganomics--trickle-down, supply-side tax policies--don't work.  Kansas proved that, if anybody actually had any doubt before.  If the Republican majorities in the House and Senate pass this " Class War" tax legislation--written and argued and honed to a tee to serve the wealthiest multinational corporations and individual campaign donors while stabbing the middle and low-income classes in the back--they will potentially pay a big price at the polls in 2018 and 2020.   They will pay that price because their tax legislation will send the U.S. economy into another tailspin that will lead to cuts in the standard of living of ordinary people so people like the Trumps can have even more gaudy gold faucets in their many mansions.

I call on everyone who can to write and call Jeff Flake (Arizona)--ask him to stand on principle and vote against the end of the Obamacare mandate, the giveaway to the wealthy and big corporations, the ridiculous scammable complication of different rates for the same income depending on what job the taxpayer worked at or whether the taxpayer owned the business or was an employee.  Ask him to vote down this despicable tax legislation for the good of the country and ALL the people.  Do the same for Susan Collins (Maine), who already has expressed real concerns about the impact of the elimination of the health insurance mandate.  Even her 'bargained for' (but not actually promised) two-year patch wouldn't do much good:  millions of people, the most vulnerable amongst us, will lose health insurance and therefore health care if this tax legislation passes.    And let Bob Corker (Tennessee) know how much we all respect him for actually standing firm against this tax legislation travesty--and ask him to stand even taller by resisting the pleas to compromise principles 'just to get a win for  Trump'.  Let's push our Senators and Representatives to stand tall for a sustainable economy based on fiscal responsibility (don't create a $1.5 trillion dollar deficit) and distributive justice (don't push the middle class into dead-end living conditions) and end the giveaways to the wealthy oligarchs.

I predict that if this bill passes the expected accounting for the Republican Party will come even sooner and with even more  strength against those who supported Trump's daily vitriol of falsehoods and the Trump Administration's filling the DC swamp with those who put pollution, despoiling the environment, destruction of the wilderness and national public lands foremost on their agenda.

The Utterly Terrible GOP Tax "Reform" Scam

The Republicans in the House and Senate continue on their downhill rush to pass their so-called "tax reform" plan before the holiday break.  It's a mad rush to nowhere, a corrupt process of "please the oligarch" that will cause a huge deficit increase (on the scale of $1 to $1.5 TRILLION over ten years) and be used by the Ryan, McConnell and Trump cadre of liars to justify a domino effect of Medicare, Medicaid, and Social Security cuts.  It is class warfare of the one percent against everyone else.  And it is being sold to the American people with a litany of falsehoods.

Almost all the provisions in the bill are designed to be generous to the ultra wealthy and stingy to the middle class and poor. 

Corporations and their owners and managers--among the wealthiest people in the country--get the only permanent tax breaks.  It's done in the name of competitiveness, but that's bunk.  It essentially encourages corporations to continue to move profits out of the US because foreign profits are taxed at zero while US profits are taxed at 20%.  It pretends that the multiple tax breaks for big corporations are necessary (under disproven trickle-down and supply-side theories) to lead to more investment in business in the US and to more jobs and higher pay for workers.  But in fact corporations are enjoying record profits under current law and they aren't using those record profits to pay their workers more or to create more jobs or even necessarily to invest in the US.  Mostly they are just doing share buybacks for shareholders (ie, owners/managers and other shareholders) that include the  wealthiest people who own the most corporate stock.  That's because it is demand, not capital, that determines what business expansion is needed and results in labor shortages that give workers leverage to demand more pay.  Tax cuts for corporations just add to the already existing capital glut.

The estate tax cut (elimination in the House bill; doubling the exemption to levels that only the very few multi-billionaires will pay any at all in the Senate) ensures that the wealthy will pay almost no tax at all.  They borrow against their wealth while alive.  Their estates pay no tax on the accumulated wealth when they die.  Their children inherit with a "step up" in basis so they get a huge windfall.  And their children can pay off the parents' debt by selling a few items (because of the basis step-up, with no taxes either) and live on their windfall without ever lifting a finger to do any real work.

Individual workers really lose out in these bills.  Under the House bill, the rate on the lowest wage earners is INCREASED 20%--from 10% to 12%.  And all of the 'tax cuts' for ordinary taxpayers sunset after a few years, while the corporate cuts are permanent.  Shows where the GOP loyalties lie--not to the worker base that put them in office, but to the wealthy oligarchs like the Koch Brothers who donate to the GOP political campaign chests.

The pass-through provisions (a 23% "deduction" from income before tax is one version)--along with the ability of businesses but not individuals to deduct state and local taxes--are a great boon for wealthy owners of real estate partnership interests, like the Trump family.  But they make no sense at all.  The more different kinds of income categories that are created with different rates, the more you empower the wealthy to gamesmanship with the tax system.  That's what this legislation does in spades.

And after the American people spoke up in Town Hall after Town Hall that they wanted the Affordable Care Act health insurance system protected, the Senate's version of the so-called "tax reform" bill (developed in utter secrecy by Republicans bargaining with Republicans as though nobody else counts) eliminates the individual health insurance mandate (and accompanying penalty).  Without that, the entire idea of affordable insurance through government-operated exchanges fails, because the only people on those exchanges will be those who are sick enough or old enough or vulnerable enough to realize that they will need health insurance soon.  Insurance works by diversification of risk--that's why the Republican insurance plan in Massachusetts, the model for Obamacare, called for an individual mandate and penalty.  Without that core feature, the exchanges can't work because the risk isn't sufficiently diversified.  The Republicans who are trying to gut Obamacare know that, and apparently they don't care that this particular "tax cut" will in fact cost more than 8 million Americans the possibility of having affordable health care, likely leading to early deaths for a large number of that group.  They don't care, I guess, because "those people" are less likely to be wealthy and less likely to vote Republican.  If you are so blinded by partisan fealty that you no longer care about legislating for the good of the nation, you descend to the garbage dump level of this Republican tax bill.

Of course, the elimination of the individual tax cuts, the expansion of the real-estate-industry favorable tax cuts, the inclusion of what can only be called a 'mock' provision to deal with carried interest (it doesn't), the elimination of the medical expense deduction (in the House bill) that will leave the disabled, the injured, and the elderly in dire straits, the decimation of the casualty loss provision that helps ordinary people recover from natural disasters, the huge cutback to the state and local tax deduction for individuals (while continuing to allow it for all businesses)--all these provisions prove that Republicans don't care a fig about ordinary people.  We won't be spending money on basic scientific research (needed to be competitive in a global marketplace and needed to save lives from cancer and other diseases).  We won't be spending money on infrastructure (needed to have safe roads, trains, airports. etc).  We won't be spending money on  education (other than Betsy DeVos's favored religious charter schools that teach falsehoods on a daily basis).  We won't be creating a sustainable economy that serves all of our citizens.

Oh, but we will be decimating the environment, as Trump's lineup of industry trolls continues to reduce wilderness areas, as Lisa Murkowski sells her tax and healthcare vote to get to open pristine and irreplaceable Arctic wildlife refuge to the oil and gas fossils that have grown obese off 200 years of government subsidies (see The tax bill is bringing drilling in the Arctic National Wildlife Refuge closer than ever, Vox.com (Nov. 28, 2017)), as Zinke reduces FOR THE FIRST TIME EVER national monuments set aside by other presidents so that those obese coal and oil and gas guys can get even wealthier (see Zinke backs shrinking more national monuments and shifting management of 10, Washington Post (Dec. 5, 2017)), as Pruitt ensures that nobody at the EPA does anything to protect the air, water and land from industry pollution, see Goodby science, hello industry, LA Times editorial board (Nov. 6, 2017). .....

The passage of a tax bill that will create an additional one-to one-point-five trillion-dollar deficit is proof that the Republicans don't care if they destroy this country in their effort to return to the Gilded Age of the past (or, in Roy Moore's definition of the time that America was great, the slavery era when (white) families stayed together and were able to sell black babies away from their black mothers (or half white babies away from their raped black mothers)).

What is the Republican response to the deficit and mal-distribution problems created by such a huge tax cut for the already wealthy?

1) The tax cut will pay for itself.  This is trickle-down gobbledy-gook.  The vast majority of economists and tax experts are quite clear that this is simply not a supportable claim.  It's pie-in-the-sky ideology with no basis in fact when there have been a number of attempts to find such a basis.  It wasn't true for Reagan, back in an economy for which tax cuts held much more promise of economic stimulus than they do for our current situation.  The Kansas experiment shows this trickle-down reasoning is without foundation. Russell Berman, You Better Learn Our Lesson: Kansas Republicans say they are worried that Congress and the Trump administration will repeat the mistake they made in enacting budget-busting tax cuts, The Atlantic (Oct. 11, 2017).  But Treasury has now put out a one-page analysis--compared to the careful, extensive, fact-based analyses usually prepared to support well-researched tax proposals--saying that the GOP plan would produce record growth and that growth would pay for the tax cuts.  See Alan Rappeport and Jim Tankersley, Treasury Defends Tax Plan Cost with One-Page Analysis (Dec. 11, 2017).  Event the speculative Treasury 'defense' assumes away half of the deficit with legislative cuts that aren't even on paper yet.  It's pure fiction.

2) Medicare, Social Security, Medicaid (the "entitlement" programs) will have to be cut to make up for any deficits.  That, of course, is the underlying plan. See Jeff Stein, Ryan says Republicans to target welfare, Medicare, Medicaid spending in 2018, New York Times (Dec. 5, 2017).  Create a deficit and use it to 'starve the government' to justify cutting any programs that don't serve the oligarchs.  Most of that minority of people who voted Trump into the presidency (assuming there wasn't a good bit of ballot falsification, which I think went on in Detroit to not count everyone's ballot) will suffer from this--they depend on Social Security when they retire and on Medicaid when they become incapacitated in their old age and need nursing home or assisted living care.  Under the Republicans, we'll return to the "good old days" of the Great Depression when old folks became homeless and the government didn't have to bother with caring about the vulnerable.

We all should be hitting the phones and telling every GOP member of Congress that they are not there to protect their wealthy donors: they are there to protect us and ensure that the economy is sustainable and viable for all of us.  This tax legislation stinks. Tell Congress to ditch it in the sewers where it belongs.

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The Long Game of Republican Economics

Taxes, Government, and the Good Life, Part 2

In yesterday's post, Taxes, Government, and the Good Life, I noted the "long-term position of the GOP" in favor of downsizing government, which can be seen, at least in part, as a way to justify the GOP obsession with cutting taxes on the wealthy and on corporations (mostly owned by the wealthy).  Worth exploring in that context is Eduardo Porter's article entitled "The Case for More Government and Higher Taxes," NY Times (Aug. 2, 2016).

Porter starts by noting the radical shift in the way Americans think about government.  "Americans once appreciated the government that serves them. That’s long gone."  He draws on research by the Pew Research Center showing that 4 of every 5 (or more) voters have said in the last 6 years that government makes them feel frustrated or angry. 

That anger with government has become extraordinarily visible in this election season as one of the candidates for president has seemingly fed on the distrust and hate of a government whose leader's face is different from the majority white population.  Most of us have seen this anger on the screen during the GOP convention, as Trump supporters--mostly white (only 18 out of almost 2500 delegates were black)--expressed their frustration with the societal changes that they see as leaving them behind and creating a world that they don't like.  On the right, that is, the frustration with government seems to morph easily into vitriol, as Trump supporters openly condemned blacks and used violent expressions to talk about the first female presidential nominee of a major party, Hillary Clinton.  (See, e.g., the video below "Unfiltered Voices from Donald Trump's Crowds"--warning: there is offensive speech here.)

 

Americans once understood that government allows people--through taxes, through voting, through volunteering--to create public institutions that could never exist if each one of us had to do it alone.  Through government, we citizens as taxpayers can accomplish projects much  larger than ourselves.

But the shift that Porter mentions has  occurred over the last few decades, due, in large part, to the funded effort by various "think tanks" and high-powered, wealthy individuals in support of a larger goal of maintaining very low regulation on Big Oil, Big Pharm and other Big Business and ensuring very low taxation on rich individuals and the corporations they own and manage.  The constant repetition of mantras that denigrate government persuade Americans that, as Reagan said while serving as the most powerful government leader in the world, "Government is the problem" or, as Rush Limbaugh said, it should be downsized until it can be drowned in a bathtub (paraphrasing).  We constantly hear from the Fox News bloviators that the growth of government stifles the economy, that private enterprise is ALWAYS better than government at doing any job, that public employees should be fired--or at least not allowed to form unions that give them strength in negotiations, etc.  Most of these statements appear without support--those on the right simply presume them to be true and are not very willing, in my experience, to delve into the actual facts to see if they support the presumption.  And the push for deregulation and tax cuts for the benefit of the rich continues apace.

As we approach this November election, though, we should ask ourselves what evidence there is to support that mantra.  Is it just a way to 'brainwash' voters into voting against interest?  Is it just a way to ensure that the elite 1% continue to be able to get Congress to enact laws that favor them?   Is it just a way to convince Americans that regulation is bad because the 1% doesn't want their ever increasing profits to be reduced one whit by fair wages sharing productivity with workers, or regulation that would protect the natural beauty of this great country while providing for a more sustainable economy?

Porter suggests a new book as a worthwhile reference on the topic:  How Big Should Our Government Be?, by Jon Bakija, Lane Kenworthy, Peter Lindert, and Jeff Madrick.  The authors, he notes, make clear the value of government and suggest that there are four important  tasks for government facing us now.

“A national instinct that small government is always better than large government is grounded not in facts but rather in ideology and politics,” they write. The evidence throughout the history of modern capitalism “shows that more government can lead to greater security, enhanced opportunity and a fairer sharing of national wealth.”

"The scholars laid out four important tasks: improving the economy’s productivity, bolstering workers’ economic security, investing in education to close the opportunity deficit of low-income families, and ensuring that Middle America reaps a larger share of the spoils of growth."

The article includes a good graphic, available here, showing the importance of government to quality of life.  Countries that have increased tax revenues as a percentage of GDP have achieved  better GDP growth than the United States, which has enacted numerous tax cuts and kept government extraordinarily small (and also less innovative). As the blurb for the graphic says,

"Despite arguments that Big Government hinders economic activity, many countries where government has grown the most have also experienced stronger economic growth. Governments have grown across most industrialized nations — raising more taxes over time to offer more public services. In the United States, by contrast, the government remains virtually as small as it was 50 years ago."

Readers will want to look at the graphs accompanying the Porter article, available here, showing GDP growth versus tax revenue as a share of GDP from 1960 to 2013, and the change in tax revenue as a share of GDP from 1965 to 2014 for most OECD countries.   (I was unable to reproduce them here, though the black point in the left graph below is the United States, and the thick black line in the right graph below is the United States.)  These figures clearly show that the economic growth that the right claims to want to produce is in fact highly correlated with more government spending and higher taxes as a percent of GDP.  Of course we want the taxes to be reasonable and the spending to be the right kind--public infrastructure and human capital, basic research that supports biomedical, technical and other innovations, etc.  But blanket statements that smaller government is always better, that private enterprise always does things better than government, or that ordinary Americans are better served by "getting rid of" regulations developed to protect people and our environment--those kinds of ideological dogmas are simply ungrounded in fact.

 

Does Lowering Corporate Tax Rates Create Jobs? Answer is a resounding "no"

For years (decades, actually), the American pro-wealthy right has argued that lowering corporate tax rates will create jobs.  That is the presumed purpose behind the push by Dave Camp to enact a tax reform package with lower corporate rates, and the reason that even President Obama has voiced (tepid) support for lower corporate rates.

Baucus at Senate Finance and Camp at House Ways & Means are part of an oft-cited "bipartisan consensus" (though its never clear whether there really is one) for cutting corporate tax rates through  "revenue neutral" corporate tax reform.  This is a consensus which, if it does exist, has resulted from decades of corporate lobbying in Congress and near-absolute capture of the media on the issue, combined with the proliferation of robotic economics and "law and economics" faculties who scribble endlessly about the "economics" of corporate and capital income taxation, producing studies that suggest policy based on simplifying assumptions commonly used by economists that ensure that the outcome of their mathematical games should have almost no application  in the real world.  See, e.g., Ponnuru, Max Baucus's Self-Defeating Corporate Tax Plan, Bloomberg.com (Dec. 2, 2013) (indicating that "There’s bipartisan support for lowering the 35 percent federal corporate tax rate, which is among the highest in the developed world. Both parties see the rate as a burden for the economy because it pushes investors -- American and foreign -- to seek their returns in other countries. Economists argue that the tax therefore depresses wage growth in the U.S., a claim supported by numerous studies.")

So in spite of those many "studies", I've argued frequently in the past that there is no there there--i.e., that lowering corporate tax rates will do nothing to create jobs.  Instead, I've said, it will simply deliver an even higher profit margin to be skimmed off by the highest paid executives and, possibly, shareholders.  The higher profit margins are unlikely even to be used to increase workers' shares of the corporate revenues through higher wages, a place where they could most help the economy other than new jobs created.  Thus, the drive for "revenue neutral" corporate tax reform (cut corporate taxes, cut expenditures elsewhere to make up for the decreased corporate tax revenues) is just another example of corporatism as an engine of the modern form of US class warfare.

The Center for Effective Government (formerly OMBWatch) has now done a study looking at the "job creation track records of 60 large, profitable U.S., corporations (from a list of 280 Fortune 500 companies) with the highest and lowest effective tax rates between 2008 and 2010."   See Scott Klinger & Katherine McFate, The Corporate Tax Rate Debate: Lower Taes on Corporate Profits Not Linked to Job Creation, Center for Effective Government, Dec. 2013.   It confirms that corporate tax cuts don't create jobs.

The study, for example, found that a supermajority (22) of the 30 corporations paying the HIGHEST tax rates created 200,000 jobs between 2008 and 2012, while only 8 of those 30 had any reductions in the number of employees.  IN contrast, the 30 profitable corporations paying no or very little taxes in that period had an aggregate loss of more than 51,000 jobs--half created a few jobs and half reduced jobs between 2008 and 2012.

Here's the introductory text to the report:

The American corporate tax system is badly broken. Some corporations pay a third or more of their profits in federal taxes, while others pay nothing at all. Still others legally claim large sums as refunds even though they’ve generated sizeable profits in the United States. The responsible corporations that pay their fair share of taxes – companies like Smuckers, Nordstrom, Hershey, and Automatic Data Processing – are helping to fund the schools, infrastructure, national parks, and public protections that benefit all Americans. And the taxes they pay don’t stop them from investing in their businesses and adding new jobs for U.S. workers.

Many corporate leaders agree the U.S. corporate tax code is broken, but they argue that the core problem is that the tax on corporate profits (35 percent) needs to be lowered. Verizon’s CEO Lowell McAdam and 16 other CEOs who are members of the RATE Coalition wrote in a joint letter to the leaders of the House Ways and Means Committee and the Senate Finance Committee: “Our competitors in the OECD have lowered their statutory tax rates while the U.S. rate has remained relatively constant. This has resulted in an uncompetitive tax environment that discourages investment and job creation here at home…a lower corporate rate will boostinvestment in the U.S., bringing more American jobs, innovation and growth.” ...

A 2013 study by the U.S. Government Accountability Office found that large corporations paid on average just 12.6 percent of their 2010 profits in federal income taxes.1 Even when foreign, state, and local taxes were added in, the companies paid only 16.9% of their worldwide profits in [all] taxes in 2010. By contrast, small businesses pay an average tax rate on their profits of 19 percent, according to the Small Business Administration. U.S corporate profits as a share of the economy are at a 50-year high, yet federal corporate tax collections as a share of the economy are near a 50-year low. Id. at 2-3 (emphasis added).

Lowe's was an example of a relative high tax-paying company that created jobs:  paying taxes at more than 36% and hiring more than 28,000 new employees between 2008 and 2012.  In contrast, Verizon made enormous profits ($32 billion between 2008 and 2010), paid no taxes (receiving refunds of $951 million) and eliminated about 56,000 jobs between 2008 and 2012.  The 58 firms that repatriated $218 billion in the 2004 "tax holiday" at very low profits saved $64 billion in taxes but then proceeded to eliminate 600,000 jobs.

Not to mention that if corporations in 2012 had actually paid the corporate tax rate of 35 percent on their humongous $1.8 trillion in profits, the corporate tax receipts would have reached $630 billion instead of the $242 billion actually paid, resulting in a one-third reduction in the deficit.

It should not be surprising that most Americans see the slide in corporate taxes relative to corporate profits as a problem--the lost revenue could go a long ways to preventing cuts to education and infrastructure spending or Medicare, Medicaid, and Social Security benefits.

[A] brand new national survey by Hart Associates found that “by a remarkable nine-to-one ratio, voters want revenue generated by closing corporate loopholes or limiting tax deductions for the wealthy to be used for public investment and deficit reduction (82%), not to lower tax rates on corporations or the wealthy (9%). In other words, the public does not support “revenue neutral” corporate tax reform.

 Folks, it is quite clear that there cannot be a sustainable good-for-all economy if productivity gains constantly drift upwards (redistribution from the many to the few) as they have been in this country for the last two decades while at the same time tax policies "reward" the elite with lower taxes (another form of redistribution from the many to the few).  One has to wonder just how tone-deaf Congress must be, to continue to listen to economists whose policies rest on mathematical silliness and the lobbyists for big corporations and their wealthy shareholders and managers, while ignoring the crisis in middle and lower-income America due to a stagnant minimum wage and the deftness of the elite in capturing all productivity gains.  The tone-deafness has all the earmarks of a form of elitism--Congress is simply unable to understand the cacophony of the ordinary world and finds the neat equations of Chicago School economists, accompanied by the tender ministrations of corporate lobbyists and elbow-rubbing with CEOs and Board chairs, music to its ears.

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

I should have written about this long ago, but a recent "dealbook" by my former colleague Steven Davidoff, A Chance to End a Billion-Doillar Tax Break for Private Equity, New York Times (Oct. 23, 2013) reminded me of the import of a recent court decision--Sun Capital Partners (No. 12-2312 First Circuit Cout of Appeals July 2013), --important for its implications for the private equity industry's privileged "carried interest" tax treatment (income to managers currently treated as preferentially taxed capital gains rather than ordinary compensation income) and the assumed treatment of the pension obligations of employees of companies taken over by those funds (ability of private equity funds to disavow a company's pension obligations to its ordinary workers through bankruptcy). 

As Davidoff notes, private equity managers claim that changing the carried interest privilege would result in less investment and ultimately harm economic growth.  That's an argument long used by the right to justify the capital gains privilege, but certainly controversial (at least), since uninvested money will earn even less than invested money that is taxed at a slightly higher rate. Given the hugely outsized earnings by equity fund managers--in the hundreds of millions and even billions annually--it seems unlikely that a higher tax rate would sharply reduce investment.  They'd still have after-tax income equal or more than most CEOs.  And as I've noted frequently here, getting carried interest taxation right would be at least one step towards ensuring that the tax system performs its most important justice function by reducing, rather than exacerbating, the income inequality dynamic that harms the kind of broad-based economic growth that underlies a sustainable economy.  See, e.g., works on income inequality and the problems of unequal wealth distribution for sustainable economies by Benjamin Friedman, Piketty & Saez, Kate Pickett and Richard Wilkinson  (e.g., The Spirit Level: Why Equality is Better for Everyone (2009)).

The Sun Capital case arose out of the takeover of Scott Brass, a manufacturing business, by Sun Capital Partners, a private equity fund that buys out distressed companies for restructuring and resale (often involving firing workers and using bankruptcies to disavow pension obligations).  As Davidoff summarizes:

About a year after the takeover, Scott Brass sought bankruptcy protection.  Sun Capital sued the comapny's pension fund, the New England Teamsters and Trucking Industry Pension Fund, seeking a judgment that it was not liable for $4.5 million of the company's pension.  Under the pension laws, Sun Capital would be responsible for this amount if Scott's employees were under the control of Sun and the funds were engaged in a 'trade or business.' The pension fund argued that the Sun Capital funds were liable because the funds were engaged in the trade or business of operating Scott.  Sun Capital argued the opposite, saying that it was merely a passive investor.  A Chance to End a Billion-Doillar Tax Break for Private Equity 

The court concluded that the private equity fund was engaged in a trade or business for purposes of the Employee Retirement Income and Security Act (ERISA), rather than merely a passive investor in the business that it took over, Scott Brass, Inc.  Sun Capital Partners (No. 12-2312 First Circuit Cout of Appeals July 2013).

This decision could clearly "make it harder for private equity funds to walk away from the unfunded pension liabilities of companies they have bought if the company goes bankrupt."  Vic Fleischer, Sun Capital Court Ruling Threatens Structure of Private Equity, DealBook, New York Times (Aug. 1, 2013).  And it is "not a big leap to argue that the fund was [also] engaged in a trade or business for tax purposes."  Id. 

No one disputes that the general partner (or its affiliated management company) often gets highly involved with the fund's portfolio companies.  In Sun Capital, for example, the management company weighed in on the portfolio company's personnel decisions, capital spending and possible acquisitions.  The critical question is whether the general partner's activities can be attributed 'downward' to the fund--that is, from the partner to the partnership.

***

...[T]he court noted that Scott Brass Inc. paid fees to the general partner of the fund for the management services it provided.  Those fees were then used to offset part of the 2 percent annual management fees that the limited partners normally pay to the general partner.  The court explained that these fees thus 'provided a direct economic benefit' that 'an ordinary, passive investor would not derive: an offset against the management fees it otherwise would have paid its general partner.' ...

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

 

If the Treasury and IRS (or courts) were to conclude that the trade or business determination for ERISA should carry over to tax, a number of tax consequences could well follow that would upend the current highly favored tax treatment of private equity fund investors and investor/managers.

• foreign investors in a private equity fund could be treated as having income that is "effectively connected" with a U.S. trade or business, resulting in being subject to tax on that effectively connected income;
• tax-exempt investors in a private equity fund could be treated as having trade-or-business income, resulting in application of the UBTI (unrelated business taxable income) rules that would subject the normally tax-exempt investors to tax on that income; and
• private equity fund managers' profit shares ("carried interest") could be treated as ordinary income from sales in the ordinary course of business (bought out and restructured companies) rather than as capital gains income from a passive investment.

Will Treasury grab this lifeline for eliminating the privileged private equity tax treatment?  Remains to be seen.

 

PS.  If private equity funds are really trades or businesses, then isn't a private "credit fund" really a banking business that should be regulated as such?  See, e.g., Manning, Exclusive: Florida Private Equity Fund Expands, Plans to Offer Credit, Tampa Bay Business Journal (Oct. 28, 2013).

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Will Boehner Prevent Extremists from Causing US Debt Default?

As the shutdown continues, Republican Speaker Boehner still refuses to bring a clean budget resolution to a vote.  It is most likely that a clean resolution would pass, ending the charade of the extremist Tea Party faction in the House willing to cause individual suffering for hundreds of thousands of workers and communities, while also damaging the US government with the huge incremental costs of transitioning into and out of shutdown.   Instead, word is that Republicans are planning a series of small bills so they can claim they are funding the "good" stuff in the government.  Again,  a perfect example of hostage-taking--letting those the hostage-takers like get out, but holding whatever the hostage-taker doesn't like hostage.  The Dems would be wise to say no to all of these special interest bills.  

The media tend to present this as a "he said, she said" type situation where both sides are at fault.  It isn't.  This is a case of a desperate minority attempting to enforce their will on the majority of this country through whatever means they can find, including destroying the economy and causing individual suffering.  The Tea Party efforts are even causing problems for Republican congressional staffers, many of whom receive fairly low salaries (as little as $28,000 a year), who would be denied any federal subsidy for insurance under one of the Tea Party proposals, even though both parties had agreed that they should be eligible.  See Joan McCarter, GOP staff: Our bosses 'threw staff under the bus', Daily Kos (Sept. 30, 2013).

The Dems in control of the Senate negotiated with the House over the budget measure for months.  And the Dems compromised an extraordinary amount by agreeing to the "across-the-board" sequester, which cuts government programs in arbitrary and harmful ways.  And the Dems agreed with the House on letting most of the Bush tax cuts be made permanent, including the dividend treatment as capital gains that benefits mostly the wealthiest of the wealthy.  The Dems have compromised already on fiscal and tax policy, giving the right much of what it wanted.   It was the House, controlled by a minority of Tea Party Republicans, that refused to appoint conferees to the necessary conference committee to work out the details, just as it is the House that continues to attempt to exploit shutting down government/causing suffering/and potentially cause a US default to try to get its way.  The Tea Party Republicans have shown a reckless willingness to put the country at risk of huge harm to get their way.

Senator Reid has made a reasonable offer that Boehner should let a clean continuing resolution get to vote so that the government can reopen, and then the Senate will appoint conferees for a budget conference committee where the House and Senate can hash out a real budget bill.  See Lewison, Reid makes Boehner an offer: Reopen government and then let's talk, Daily Kos (Oct 2, 2013).  And today, President Obama challenged Boehner to allow a vote and get the government operating again. Stop this Farce, Obama Tells Contress on this Third Day of Shutdown, Reuters.com (Oct. 3, 2013).  

"As reckless as a government shutdown is, as many people as are being hurt by a government shutdown, an economic shutdown that results from default would be dramatically worse."  Id.

Even the threat of default is problematic.  

The Treasury report shows that the Congressional debt-limit standoff in 2011 hurt consumer confidence, small-business confidence, household wealth and the stock market, with ramifications for lending and the economic recovery.  Id.

But maybe there is a light at the end of the tunnel.  Apparnetly, Boehner realizes that Republicans will pay heavily if he lets this fight go to the point of causing a federal default so he "has told colleagues that he is determined to prevent a federal default and is willing to pass a measure through a combination of Republican and Democratic votes, according to multiple House Republicans."  See Ashley Parker & Anne Lowrey, Republicans Say Boehner Vows to Avert Federal Default, New York Times (Oct. 3, 2013).  Michael Fitzpatrick (R-PA) indicated he expected there would be another vote with majority Democratic support. " 'Hurricane Sandy, the fiscal cliff, all of the big votes require reasonable Republicans and Democrats to come together in order to pass it and get it to the president’s desk,' he said. 'This will be no different.' " Id. 

One of the commenters on the Times article about Obama's speech urges that the Dems hold firm.

[The Republicans are] just holding out at this point to get some kind of a fig leaf so they can call their shutdown tactics a success. And that's exactly why Obama and the Democrats shouldn't give them an inch. If we don't want to go through this destructive, pointless process every three months, we need the whole nation to see that shutting down the government is a losing gambit. There should be no fig leaf and no token concessions of any kind. ... 

Another points out the historical origin of the debt ceiling--demonstrating that extremists on the right have long used whatever means they can find to try to undo programs they don't like.

[W]e all should remember that the "debt ceiling" itself was established in 1939 by the conservative coalition in Congress after major Republican gains in the 1938 elections in order to push back New Deal public works and other programs and prevent the establishment of new social welfare programs. The debt at the time was 41 billion and the [ceiling] was 44 billion. ...

A sustainable economy requires a Congress that will act with some temperance to reach agreements across partisan disputes.  A government cannot be run by minority blocks who demand their way no matter what.  Voters should remember this mess when next they go to the polls to elect a Senator or Representative.   

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Cruz, Tea Party, Hostage-Taking Budget Tactics (and the IRS)

The House, dominated by Tea Party/GOP politicians (or those fearful of their impact on upcoming primaries) passed a bill that attempted to tie the continuing operations of the government to compliance with Tea Party ideas about getting rid of the health reform legislation duly enacted four years ago.  See Weisman, House Bill Links Health Care Law and Budget Plan, New York Times (Sept. 20, 2013). Ted Cruz has now run his non-filibuster filibuster in the Senate, and then voted against his own "principled" filibuster position (presumably out of a quite justifiable fear that he would be shown for the fool he is as the only one voting in support of his "principles", since the Senate vote was unanimously on the other side). Ted Cruz Filibuster, NY Daily News (Sept. 27, 2013).

Remember, these are the same Tea Partiers who cried "Get Government Hands Off My Medicare," so one can't expect to see much rational debate about facts and ideas, especially on health care.  The fact that Obamacare is based on a Republican, business-centered idea is lost on the Tea Partiers, who seem to simply hate anything associated with Obama and Democrats.  Similarly, the fact that the reforms for the first time ensure that people who have pre-existing conditions can find insurance to help pay for catastrophic health costs at reasonable rates doesn't seem to penetrate the Tea Party conscience.

The Tea Party and its amenable GOP politicians, however, apparently aren't done trying to use whatever tool however destructive to get their way on health care. Having a sustainable economy is not even on their agenda.  After not succeeding in repealing the health care reform law that at least offers some Americans a chance for needed health coverage (including those with pre-existing conditions and those whose employers offer no plans and who cannot afford the typical premiums for non-group plans), the Tea Party/GOP coalition is using the threat (and likely reality) of a devastating government shutdown unless it gets its way on a matter that the American people as a whole have soundly rejected.  It is ready to push the country off the fiscal cliff all over again. So after the Senate voted cloture to consider the House bill and then passed a clean funding bill to get us through at least a few more months, the House GOP (with the Tea Party reactionaries in charge) again voted on Saturday to add amendments intended to destroy Obamacare to the funding bill (a one-year delay  plus a repeal of the medical device tax, one of the measures intended to cut health care costs and pay for needed reforms).  

The message is simple.  The GOP is attempting to hold hostage the entire federal government, including at least 800,000 federal employees who will be furloughed but who need their paychecks to live, and many towns and cities across the country that depend on their federal government agencies and employees for their own livelihoods.  The Tea Party/GOP coalition has demonstrated that it doesn't care about the government, the long-term harm to the country, or the suffering of individuals caused by these actions.  The Tea Party/GOP coalition is willing to keep going its selfish way, like a petulant child determined not to let anybody have anything at all unless he gets his way.

And even then, it apparently intends to continue to wreak havoc, with the threat of causing the US government to default on its debt for the first time ever, using the silly comparison of the federal government to a family operating on a fixed budget as its equivalent of P.T. Barnum's fictitious but real-seeming mermaid to scam its "Tea Party" members.

While we need to make judicious choices about how and what we spend on, we shouldn't make those decisions based on a single-minded and short-sighted goal of cutting tax revenues and not increasing the federal debt limit.  We are an enormously rich country.  We could work miracles of ending poverty, repairing infrastructure, funding basic research, and creating educational opportunity if only we had the will to do so.  And doing those things would create jobs and hope for the under-and un-emplolyed.  This is because the federal government is not a family operating on fixed wages.  It can print money.  It can also raise taxes.  We are one of the lowest-taxed countries in the OECD, down at the bottom of advanced countries with the likes of Turkey and Mexico.  We have allowed corporations (and their mostly very rich shareholders) to avoid taxes, through legislation and through sharp-witted corporate tax attorneys, to the point where they are only paying a pittance of their enormous profits to the government.  We have allowed our tax brackets to become fossilized at the upper range at extraordinarily low levels of income, when the top earners get so many millions that they pittance that even the top rate brings in is just a gnat's bite for the rich.  

These facts scream for recognition that the Tea Party goals are not only damaging in the process of government-hostage-taking being used to try to reach them, but highly unfair and irresponsible in their likely impact of accelerating the increasing inequality in this country--inequality that means the rich are getting rich while the poor and middle class are losing ground. Thus, the Tea Party/GOP coalition is pushing forward in what amounts to class warfare on behalf of wealthy Tea Party funders like the Koch Brothers and their corporate empire and the "silver-spoon" crowd like Mitt Romney who think that they got where they are through their "merit" (ignoring the many advantages of networks and educational opportunities that helped them "make it" in the status-and-power-based world of crony capitalism).

Charles Reid at Huffington Post  concluded that Cruz was a huckster primarily intent on self-promotion appealing to a Tea Party/Republican base that invites itself to be huckstered.  Here's his description:

[A] good half of the Tea Party is pure, old-fashioned American hokum. There are the conspiracy theorists selling their tales of devious plots by the Federal Reserve. And the gold dealers who spin elaborate yarns of out-of-control inflation which the government keeps secret. And there are the Second Amendment fanatics warning ominously about plots to disarm law-abiding American constitutionalists. There are even the patent-medicine folks. Newsmax, a principal Tea Party news organ, is filled daily with claims about cures for everything from diabetes to Alzheimer's. Charles J. Reid, P.T. Barnum, Joe McCarthy, and the Rise of Ted Cruz, HuffingtonPost (Sept 27, 2013).

But Cruz also draws on what Richard Hofstadter called the "paranoid style" of American politics, says Reid.

This mode of thinking is darkly conspiratorial. The world is sharply divided -- "us" against "them." And those who stand against the heroic defenders of justice and the American way are always secretly scheming to run not just the country but the entire world.  

***

[T]o enter today's GOP base is to cross the border from reality into Glenn-Beckistan. There are the young-earth creationists who see the whole of empirical science as a diabolical plot to conceal divine creation. There are the global warming skeptics, found even in the pages of the formerly great Wall Street Journal. And then there are the folks who come out of the woodwork at conservative workshops and rallies: The ones who want to abolish the IRS. Those who wish to dismantle whole government agencies. Those who believe Social Security is irretrievably insolvent, an accusation first made by Alf Landon in 1936. Even the next generation of segregationists who once thrilled to Wallace and Goldwater.

Charles J. Reid, P.T. Barnum, Joe McCarthy, and the Rise of Ted Cruz, HuffingtonPost (Sept 27, 2013).

This is what the U.S. Congress is reduced to--paranoid hucksterism parading as compassion for the people.  A minority of flim-flam artists huckstering for attention that will, they think, win them reelection and please their paranoid-prone base of Tea Party/GOP constituents--the group who thinks their religious freedom is being oppressed when they can't repress everybody else's religious rights; who thinks a conspiracy to undermine them exists when saner thinking attempts to impose some kind of reasonable restrictions on the gun mayhem that is killing this country's children and youth and elderly in what we once thought were relegated to movie depictions of Old West shoot-em-outs; and who combines this paranoid conspiracy-thinking with anarchic libertarianism to conclude that "taxation is theft" and "government is the problem" even when these majority-Republican rural constituencies from Alaska to Mississippi depend on government employment and other federal dollars for their very livelihoods.  See In Republican States, More Government Jobs, New York Times (Sept. 27, 2013).

There's the rub.  The inability of the Tea Party base to listen, to consider facts, to accept the importance of community and the important role of taxes in maintaining the institutions that make community possible through collective action.  It makes me think of George Orwell's 1984, as depicted in the movie with John Hurt and Richard Burton --a population that has taught itself not to think with home-schooling and religious indoctrination, reinforced by political demogogues who retain power and perks by figuratively beating the proletarian to a nonthinking mass that resents any attempt to act collectively for the greater good of the people. 

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Despite Cruz, Senate heads toward Obamacare vote

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

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

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

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

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

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

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

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

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

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

3. cutting out corporate taxes means increasing the deficit

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

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

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

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

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

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

Related articles

$2 Trillion Wasted In Tax Breaks For Wealthy

NY Times on Corporate Tax Planning/Tax Avoidance

Wealthy benefit the most from top tax breaks, government study shows