ataxingmatter

The Times Handles the Trump Tax Cut Framework with Kid Gloves

There's been a good bit written about the Trump tax cut framework released just over a week ago.  Most of it points out, as I have here and here, the absurdity of the claims by Trump and GOP spokespeople that this isn't a tax cut aimed at benefiting the ultra wealthy.  After all, even with few details and no attempt to deal with the really tough issues that would face real tax reform considerations, it is awfully clear that almost everything in the package is designed to make the wealthy even wealthier. 

Just a quick review of the way the proposed tax cuts exclusively or primarily benefit the ultra wealthy:

• elimination of the estate tax, which taxes fewer than 2% of the estates, those that have in excess of $11 million (the couples' exempt amount) and haven't used the various trusts and family partnerships to let even more estate value escape tax through valuation gimmicks
  • Not waiting on the tax cut proposal, Trump's Treasury secretary Steve Mnuchin announced in "Second Report to the President on Identifying and Reducing Tax Regulatory Burdens" (Oct. 2, 2017) a current step to let wealthy people continue to use valuation gimmicks to avoid a fair estate tax, through withdrawal of the Obama Administration's proposed regulation under section 2704 that would disregard the purported restrictions on certain family-controlled entities in setting estate valuations--a regulation clearly merited because of the ridiculous scams of putting assets in family partnerships in order to claim that they are worth 1/3 of their actual value, even though the partnership can be dissolved afterwards with the full value magically returning.  (I'll deal with the regulatory changes in my next post.)
• elimination of the AMT, which imposes tax when the taxpayer would otherwise benefit from a surfeit of regular income tax subsidies (loopholes, tax expenditures, deductions, credits).  For a thorough analysis of the AMT, see A Taxing Matter series of 6 posts, beginning here.
• reduction of the statutory corporate tax rate for the largest corporations from 35% to 20%, which benefits primarily the highly compensated managers (who receive substantial amounts of stock options as part of their compensation) and big shareholders (who tend to be mainly the ultra wealthy who own most of the financial assets) and does little or nothing to help small businesses, that already pay tax rates of 25% or less
• creation of a single 25% rate for recipients of all business pass-through income (i.e., from partnerships), which benefits almost exclusively the ultra rich, since small business income is already taxed at 25% or less, while wealthy partners in real estate firms would be taxed at the highest individual rate under current law on their pass-through income, and
• creation of full, upfront expensing, resulting in a non-economic windfall to businesses that will, again, mainly just increase profits passed on to their wealthy owners. (Although this is purportedly a five-year provision, everybody knows that is just a gimmick to pretend that its impact on the deficit is less than would be admitted if it were permanent.  Everybody also knows that the intent is to make it permanent.)

But there are always journalists who try a little too hard to give obviously bad tax ideas a surface claim to reasonableness.  Apparently, even James Stewart, who writes "common sense" entries for the business section of the New York Times, suffers this vulnerability.  See, for example, his "Tax Cuts are Easy, but a Tax Overhaul?  Three Proposals to Make the Math Work," New York Times (Oct. 6, 2017), at B1 (digitally titled "Tax Reform that doesn't bust the budget? I've got a Few Ideas, Oct 5, 2017). 

I like the print title better, since the Trump Plan has clearly already ditched any real idea of "tax reform" for a wholesale attempt at trillions of dollars of tax cuts mostly benefiting the rich.   There are other things that aren't so good about the article.

1) Stewart calls the Trump giveaway to the rich "the most ambitious attempt at tax reform in over 40 years."  That's simply not correct, because it isn't an attempt at tax reform and it isn't really ambitious. 

• Ambitious? How can Stewart call a grab-bag of all the old GOP cuts-for-the-rich gimmicks "ambitious."  Unless he thinks that conning typical Americans who don't understand much about taxes into thinking that this is a populist tax reform intended to help the middle and lower income classes and not drop more riches on the already rich makes it 'ambitious'..... 
• Tax reform?  This isn't tax reform; it's just a series of tax cuts.  The framework leaves any thinking about tax reform for somebody else to do--which means it really isn't intended to happen at all.  Later in the article Stewart quotes Holtz-Eakin (right-wing tax cut advocate) and Kevin Brady (same) about the "ambitious" framework.  They're gung ho.  Brady says it's ambitious because they are trying to do what the 1986 reform  effort did in several years in only a few months.  Nope--they are not trying to do what the 1986 reform did.  The 1986 reform was a fully bipartisan effort in both the House and Senate, with  Packwood in the Senate and Rostenkowski  in the House leading lengthy hearings and in-depth study of issues, along with a responsible and active Treasury and CBO providing in-depth analysis of impacts.  Trump and the GOP now intend to pass a tax cut for the rich with only GOP support (unless Trump can bully some election-vulnerable Democrats into going along with the travesty).  And they don't intend the kind of exhaustive study and consideration that would provide real information on who would benefit and who would be hurt.  We've already heard that some GOP want to pay an outside (GOP-friendly) consultant to do the "dynamic scoring" and not the CBO, because they want to be sure that it predicts plenty of growth (a number that is easily manipulable, which is why 'single score dynamic scoring' is utterly absurd).
  • Tax reform would look at the wasteful expenditures we make through the tax system to support old technologies that are clearly part of human-caused climate change, such as our continuing century-long subsidy of fossil fuel extraction, coal-based mountainside destruction, and environmental wildlands-destroying oil, gas, mineral and cattle leases. 
  • Tax reform would consider who has benefited most from the many loopholes and tax expenditures that we've riddled the original 1986 tax reform act with in the years of money-smoothed lobbying since--such as the reinstatement of the preferential capital gains rate within 2 years of the 1986 tax reform's well-considered removal of the preference, or the reinstatement of the absurd R&D credit when thorough study and consideration showed that it did not result in more research but merely more money (fungibly located, to the advantage of IP-intensive industries like pharmaceuticals and digital software firms).
  • Tax reform would have a target amount of revenue to raise with taxes, based on social, infrastructure, and other important spending and the debt service needs of the already incurred federal debt, rather than a mere pie-in-the-sky idea of a "dynamic scoring" that would "show" that trillions of dollars of tax cuts over ten years would magically pay for themselves through turbo-charged economic growth that none of the top economists think possible.

2) Stewart acknowledges that the framework appears to be a tax cut for the rich and that it appears to recklessly drive up the deficit and that it leaves the hard part for Congress to figure out (which loopholes to close and how to do it) while claiming huge benefits from corporate and business tax cuts that add to the huge corporate and business tax cuts enacted under Bush 2, many of which were made permanent under Obama.  But he excuses all that with the cop-out phrase "this plan is just the opening salvo."

• Opening salvo?  Something that comes after years of GOP planning and saying they wanted to cut taxes on corporations, eliminate the estate tax, eliminate the AMT, cut taxes on high earners, move to a rate structure with fewer and lower rates, and move to much lower tax revenues by eliminating world wide taxation and adopting a territorial system --i.e., do all the things that this 'framework' does?   That's just an "opening salvo"?  I think that term casts what is going on here in much too friendly a light.
• Opening salvo?  when these planners have already said that they are convinced that dynamic scoring (i.e., counting your chickens (economic growth) before they hatch, even before there are any eggs to count) will solve all their problems because they ALWAYS assume that tax cuts to wealthy people will trickle down to everybody else and make the economy grow, even when every bit of evidence from history suggests that simply isn't the case, including the recent Kansas disaster? 

3) Stewart claims that "substantial aspects" of the framework already have bipartisan support, by which he means the idea that "global competition" demands that we cut corporate tax rates and everybody agrees that companies should not be able to stash earnings overseas tax-free. 

• Bipartisan support?  Of course, while there are various 'free-market' economists who make the argument that we need to cut corporate rates for competitive reasons, it can be argued that when 75% of corporations pay no federal income taxes whatsoever and when highly profitable companies have been able to increase their profits and when U.S. corporations pay a smaller amount of taxes as a portion of GDP than corporations in other advanced countries, global competition does not seem to be a problem.  The problem is the loopholes in our system that allow multinational firms--especially those that depend on intangible intellectual property rights--to pretend to move those rights around and thereby claim that the profits from that intellectual property created here are earned abroad and not subject to U.S. taxation.  We could deal with that, but the GOP in House and Senate aren't interested in asking those questions in ways that lead to effective answers.  Democrats tend to be more interested in considering what the root problems are.  So "bipartisan support" that appears on the surface is likely only skin deep. 
• Global competition?  Right now, we already allow U.S. companies to move active businesses abroad tax free.  We facilitate their ability to take advantage of low-tax jurisdictions to compete with U.S.-based companies!  We give financial institutions a pass on the 'subpart F' provisions of the Code through the "active financing" exception.  And the Mnuchin report on regulatory "burdens" indicated that the Trump administration will pull back on the anti-inversion regulations.  We know things we can do to stop the way quasi-sovereign U.S. multinationals play various tax jurisdictions against each other.  We could deal with that with a renewed emphasis on something other than the old 'transfer pricing' methodologies and with full taxation on taking business assets out of the country.  We could clamp down on transfer of technology to China in exchange for China letting our multinationals into the markets there.  So it is not really "global competition" but failure of this administration or this congress to focus on addressing remedies to problems.

4) Stewart claims that the framework's "doubling" of the standard deduction will allow "many more individual taxpayers ... to file a simple short-form return."

• Doubling of the standard deduction? Looked at alone, it sounds good.  But doubling the deduction while eliminating the personal exemption actually puts a cap on the amount of income exempt for low-income families, rather than increasing it.  A family of 5 might well end up paying more in taxes out of an income already inadequate to provide a decent standard of living, especially when coupled with the 20% increase in the lowest rate, from 10% to 12%.  Why does Stewart just repeat the (not necessarily correct) selling points for the framework without taking these issues into account?
• Simple short-form return?  having 4 rates instead of 7 and doubling the deduction while eliminating the personal exemptions is simplification on an inconsequential scale.  The real complications are character of income (that nasty preferential capital gains rate, again), and whether something counts as income or not.  The people on the low-income of the scale don't have simple returns because they have an Earned Income Tax Credit to calculate.  People in the middle may have pensions, capital gains, income from investments of varying types, rental income, mortgage interest deductions, and various other items that requires a little more work.  Many provisions have exceptions designed to aid certain kinds of businesses or small businesses, all of which add to complications while filling an important function.  But let's also remember that tax preparation software has already made even  complicated tax returns fairly "simple" to figure out--just enter the right numbers into the right places in the software.  We don't need tax cuts for the rich to have a fairly simple tax return process for the majority of the people of this country.  Most already claim no itemized deductions (nearly 70%, a fairly consistent number).  Most can easily do their tax returns with cheap software.  Most don't need tax cuts for the rich to facilitate their tax returns.

5) Stewart claims that "a lower rate for small businesses and pass-through entities, while more controversial, should promote economic growth."  And he thinks that is the most important thing this framework does.

• Lower rate for small businesses?  Who is kidding who.  Most small businesses are just that--they are SMALL in assets and in revenues, and they are NOT taxed at the 35% statutory rate that applies to corporations that have more than $18 million in taxable income (note--taxable income of 18 million means gross revenues of many more millions).  Most small businesses are taxed at 25% or less already!
• Lower rate for pass-through entities?  The main pass-through entity is a partnership, and there is no current rate for partnerships to pay tax, because their income, gain, loss, deduction and credit items pass-through to the partners, who take them into account on their tax returns and pay at whatever rate the partners pay based on their total taxable income 'picture'.  Creating a flat rate of 25% for pass-through income won't benefit small business proprietors, who already pay a lower rate in most cases.  But it will hugely benefit wealthy partners in real estate development partnerships and similar companies that would have otherwise been paying tax at the 39.6% rate and under this would pay tax at only 25%.
• Promote economic growth?  What about this is in any way empirically supported as promoting economic growth--especially the broad-based, raising- all-boats type of economic growth that actually goes to the middle and lower classes and has a multiplying effect on growth because of the increased demand that creates more business that creates more jobs, etc.?  There's really no support for these long-term GOP tax cut proposals to actually do anything about creating jobs and creating sustained economic growth that will actually help the middle and lower income groups.  Cutting corporate taxes mainly puts more money into the pockets of corporate managers already paid in 12-15 million a year and more.  Cutting the tax on recipients of partnership pass-through income mainly puts more money into the pockets of the real estate developers and hedge fund managers and joint venture capitalists who already earn tens or hundreds of millions annually.  None of those profits will necessarily remain in this country (they are likely to be used to expand in China). And again, Kansas.  The Kansas "experiment" in drastic cutting of business taxes was supposed to prove, once and for all, that the GOP ideology of tax cuts that pay for themselves was not an Arthurian legend based on Arthur Laffer's absurd napkin theory but a real, empirically provable, workable way to jumpstart huge economic growth.  After finding the state swamped in deficits and facing reduced growth from the predictable decline in state services, even the GOP members of the Kansas legislature recognized that taxes had to be raised.  And they did it over Gov. Brownback's veto.....That says a whole lot about cutting taxes that the Trump framework people will, of course, call 'fake news' (their favorite term for dissing any facts they find inconvenient).

OKAY, I know.  I've already got 5 items picked for discussion and I've not even gotten to Stewart's three ideas for making the absurd Trump tax framework "add up mathematically."  That's because he assumes away many of the problems with the framework, making it easier to claim he's found a solution to the deficit issues.

6) Stewart takes the framework at its word but disregards the state and local tax deduction (likely to be heavily lobbied against) and the expensing (costs $220 billion for just 5 years and would be much more costly than that when made permanent).  He's willing to buy the idea of a budget resolution that says it is okay if the tax cuts result in a $1.5 trillion revenue shortfall over ten years (i.e.,, okay if tax cuts for the rich create an additional $1.5 trillion deficit), on the assumption that drastically faster economic growth will make up much of the difference.  As he puts it, "that's a debatable proposition, but for purposes of this discussion, let's accept it."

• A budget resolution for a $1.5 trillion cost over ten years to tax cuts that likely will cost $3 trillion to $7 trillion?  How is just "accepting" that reasonable, or common sense?  Sounds nutty to me.  Especially in light of the arguments that the GOP has made in the past (and can be expected to make again in the near future, in part justified by the deficits created by their tax cuts for the rich) for decreasing funding for Medicaid, Medicare, Social Security and any other programs for the vulnerable based on their "worry" about deficits and debt.
• Accepting an assumption of economic growth at sustained high rates that are much higher than experienced even during periods of economic stimulus from federal spending?  Not just "debatable" but outright "unreasonable."

7) Finally, Stewart gets to his "three ideas".  Based on his conclusions in item 6, he assumes that he needs to find just $1.1 trillion over 10 years to make the framework workable.  (You already know that I think that it is ridiculous to assume away huge portions of the problems with the framework, so I won't reiterate more than in this sentence.)  How does he propose bridging the gap and raising the $1.1 trillion? With some ideas that progressives have been proposing for the last 40 years.

• A tax bracket of 44% on the top 0.1% of taxpayers who have more than $2.1 million of adjusted gross income would raise about $300 billion over 10 years.
  • This wouldn't be near enough to compensate for the huge tax breaks that go mostly to these same taxpayers, but it is something that should be added to at least clawback some of the largess to the rich.  The rich received tax cuts from Reagan and Bush 2 that have drastically lowered their share of taxes paid.  They would receive another wallopingly huge gift of tax reduction from the Trump framework.  Probably the rate ought to be higher (a number of rates at 40%, 44%, 48% and 55% rate, for example, for various levels of income).
  • Stewart says raising rates would "raise issues of fairness" by penalizing earned income (i.e., for those CEOs and hedge fund managers who make $300 million or $700 million annually in compensation) while leaving passive investment income that is subject to a capital gains preferential rate untouched.  Yeah, that's a problem, but it is easily solved.  Eliminate the preferential capital gains rate, which just favors the very rich anyway, isn't justifiable under any of the reasons put forward for it, and was eliminated in the well-considered 1986 reforms (before the lobbyists got to Congress and got them to un-eliminate it).  Even Holtz-Eakin acknowledges that raising capital gains rates to the same as ordinary income rates would be reasonable. 
• Tax capital gains at death, he says,  because they are taxed preferentially (if at all) during the owner's life  and there is no justification for allowing them to pass from generation to generation without ever being taxed.
  • Hard to disagree with this idea.  There is no justification for allowing appreciation to pass untaxed to heirs, with or without an estate tax.   This is something that should be enacted (without the elimination of the estate tax) because most estates haven't been taxed at all, and most estates of the ultra wealthy have huge appreciation that horribly exacerbates inequality when it passes to heirs (who did nothing to earn it, in many if not most cases) with bump up in basis and no taxation of the gains.  Combine that with the way such assets permit borrowing during life, to be paid off by sale of a few assets at death at no taxable gain, and you have the ability of the ultra-wealthy to live off their assets with almost no taxation during their lives or in their estates (especially if the estate tax is eliminated) or in the hands of their heirs.  As Steve Rosenthal puts it in commentary to Stewart in the article, "to take away the backstop of the estate tax without a tax on capital gains at death is crazy."  Couldn't say it better myself.
  • Stewart says Congress could exempt "family owned farms and small businesses."  Yeah, it could.  But it shouldn't.  Those family-owned farms  may be huge corporate entities, not 'small' in any sense of the word.  They can afford to pay tax on gains that haven't been taxed in a lifetime.  Any exemption should be minimal (maybe  exempting gains on assets of $1 million or less, like the pre-Bush estate tax exemption amount).
• Curb the deduction for corporate interest expense.  This is another workable idea, since debt remains one of the ways that corporations finagle where income goes and where deductions are generated, in spite of the various existing provisions for limiting deductibility of corporate interest payments. 
  • Most GOP proposals, as Stewart notes, couple reductions in interest deductions with elimination of taxes on interest income. That is not necessarily a sound approach, and you can bet that the real estate industry (among others) would huff and puff and blow the straw house of limitations away in no time.  Just look at the "at risk" rules under section 465, which were intended to prevent taxpayers from using nonrecourse debt to create basis to allow utilization of phantom losses, as originally enacted in 1976.  It just took another session of Congress to get a loophole that essentially swallowed the rule, allowing "at risk" treatment of "qualified nonrecourse financing" for real estate projects.  So any reductions to the deficit here would likely be temporary at best.  And there are other real estate tax expenditures that should be attacked, too, like the section 1031 like-kind exchange rules that favor in particular real estate developers by allowing deferral of  gain when trading properties (even when it is actually getting cash that a middleman holds, and then buying another--a far cry from the original intent of the section).

Stewart, at the end, takes a victory lap, because these three provisions, if enacted, could conceivably raise enough revenues to close the (assumed) $1.1 trillion gap.  The problem --this is very misleading for typical readers.  It looks like he is presenting the "tax cuts for the rich" framework as a workable plan that can be easily paid for and that is promising in terms of economic growth potential.  As you can see from my analysis, I think the framework itself is not a workable plan, it cannot be easily paid for, and it does not hold out a real promise of economic growth.

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Trump's Refusal to Release His Own Tax Returns and California's Legislature

As most everyone is aware, Trump has refused to release his tax returns, breaking precedent with decades of presidential candidates and president's release of tax returns.  Even Dick Cheney,  grumpy corporatist veep, released his tax returns.  I had fun using them as the raw material for an introductory course in federal income taxation where we looked at the returns to understand how the various "lines" correspond to items specified in the Code (like "adjusted gross income" and "miscellaneous deductions").

Trump, however, used various excuses, none of them particularly strong, to say he "couldn't" release his returns.  The main excuse was that his returns were under audit.  Of course, that makes no difference whatsoever.  Any taxpayer can release returns, whether or not they are under audit, and other presidential candidates (Nixon comes to mind) have done so during an audit period.  Trump most likely didn't want to release his tax returns because he didn't want to provide fodder to critics who would look at the relatively measly amounts of taxes that he had to pay,  or find information about trusts and other entities set up to keep money of shore or, who knows, find information about connections to various Russian oligarchs.  Another reason that Trump likely hasn't wanted to release his returns--he wants to be able to pretend that he is not a beneficiary of all those many loopholes in the Code that particularly benefit the ultra-wealthy.

That comes to the surface now, because of his claims, in an Indianapolis speech, that he would not receive any benefit from the so-called "reform" tax "framework" put out by Trump and the GOP leadership.  We know from 2005 returns that he has, at least in that year, had to pay $31 million in Alternative Minimum Taxes (AMT) in a year when he would otherwise have paid very little in taxes.  That is, in fact, the purpose of the AMT--to force wealthy taxpayers to pay some tax on their incomes when they otherwise have the ability to take advantage of so many loopholes that they would get off pretty much tax free.  So we know that Trump lied when he said in Indianapolis that he would not get a benefit from his own tax proposal.  His tax proposal would eliminate the AMT backstop for wealthy payment of at least some taxes.  That would directly benefit Trump.  He lied.

Trump would also directly benefit from the elimination of the Estate Tax.  That is a tax that is very low at this point, because of decades of GOP whittling away at it to reduce it to zero on behalf of their wealthy donors.  When a married couple with $11 million in assets die, their estate would not pay any estate tax, because there is an exemption for the first $11 million for a couple.  On the rest of the estate above $11 million (a size of estate of those in the top 1% of the distribution), the tax rate is now exceedingly low--only 35%.  Trump's plan would reduce it to zero.  He said in the Indianapolis speech that eliminating the estate tax would help middle class people, small family farms, and small businesses.  He lied.  Only the wealthy pay any estate tax (see above).  Very few small businesses and family farms are subject to the estate tax at all--estimates say there would be only about 80 in a given calendar year at this point.  Of those that are subject to it, the amount subject to the estate tax is only the excess over the exemption amount.  And family farms get 14 years to pay off any tax like that the heirs might owe, through a provision for installment payment intended to help preserve family farms and allow them to pay the tax due, if any, over time out of the operating profits of the business.  So, again, Trump lied. 

Trump also would likely benefit huugely from the reduction of rates on corporations, through getting more dividends out of the even higher corporate profits that would result  (to the extent that he has investments in corporate stock, which are likely substantial, since most of the financial assets in this country are owned by those in the very tip-top of the income and wealth distribution). So, again, Trump lied.

Trump would also likely benefit bigly from the reduction of rates on pass-through income from real estate partnerships and hedge funds.  The Trump empire is clearly in real estate, and there are likely quite a few partnerships in the structure of the Trump companies.  Since otherwise passthrough income is currently taxed at the individual partner's personal income tax rate, a 25% rate on income that would currently be taxed at a 39.6% rate (including the tax on investment income), is a 14.6% lower rate or more than a 1/3 reduction in the tax rate on the income. So, again, Trump lied.

Given that Trump distorts so easily the actual effect on him personally of his tax proposals, it would clearly be helpful to the citizenry to have a chance to review Trump's tax returns (and to have had them before the election to take into account as he talked about taxes and wealth). Every president has done so since the 1970s.  Seventy four percent of respondents in national polls think Trump should release his tax returns.  See McGuire release.

The California legislature has decided that if Congress won't act to do something about this, than it will.  As Democratic Senator Mike McGuire, a proposer of the bill, noted in a June 1, 2017 release about the bill:

 "Everyone knows that President Trump used the birth certificate issue against President Obama as a dog whistle to white supremacist groups,” Senator McGuire said. “The truth is that we have never elected a president who was not a citizen. That has never been a problem and does not require a solution. But we have elected a president – and he is currently in office – who has serious conflicts of interest that are endangering our national security and who is consistently violating ethical norms to enrich himself and his family. That’s a very serious problem which does require a solution – and the solution is SB 149.”

The legislature has passed a bill (Senate Bill 149, titled Presidential Tax Transparency bill), now apparently awaiting Governor Jerry Brown's action, that adds a ballot-eligibility disclosure provision requiring presidential candidates to release 5 years of tax returns.  See Brandon Carter, California legislature passes bill requiring presidential candidates to release tax returns, The Hill (Sept. 14, 2017); CNN Wire & John Fenoglio, California passes bill requiring presidential candidates to release tax returns; Trump could be impacted in 2020, KTLA News (Sept. 16, 2017). The California secretary of state would make the returns public (with redactions as necessary) on the state website. Although it was mostly Democrats who supported the measure, the bill was bipartisan: some Republican members in both chambers supported the effort.

Expect a court challenge to the bill if Governor Brown does sign it into law.  The challengers would argue that any additional restriction--even a ballot eligibility requirement--is unconstitutional, since it would add to the eligibility requirements in the Constitution.  But the supporters would ably demonstrate that's a specious argument: every state has requirements that candidates must comply with to get on the ballot--mode for getting signatures, mode for making requests, timelines within which to comply, fee payments, etc.  This tax return release provision is more similar to those (i.e., a disclosure requirement that is procedural in nature) than it is to the eligibility requirements of age, citizenship, residency set forth in the Constitution ("achievement" requirements that are substantive in nature).  The substance on the tax return isn't relevant to whether a candidate can be on the ballot; just the procedural element of complying with the disclosure requirement.  Constitutional scholar Laurence Tribe agrees with me that a disclosure requirement isn't an additional qualification (see KTLA News article for quote). And other states--New Jersey, Connecticut, Massachusetts, New York, for example-- are considering or have passed similar action.

Senate Finance Committee cuts tax return preparer regulation

As most tax practitioners realize, many people who hold themselves out as "tax return preparers" actually know nothing about the tax laws and may even assist their clients in cheating on their taxes by inventing home offices, travel-away-from-home expenses, or other fictional deductions.  The U.S. Department of Treasury sought to deal with this by amending regulations governing "practice before the IRS" in Circular 230 to require those who prepare returns for payment to acquire an identification number and pass certification requirements.  The ABA Tax Section has been supportive of these requirements, because it is clear that both individual taxpayers whose returns are not accurate and the U.S. government suffer when scams are perpetrated by shady tax return preparers. 

But some of those regulated under Circular 230 objected and brought suit.  They got the D.C. Court of Appeals, in Loving, to hold that the longstanding provision that permits the Treasury to regulate tax practitioners that 'practice before the IRS' covered only litigation-like controversies.  This is, in my view, patently absurd.  If anything constitutes practicing before the IRS, the preparation of taxpayers' tax returns must.  It is the core interaction of a taxpayer with the IRS/Treasury, and is something that we must do.  If an 'adviser' prepares the return for us, that adviser is representing us to the government.  That clearly should constitute "practice before the IRS."

So once the Loving court ruled against the government on its ability to regulate these maverick 'tax return preparers' who do not have to know or follow the law, many tax practitioners and others pushed Congress for legislation to permit the Treasury to regulate tax return preparers.  The ABA Tax Section wanted the Big ABA (the American Bar Association that includes all of the various "sections") to support a resolution urging Congress to pass legislation allowing the regulation of tax return preparers.  But the Big ABA was not willing to even consider the resolution.  That was a revealing moment for me, since it showed that attorneys in the leadership of the Big ABA are not really serious about wanting what is best for individuals that we serve or for the good of the country.

Nonetheless, there has been a push to enact legislation to permit regulation.  And the Senate had a bill before it that included a provision authorizing regulation.  But the AICPA (the national organization for certified public accountants) apparently lobbied heavily against the provision.  So guess what.  Congress--that dysfunctional branch of the Federal government that seems to think that holding hearings about scam videos and shouting at the former Secretary of State about Benghazi is reasonable expenditure of time--is showing itself dysfunctional again.  The Senate Finance Committee, which will hold a markup of the bill this Wednesday, will not include the provision for regulation of tax return preparers.

See JCT Publications 2016 :  JCX-28-16 (April 18, 2016) (JCT report noting deletion of the return-preparer provision)

Furthermore, the Senate Finance Committee continues to harass the IRS with more provisions demanding information on IRS audits. See JCX-30-16 Note that this will almost always work to the advantage of cheating taxpayers (especially the rich) and the disadvantage of the government, as IRS employee morale deteriorates and IRS employees fear that their jobs will be on the line if they are aggressive in pursuing likely tax cheaters. See JCX-30-16 (chairman's mark for "The Taxpayer Protection Act of 2016").

This is one more bad example of the influence money and profit-making have over congressional deliberation and the poor policy decisions that result.

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.  

Related articles

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

Senate Invitation to Defend Tax Breaks Propels Lobbyists

Rand Paul demands an apology for Congress looking at quasi-sovereign MNEs' tax-avoidance gimmicks

[edited 3:26 EST to add link to Fleischer article]

Did you hear about Rand Paul demanding an apology on behalf of Apple for the Senate investigation of the way that major muntilnational enterprises use whatever gimmick their very highly paid tax advisers and accountants can think of to ensure that profits actually attributable to the US get attributed to some tax haven (like Ireland, the Caymans, Bermuda, the Netherlands, as used in those inventive tax structures called "double Irish" and "Dutch sandwiches" and other fancy useful-only-for-tax-avoidance-purposes-chains of offshore affiliates)?  If not, see this (thanks to CrooksandLiars for providing the video embed code as well as an interesting commentary).

 

Rand Paul seems to be getting even more radically pro-corporatist/pro-elitist than he ever was, while claiming "libertarian" leanings that supposedly support ideas of individual freedom.  Can't have it both ways.  The corporatist agenda is one that favors humongous bureaucracies of over-paid corporate executives and high-level managers who preside over global institutions with enormous power to influence any one country's legislative bodies and executive agencies.  It doesn't have much sympathy for the little guys, whether the workers who are poorly paid or the people who consume its products who are treated as much as a commodity as the product produced by the MNEs that further their masters' corporatist agenda. The managers make sure that the laws give them a good living for life--including maintaining defined benefit plans (in the US) for themselves while casting their ordinary workers onto market-vulnerable 401(k) plans; paying themselves lucrative salaries, bonuses and perks while firing workers and getting rid of their benefits at every opportunity; setting themselves up like royalty in office suites, company jets, elite hotels and philanthropic galas (that advance their personal status agenda) while letting workers and consumers suffer whatever poor pay, environmental pollution, and inhospitable workplace vagaries their "business model" requires.

It's not that Apple is the only one of these corporate miscreants exploiting all the benefits of the United States while avoiding paying its fair share of taxes.  Google (which is, like Apple, a company whose primary asset is its intellectual property developed in the good ole USA) also employs a vast array of offshore gimmicks to avoid US taxation of its profits.  See Jesse Drucker, Google joins Apple avoiding taxes with stateless income, Bloomberg.com (May 22, 2013).

Google, for example, has used a pair of tax shelters known by tax attorneys as the “Double Irish” and “Dutch Sandwich” that move foreign profits through Ireland and the Netherlands to Bermuda to avoid about $2 billion in income taxes a year, according to the company’s filings in the U.S.

Like Apple, Mountain View, California-based Google shifts profits into an Irish subsidiary that doesn’t pay taxes in Ireland. In Google’s case, it says the unit is managed in Bermuda, which has no corporate income tax.

Should Google's "managed in Bermuda" save it from US taxation--nope, because it would never make the transfers to those offshore affiliates in the first place if they were third parties.  Our rules let companies readily move "active businesses" offshore and our transfer pricing rules let companies pay scant taxes on transfers of their core business assets offshore.  And much of the time when companies claim they are 'managed' offshore it is really just another much of flimflammery.  For instance, the company may arrange a (company-paid) vacation for its board and senior managers in a tax haven island paradise once a year, and keep "originals" of records in the island hideaway while keeping digital copies in the parent CEO's hands, where the company is really run, etc.  It may even have "directors" based in the island resort--like those two lawyers in the Cayman who "run" myriad companies located there.  It may even hire a real director who is directed to live in the offshore resort area to add a little more (fake) substance to the offshore management claim.  But can that offshore company make any decision that the parent execs don't want it to make?  Aren't its engineers and (US-subsidized) research the key component of those profits?  You tell me. 

My colleague (formerly at Cleary Gottlieb in New York, and now as a tax professor) Ed Kleinbard got it right, in a discussion quoted in the Drucker article.

Senate investigators drilled down into a crucial component of Apple’s strategy that Edward Kleinbard, a former corporate tax attorney and professor at the University of Southern California Law School, said may make the company vulnerable to taxation in the U.S. In the panel’s report, the top Irish subsidiary receiving offshore profits was found to have held almost all its board meetings in California, with its sole Irish board member rarely attending.

“Apple says their Irish subsidiaries’ ‘mind and management’ lies outside Ireland, but the real question is, do those subsidiaries have any mind of their own at all?” Kleinbard said. “If they are not really competent to make independent decisions to take on risks and make contracts on their own behalf, then the structure collapses of its own weight, and the income properly should be taxed to the United States.”  Id.

 Folks, Rand Paul is right only about one think--Congress should indeed apologize to somebody, but not for what Paul wants it to apologize for.  Congress should be apologizing to ordinary American people for having so long deferred to the corporatist agenda, letting US-based companies get away with running an Irish shell from California and claiming that the profits attributed to the shell are earned in an active offshore business. 

Substance over form should say that any company managed by US company officers is a US company.  And any company used as a conduit to shift profits offshore should be disregarded.  And any company affiliate purporting to purchase critical intellectual property rights should be disregarded.  Etc.  Congress simply hasn't had the guts to stand up to these corporate giants, because these corporate giants employ armies of Goliath lobbyists who win almost every battle againstthe David-sized organizations representing ordinary Americans.  (Latest non-tax example--the Interior Department's adoption of the ALEC-designed fracking bill stupidly allowing more climate-change-generating fracking on public lands!)

A fellow tax prof, Victor Fleischer, notes one of the reasons Congress hasn't acted on these issues--the very real (not too-well-veiled) threat by corporate executives who've made millions or billions from their US-subsidized enterprises to now abscond to foreign countries for real, moving the engineering and intellectual property development and research there.  See Victor Fleischer, Finding the Roots of Apple's Economic Product, DealBook (May 21, 2013).

Related articles

How Apple avoids US taxes with shell games

Rand Paul says Senate panel should apologize to Apple for bullying it over offshore tax shifting

Hedge Fund Tax Avoidance Schemes--using (purported) offshore reinsurers

It seems that billionaires think they are entitled to it all and think they should be able to run their speculative games without paying much of anything at all in taxes to the government they depend on. And none of this is good for the economy or good for the taxpayers not in "the 1%".

Case in point--John Paulson, the notorious hedge fund manager who got a CDO built to his desires with a bunch of iffy subprime mortgages and then took the short side of the bet, making a fortune off the bet against subprimes in the mortgage crashes underlying the 2007-8 Great Recession.  See, e.g., Zuckerman, Trader Made Billions on Subprime, Wall St. J. (Jan. 15, 2008). 

What has Paulson done?  He established a new "reinsurance company" in Bermuda in April, that turned around in June and put the money invested in it  back into Paulson's hedge funds in New York, as a portfolio of insurance "reserves" to be held to pay off insurance risks that go bad.   The result is tax deferment for Paulson and other executives of his hedge fund along with recharacterization of ordinary compensation income as preferentially taxed capital gains.

For a discussion of the hedge fund reinsurer gambit, see , e.g., any of the following.  The story at Bloomberg has reinvigorated media attention to this issue.

• Zachery Mider, Paulson Leads Funds to Bermuda Tax Dodge Aiding Billionaire, Bloomberg.com (Feb. 19, 2013);
• Andy Barile looks at hedge fund-backed reinsurance, World Risk and Insurance News (Feb 11-15, 2013) 

Barile notes that these hedge funds are using reinsurance premiums and investing in a very aggressive way, compared to traditional reinsurers".  This aggressive position produces a downside if there are low investment returns, especially if there are catastrophes for which they have to pay claims when their investment strategies have produced losses.  He says that "it remains to be seen" whether hedge-fund reinsurers are in it for the long haul, since they have a shorter time frame on making greater returns on their money.

• Baker, The Bank For International Settlements: Evolution and Evaluation (Greenwood Publishing 2002), at 235-237

Looking at this as a global concern, Baker ultimately suggests that the Basle Capital Accord rules should be extended to hedge fund reinsurer operations,  "Another area in which the BIS should take a leadership position," he says, "is the role in which reinsurance firms play in hedge fund operations.  The tax implications of hedge funds using reinsurance firms in their funds for tax advantages points to the need for more government regulation of this activity."

He describes the basic problem as follows:  "wealthy individuals invest in private placement offerings of offshore reinsurance companies.  These companies, many headquartered in Bermuda, buy insurance policies written by name-brand insurers...and "may then invest its stock issue returns in a hedge fund.  ...[That reinsurer] pays no taxes on the trading profits until it sells the fund shares and then the reinsurer is taxed at a lower capital gains tax.  The tax savings are passed on to the individual investor.

He goes on to say that "The problem ... is that insurers are exempt from registering as investment companies....These reinsurers do not have to make annual distribution of profits as mutual funds do and they are not taxed by the Internal Revenue Service as investment vehicles.  ...In short, the activity ... is a method for wealthy investors to reduce their tax burden as a result of a tax loophole.  Since these insurance companies are mixing insurance business with investment business, they need more supervision. 

This is especially true when hedge funds are involved.  "[H]edge funds work with reinsurers to reduce tax liabilities for their wealthy clients.  ...U.S. hedge fund managers and investors form a tax-advantaged reinsurance company offshore in...Bermuda, which has no corporate income tax.  The Bermuda-based reinsurer sends investment assets to the hedge fund to invest.  Investors return to the United States with shares of the reinsurer and pay no taxes until the company goes public.  At that time, investors [and managers] sell their shares in the reinsurer company and are taxed at a lower capital gains rate. 

These schemes are worrisome from both tax and insurer regulatory perspectives.  "Aside from the tax loophole problem, the real issue in these cases is the added underwriting risk incurred in the process. ... [Hedge funds acting as reinsurance companies] have insufficient insurance expertise.... Much of this activity has stemmed from financial engineering and deal making of the 1990s. ... [W]ithout the bailout of LTCM [Long-term Capital Management hedge fund] by national bank regulatory authorities, many banks and reinsurers might have collapsed as well."

So why do it and how does the hedge fund reinsurer gambit work?  Remember that these hedge fund execs get a ridiculous amount in compensation in the form of a "fee" (usually 2% of assets under management) and a "carry" (usually 20% of the profits).  (The fee and carry are often represented as 2 and 20, but can be much higher for some firms with status, rising to as much as 5 and 50.)  Without more, hedge fund managers don't get as much benefit from the claimed treatment of a "profits" partner as private equity fund managers do.  Though the managers claim classification as "profits" partners whose taxation is based on their share of the partnership's gains and ordinary income and not as payments of (ordinary) compensation, hedges mainly yield ordinary income so don't act directly as "converter" entities.   Private equity fund managers also claim they are "profits" partners whose income should not be classed as compensation but as pass-through shares of the  partnership items:  in their case, most of the private equity fund's gains will be deferred anyway (for several years at least until the partnership sells the leveraged company) and they claim those deferred gains should be characterized as pass-throughs characterized by the partnership rather than being characterized as ordinary compensation income to them.   

So for hedge fund managers,  gaining deferment (of what is clearly in substance their compensation as managers) can achieve  minimal current tax.  If the money is cycled through an offshore corporation that pays no taxes, that's even better because it gets preferential rates as well.  The deferrment is achieved by waiting to sell the stock, and the sale of the stock is reported as a capital gain.  Thus what is really current compensation income is recharacterized, through the reinsurer "conduit" scam, as a deferred capital gain.   So hedge fund and private equity managers ultimately both claim to get the best of all possible worlds--their wages from work are not currently taxed as wages at ordinary income rates, they pay no payroll taxes on their compensation, and their compensation is deferred and taxed at preferential capital gains rates. 

This is so obviously unfair to the vast majority of ordinary taxpayers who pay taxes on their compensation income even before the end of the tax year through the withholding mechanism that Congress should step in with legislation.   It seems hard to justify a "profits" interest in a partnership at all: it has been created by the "Wall Street Rule" that gains credence because big-money people claim it is correct.  As usual, tax administration eventually mostly went along with it (Rev. Proc. 93-27) and a few court cases (Diamond, Hale) mostly treat the notion of a profits partner who pays no taxes on his compensation as reasonable.  Congress could easily legislate away the profits interest and define partner in a partnership for tax purposes as someone who has made a genuine at-risk equity contribution of cash or property to the partnership. There really should be no such thing as a services partner with a "profits" interest who hasn't contributed up front for a capital interest.  And all compensation shares to what are currently treated as profits partners could be treated as ordinary income --i.e., compensation currently subject to the income tax and to payroll (Social Security/Medicare) taxation.

This use of reinsurers by hedge funds is itself a tax dodge that has been around a decade or so.  In 2007, the Senate Finance Committee held a hearing on Offshore Tax Issues: Reinsurance and Hedge Funds (S. Hrg. 110-875, Sept. 26, 2007) (179 pages).  In his introduction, Baucus described insurance tax avoidance schemes as follows:

Insurance companies make a living by doing two things: they assess premiums based on the prediction of the likelihood of events against which they insure—that is called underwriting—and they also make money by investing the premiums that they collect until they have to pay out claims. If they are good at those two jobs, they  make a profit.

Customers buy insurance from insurance companies to guard against the risk of fire, disaster, or some other calamity. In exchange for paying premiums, the customers shift some of their risk to the insurance companies. Insurance companies also buy insurance. Property and casualty insurance companies pay premiums to reinsurance companies in exchange for shifting some of their risk to the reinsurance company. Sometimes the reinsurance company is also the parent company of the property and casualty insurance company. In that case, the property and casualty insurance company shifts risk to their parent reinsurance company at something less than an arm’s length transaction.

Here is where the tax avoidance comes in. Some parent insurance companies set their headquarters in low-tax jurisdictions, like Bermuda. Subsidiary property and casualty insurance companies shift risk to the Bermuda parent. Because of Bermuda’s low tax burden, the Bermuda parent can get a greater after-tax return on their investment activities. As a result, subsidiary property and casualty insurance companies can charge lower premiums for their insurance. They get a competitive advantage over insurance companies doing business in jurisdictions that tax investments.

The second setting that we will examine today involves hedge funds. Foundations and other nonprofits are some of the largest investors in the world. The law requires a nonprofit investor that invests directly in hedge fund partnerships to pay the unrealized business income tax, otherwise known as UBIT. The policy behind the law is that tax-exempt entities should not be able to have an unfair advantage over taxpaying entities doing the same thing. To avoid UBIT, nonprofit investors sometimes invest in hedge funds through offshore entities incorporated in lowor no-tax jurisdictions, such as the Cayman Islands or Bermuda. These offshore entities are called blockers.

The third setting we will examine today is the compensation of hedge fund managers. Hedge fund managers receive fees from offshore blocker corporations used by nonprofits and foreign investors.Some hedge fund managers elect to defer their income, and deferring income means you pay taxes later, which is the same as a significanttax savings.

 The IRS has already noted that offshore arrangements using reinsurers for hedge fund managers may be shams that are subject to challenge on audit.  See Notice 2003-34 (indicating that "Treasury and the Internal Revenue Service have become aware of arrangements, described below, that are being used by taxpayers to defer recognition of ordinary income or to characterize ordinary income as a capital gain.  The arrangements involve an investment in a purported insurance company that is organized offshore which invests in hedge funds or investments in which hedge funds typically invest.")  Although the notice says that these purported insurers may be challenged as not insurers because they are not using their capital and efforts "primarily in earning income from the issuance of insurance", and although it states that such arrangements will be subject to close scrutiny that could result in the application of the PFIC rules (leading to current taxation), it has apparently not bothered to challenge any of the big hedge funds' reinsurer companies.

Again, why would they be subject to challenge?  On the basis that they are not real reinsurers, since the low amount of reinsurance that many provide is the less risky part of the business and provides a buffer to the very high reserves that they retain, sometimes invested solely in a single promoter's hedge funds.  And if they are not insurers, they are at the least "passive foreign investment companies" (PFICs) on which shareholders are subject to current taxation on profits.  (Or perhaps the IRS might go further and recharacterize the arrangement as a sham , causing the hedge fund executive to have current ordinary compensation income.)    In other words, there is good cause to think that for many of these, the tax haven corporation is acting as an offshore tax-avoidance pocketbook for the hedge fund executive, and not really as an insurer.

By the way, if you think these hedge fund managers who are making multi-millions and billions from managing other people's assets and hardly paying any U.S. taxes on those huge compensation payments are incredibly smart people who add to the economy's well-being and therefore merit that kind of out-sized pay or because of the returns they bring to people that then invest them in needed projects in the good ole US of A, you need to rethink that. Hedge funds typically pay out very poor returns, when all the expenses and profits to managers are taken into account. 

Roughly speaking, if the typical fund manager worked for free, and if the investment firms didn’t charge, these masters of the universe would still have underperformed a balanced index since 2003, by roughly 2.5 per cent per year. Andrew Hallam, Think you're smarter than a hedge fund manager?, The Globe and Mail (Feb. 19, 2013) (emphasis added).

 

Related articles

Much of MNEs' "offshore" (and hence untaxed) cash hoards held onshore

Paulson Leads Funds to Bermuda Tax Dodge Aiding Billionaires

Billionaire Hedge Funds Most Recent Moves: SPDR Gold Trust, Apple Inc., Family Dollar Stores, Inc., Dollar Tree, Inc.

Soon-to-be Google litigation with IRS over 2003-4 returns?

Bloomberg dug into Google's annual SEC 10-k filing to discover that the company plans to litigate an issue from the 2003 and/or 2004 tax years.  No suit has yet been filed, and there is no information regarding the substance of the dispute or the amount at stake.  See Googloe Plans Litigation Against U.S. Tax Authorities over Audit, Bloomberg.com (Feb. 6, 2013).

Google has been in the news lately because of its ability to offshore profits to low-tax countries like Bermuda using treaty countries like Ireland and the Netherlands.  Because most of Google's assets are intangibles, it is relatively costless to claim "sales" through intracompany transactions that offshore the intangible and then attribute the profits to other countries.  Valuation of such sales of intangibles is inherently manipulative--no company would actually sell such invaluable essential business property to a third party, and there are strong arguments that our laws should not permit companies to make such "paper-only" transfers of intangible properties to offshore affiliates that have the primary result of creating complex structures that achieve lower US taxes,  like the "Double Irish" and "Dutch Sandwich". 

As the report notes, Google's 10k reports an overall (state and federal) effective tax rate of only 19.4% in 2012, down from the 21.2 reported in 2010, even though the federal statutory rate on profits is 35%.   In 2012, at least $9.8 billion in profits shifted to a Bermuda subsidiary.  These tax-haven subsidiaries are often just token offices with some paper-pushing and no real business reason for existing.  The difficulty for the government here is action taken by the Bush administration--"In 2006, the IRS signed off on a 2003 intracompany transaction that moved foreign rights to Google's search technology outside the U.S."

 

Related articles

Goggle's Bermuda hideaway/HSBC's too-big status: time to rein in the corporations!

Intangible assets hard to tax--France has an idea...

Romney's Tax Views Lead to Blooper Comments Denigrating America's Elderly and Poor

Most of us who follow tax issues in the news and in political campaigns are aware that GOP candidate Mitt Romney has been very secretive about various items.

First and foremost, he has been secretive about his own extraordinary wealth:  he has refused to follow his father's example in releasing more than a decade of tax returns and he has maintained numerous accounts offshore, including in jurisdictions that are known for banking secrecy.  This secrecy is problematic for many voters, because without those returns it is difficult to evaluate his aggressiveness in using shelters or taking controversial positions on returns to save himself tax dollars --a topic that is surely relevant to his qualification to hold the highest executive office in the land.

Second, he has been secretive about his plans for achieving across-the-board tax cuts of enormous benefit to the uber-rich and multinational corporations while claiming to maintain revenue neutrality.  Respected non-partisan tax analysts have concluded that his plans simply don't add up--the "arithmetic", as Democratic speeches noted, is against him.  When he refuses to specify just what programs he would cut while cutting taxes and increasing military expenditures, many voters are naturally suspicious that the cuts will all be taken out of the safety net--voucherization of Medicare, privatization of education funding, and even more of the deregulation that cost us so much in the 2007-8 financial crisis--while continuing the over-spending on military and various lucrative loopholes for the wealthy like the "carried interest" provision for private equity managers.

Third, he has been secretive about his lack of commitment to the disadvantaged in our society.  His failure to describe how he will create jobs (other than through his claim that managing vulture capital "leveraged buy-out" funds is good preparation for the presidency) suggests that he has no ideas other than the long disproven ones being pushed by the Chamber of Commerce and other business lobbying organizations--less regulation, more privatization, more reductions to earned benefits like Medicare and Social Security, and more tax provisions that favor the rich that the GOP labels--without empirical support-- as the "job creators".  But he has nonetheless tried to foster an image of caring about American people who weren't born to the life of wealth and luxury that he's enjoyed.

That third point of secrecy was shattered by the revelation of a taped video of Romney comments to major donors (delivered at a May 17 fundraiser at an investment banker's home in Boca Raton, Florida), in which Romney showed utter disdain for the large segment of the US population who ultimately do not pay any federal income taxes.  Romney called those who pay no federal income tax "dependent on government" and indicated that they see themselves as "victims".  He concluded he'd "never convince them they should take personal responsibility and care for their lives."  See David Corn, Secret Video: Romney Tells Millionaire Donors What He REALLY Thinks of Obama Voters, Mother Jones (Sept. 17, 2012).

 

See also Chris Miles, Obama vs Romney Polls: How Latest Romney Gaffe May Have Just Lost Him Ohio, Policymic (Sept. 17, 2012);  MicCheck.com email alert, 47% Video Worsens Romney's September Nightmare (Sept. 18, 2012); Chris Cillizza, The Fix: Mitt Romney's darkest hour, Washington Post.com (Sept. 17, 2012).

Romney's 47% comment fairly drips with disdain and scorn for ordinary Americans, casting them, as the Mother Jones article cited above notes, as "a mass of shiftless moochers who don't contribute much, if anything, to society." David Corn, Secret Video: Romney Tells Millionaire Donors What He REALLY Thinks of Obama Voters, Mother Jones (Sept. 17, 2012). It is of a par with comments by a woman that I met at a reception in Boston over the weekend, who spewed scorn as she claimed that anybody that is on welfare or getting unemployment is just a lazy bum that wants the rest of us to hand them a living on a silver platter.  Romney's and the woman's comments both show absolute insularity from the real world of povery and near-poverty in America in the aftermath of Bush's Great Recession, when able-bodied men despair of their situation in being unable to find a job, any job, and young folks grow hopeless as they fill in application after application.  Without government programs to fill in the gaps for these groups, their lives would be truly desperate.  Their non-taxpayer situation has nothing to do with lack of personal responsibility and everything to do with a society in which the economy for too long has favored the uberrich at the cost of ordinary Americans.

Remember that the federal income tax is specifically designed to protect taxpayers in the lower income distributions from paying federal income tax through the use of the standard deduction and personal exemptions.   That's because Congress has always assumed that there should be a minimum below which the federal income tax does not reach.  And Congress has enacted a number of other exclusions and credits designed to ensure that the federal income tax doesn't fall too heavily on the more vulnerable amongst us.  

About half of those [46% of households] did't pay [federal income taxes] because of standard deductions and personal exemptions designed to exclude subsistence levels of income from taxation.  The rest received tax breaks, including the earned income tax credit, the child tax credit and tax benefits for older Americans such as the exclusion of Social Security benefits from income."  Richard Rubin, Romney's 47% With Not Taxes Combines Elderly with Poor Workers, Bloomberg Businessweek (Sept. 18, 2012). 

Furthermore, most taxpayers who pay no federal income tax do pay other taxes:  state and local income, property and sales taxes eat up a substantial amount of income, as do federal payroll taxes, which often amount to the most significant tax bite for these lower-income taxpayers.  And as the Rubin article also notes, people who don't pay income tax one year--because of returning for education, job losses, extraordinary medical expenses and other causes--come back on the tax rolls in later years when they finish studies or find work.

Regrettably, Romney's remarks at the fundraiser mainly reveal an eager player in the class warfare game that the right has engaged in for the last few decades--it reflects a firm support for tax policies that redistribute upwards to the elite, at whatever cost to ordinary Americans who are disdained and even despised as irresponsible and lazy.  With CEOs making 200-400 times what their average workers make and the productivity gains contributed most especially by the workers being siphoned off for increasingly higher pay for the executives, ordinary Americans already are hurting.  Tax policies that continue the rip-off by continuing preferential rates for capital gains, providing even more preferential marginal rates for the uberrich, and eliminating worldwide taxation on multinationals will do even greater harm to ordinary Americans and the sustainability of our economy.

Romney and Private Equity's Questionable Schemes for Paying Very Little Tax

Presumably any American who wants to be informed is aware that GOP presidential candidate Mitt Romney's claim to business acumen resides in his experience at a private equity firm that made much of its money by ramping up debt at purchased firms and using that debt to repay whatever (usually relatively small) investment the equity firm partners made in what has come to be known as "LBO" deals (for "leveraged buyout").  In LBOs, the equity firm investors almost always do well to exceedingly well, using mostly other people's money. 

Not so generally for the workers in the bought-out company.  The "rent" profits of the equity firm are often on the back of the workers, who may get fired in favor of outsourcing their jobs or get stuck in a rut, as productivity gains go to the new managers and owners and not to the workers.  At the least, the high debt load makes it very difficult for the company to succeed and certainly difficult for it to give its workers a fair shake.   Remember that one of Romney's gaffs was to admit that he enjoys firing workers.

Why anybody thinks this kind of winner-take-all, leverage-'em-up mentality of private equity firms suggests the kind of leader desirable for a democracy that purports to provide genuine opportunity for all classes of citizens to live a decent life is beyond me. 

But even if the very nature of the business and the common tools of over-leverage and "rent" profits for a very few already at the top don't give voters cause for pause, then there are the many ways that private equity firm partners manage to avoid paying their fair share of taxes, which ensures that more of the tax burden falls on the less-well-off, that are worthy of consideration, even if candidate Romney has not (as his campaign claims) benefited from them personally.  That is because if Romney is elected president, his views on the acceptability of aggressive tax strategies of questionable legality will matter.  We should know what kinds of tax schemes are routine in the business that he touts as good evidence of his ability to serve as president of this nation--especially if some of them are obviously poor policy (the carried interest treatment) or highly questionable tax avoidance schemes (the management fee conversion waiver scheme).

I. Carried Interest

The best known way private equity firm partners reduce taxes is by earning their compensation in the form of "carried interest" and claiming that such profits should be treated the same way a real capital investment in a partnership is treated, even though it is awarded as compensation for their purported management expertise and work and not as a return on an actual investment made.   That is, they claim they are profits partners in the firm and that their compensation is a distribution of the partnership's profits (usually from gains on sales, and hence eligible for preferential capital gains) to them rather than compensation income.  As such they benefit from the extraordinarily preferential rate for capital gains in the current law as enacted under the Bush administration (generally 15%).  Carried interest is the primary reason that candidate Romney has to pay such a very low rate of taxes on his income from his business.

The Internal Revenue Code (the codification of the federal statutes governing the federal income tax) does not include a specific provision governing profits interests and indicating that such "profits" partners should be treated as actual partners in a partnership (without that partnership interest itself being subject to tax as compensation) entitled to receive capital gains distributions.  Accordingly, as one partnership tax treatise puts it, the tax treatment of a transfer to a "service partner" of a "profits interest" for services "has been uncertain" because "[n]o provision of the Code specifically exempts from taxation the receipt of any partnership interest in exchange for services."  Willis & Postlewaite, Partnership Taxation, 6th ed, at 4-124.    There is some caselaw about profits interests, but those cases made it even less clear how and when such interests should be taxed. 

Finally, the Service resolved the issue with administrative authority (heavily lobbied for in the interests of equity partners and real estate profit partners, in particular) in Rev. Proc. 93-27 (and later proposed regs and other items) that does not treat the issuance of a compensatory "profits interest" as  a taxable event in most instances.  The main reason for the treatment may well be the so-called "Wall Street Rule"--once incredibly wealthy taxpayers hire sophisticated, high-priced lawyers to produce opinons supportive of a taxpayer-favorable interpretation and then operate as though the Code blesses a particular activity, it is hard for tax administrators to issue regulatory authority that treats that activity differently.

2, Management Fee Conversion Waivers

But there is another lesser-known aspect to the compensation that private equity fund partners earn for their services in their private equity firms--the management fee.  Most explanations describe this as  compensation paid for services that is subject to taxation at the ordinary rate (just like a secretary's wages would be).  But that disregards a practice that exists among a significant number of equity firms (the Times article linked below says about 40% in 2009) that are willing to take aggressive positions to avoid paying taxes and can afford to pay the tax professionals to provide a way to do it--the management fee waiver conversion scheme. 

The conversion of management fees from ordinary income to capital gains is purportedly accomplished by "waiving" the fees (not necessarily across-the-board throughout the life of the firm, but often selectively and on a quarter-by-quarter basis),  Instead of getting fees, the partner claims they are "converted" to a share of related profits --i.e., they become an additional carried interest--and hence eligible for treatment as (deferred) capital gains from the firm.  

Some tax professionals think this conversion waiver works.  Much of this is again the "Wall Street Rule"--the claim that lots do it, the IRS has known about it, and oh it should be justifiable because now the "fee" is (sort of, maybe, kinda) at risk.  It is not really at risk in the way we ordinarily think of investment risk, since these are pre-tax dollars -- the managers are not putting after-tax dollars at risk like any other investor is doing.  And as Vic Fleischer commented to the gothamist blog, "there is a tension between economic risk and tax risk .... The way Bain set it up there's not much risk at all, so it's hard to see how this income should receive capital gains treatment."  Christopher Robbins, NY AG: Bain Capital and others may have skirted tax law, the Gothamist (Sept. 2, 2012).  

I'd guess  that most professionals do not think the conversion scheme works, at least not in most instances.  This would be especially true for those who consider that interpretations of the law should further coherent bodies of law that work as fairly as possible.  And even more tax professionals likely think that the partnership rules should be adjusted to ensure that it doesn't work, since otherwise we are perpetuating inequities in the tax system that favor the already incredibly rich.

The conversion waiver issue has come to the attention of the public now because the New York State attorney general is investigating private equity firms who may have engaged in this conversion waiver practice.  See Nichnolas Confessore et al, Inquiry on Tax Strategy Adds to Scrutiny of Finance Firms, New York Times (Sept. 1, 2012) (noting that the AG's subpoenas, issued by the AG's Taxpayer Protection Bureau, cover firms like Kohlberg Kravis, TPG Capital, Apollo Global, Silver Lake and Bain, and that Bain partners may have saved more than $200 million in federal income taxes, $20 million in Medicare taxes). 

It's not clear on what grounds the New York AG is investigating this issue, which appears on the surface to be primarily a federal income tax issue.  It could be some sort of state-law fraud claim but it could also be a claim that underpayment of state taxes routinely results from the filing posture taken,  Equity partners in firms using the conversion waiver would presumably be able to save on state income taxes through either rate preferences and/or deferral, depending on the state and how much the state's laws build on the federal filing.  Though New York State does not have a preferential rate for capital gains, if the timing of reporting the income is set by the conversion waiver, the deferral would amount to a significant state tax savings that deprives New York of needed revenues. 

[Aside:  By the way, some of the information about the management fee conversion waiver first came to broad public attention in connection with Bain and the trove of documents released at Gawker.com.  See John Cook, The Bain Files: Inside Mitt Romney's Tax-Dodging Cayman Schemes, Gawker.com (Aug. 23, 2012) (noting that the huge cache of Bain financial documents "shed a great deal of light on those finances, and on the tax-dodging tricks available to the hyper-rich that [Romney] has used to keep his effectie tax rate at roughly 13% over the last decade").   These documents, and the further analysis articles available at the Gawker.com site, are worth considering for their own revelation of what Romney's real business is like and how that does (or doesn't) suggest he can help our economy as president--it is a business where "opaque complexity" allows the "preposterously wealthy" to engage in "exotic tax-avoidance schemes", according to the Gawker.com article.  (I have not yet personally perused much of the 950 page trove on Gawker.)  That said, Romney's campaign issued a statement indicating that the candidate has not benefited from the conversion waiver practice.  We have not, of course, seen enough of Romney's tax returns and supporting information to be able to judge this matter independently.  The focus on the conversion waiver thus provides yet another reason why candidate Romney should release 10 years of tax returns as other candidates have done.]

There are two additional readable pieces on this conversion waiver issue, plus a scholarly article that anyone wanting to better understand the details can peruse.  Vic Fleischer, a tax prof at Colorado who made his original contribution to academe by writing about carried interest, has an article that sets out the issues well, with an example contrasting the significant difference in after-tax results for a real investor compared to a profits-interest purported investor.  See Victor Fleischer, What's at issue in the private equity tax inquiry, DealBook, New York Times (Sept. 4, 2012). See also Brian Beutler, Did Bain Capital Execs Break the Law Using a Common Tax Avoidance Strategy? Talkingpointsmemo.com (Sept. 3, 2012). The academic piece is Gregg Polsky, Private Equity Management Fee Conversions (Nov. 4, 2008).  The following two paragraphs are from the conclusion to that piece.

In fact, there are strong arguments that it is not. While managers argue that the safe harbor in Rev. Proc. 93-27 applies to the additional carried interest, there are both technical and conceptual claims to the contrary. Without the protection afforded by Rev. Proc. 93-27, the additional carried interest would be taxable upon receipt if it has a market value capable of determination. Both the context in which the additional carried interest is issued and the specific design features of the typical additional carried interest support the view that additional carried interests are significantly easier to value than prototypical profits interests.Under existing caselaw, this would mean that the additional carried interest is taxable upon receipt as ordinary income to the extent of its fair market value.

The IRS also has strong arguments under section 707(a)(2)(A), which recasts transactions that are artificially designed as partnership transactions in order to obtain tax benefits, such as character conversion. In the context of fee conversions, the most critical fact that favors section 707(a)(2)(A) recharacterization is the manager’s very limited exposure to risk. As a result, section 707(a)(2)(A) likely applies to fee conversions. If so, the manager’s attempt to convert the character of their management fee income would be thwarted.

 

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

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

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

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

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

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

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