ataxingmatter

Private prison firms, casino operators, and outdoor advertising as REITs--time to get rid of tax subsidies for RE industries

The Wall Street Journal reported Saturday on an IRS effort to police the misuse of REITs.  See A.D. Pruitt & Amos Sharma, IRS Puts Brakes on Corporate Push to Capture Real-Estate Tax Break, Wall St. J. (June 7-8, 2013), at B1.

A REIT is a "real estate investment trust", a special-status entity created by Congress in sections 856 -859 of the Internal Revenue Code to provide a way for ordinary retail investors to share in a big investment in real estate that would be impossible for them to do individually.  REITS avoid the corporate tax so long as they distribute most of their income as dividends to shareholders.

The Journal story notes that private prison operator Corrections Corp of America has already completed conversion to REIT status.  Now a flock of corporations operating various businesses that one wouldn't ordinarily think were intended to be covered by the REIT exception to corporate taxation are applying for REIT status--including Iron Mountain Inc. (document storage operator), Lamar Advertising Co. (outdoor billboards), Equinix Inc. (data-center operator), and Penn National Gaming Inc. (casino operator).  CBS  submitted a letter ruling request for its outdoor advertising division's bid for REIT status and an IPO, a move that would save it $145 million in 2014 taxes (and more in later years), according to Davenport Research, as reported in the Journal.

In addition to the distribution requirement, REITs avoid corporate taxation only if they satisfy a complex set of eligibility requirements, including the following gross income and asset requirements. 

• The first gross income requirement mandates that at least 95% of a REIT's gross income must come from dividends; interest; real property rents; gains from property sales; income or gain from foreclosure property; abatements and refunds of real property taxes; amounts received as consideration for entering into agreements to make loans secured by mortgages on real property or to purchase or lease real property;gain from disposition of a real estate asset (other than prohibited transactions). 
• The second gross income requirement mandates that at least 75% of a REIT's gross income be derived from rents from real property; mortgage interest; real property dispositions; dividends or gain from disposition of shares of other REITs; abatement and refund of taxes on real property; income and gain from foreclosure property; consideration for entering into agreements to make mortgage loans or purchase or lease real estate; certain gain from dispositions of real estate; and "qualified temporary investment income".  (The latter term is used for other types of investments that are used as temporary parking places for money.)
• The first asset test requires that at least 75% of the total assets of a REIT be represented by real estate, cash and cash items (including receivables) and government securities. 
• The second asset test requires that (i) no more than 25% of the assets represent other securities; (ii) no more than 25% of the total assets be represented by securities of taxable REIT subsidiaries;  and (iii) except for those taxable REIT subsidiary securities (I) no more than 5% represent securities of any one issuer;  (II) the assets do not include more than 10% of the voting power of any one issuer and (III) the assets do not include more than 10% of the value of any one issuer.

A special rule permits "timber REITs" for logging businesses where more than 50% of the assets are used in a timbering business.  And there are many more details to the rules than briefly outlined here.

Already, one can see two things about the REIT rules:

(1) that this is a very complex set of rules for which the discernible intent of Congress was to cover entities that made most of their money from being landlords--holding and leasing real estate;

(2) that the real estate (and logging) businesses undoubtedly lobbied hard to get this kind of break for their property businesses--a break that isn't ordinarily available for corporations that run grocery stores or distribution businesses or manufacturing businesses. 

Aside:  Real estate developers/owners/leasers are--like Big Oil and other natural resource extractive industries--businesses that exploit natural assets.  For reasons likely dating back to the very different circumstances at our founding when people tended to think of America as a vast frontier with almost unlimited resources which required incentives to get people to development them (and of course at the same time overlooking the Native Americans who were already there and using those resources quite differently), Congress has historically lavished largesse in the form of tax expenditure subsidies on businesses that exploit land and minerals and other natural assets.

So why would a prison operator like Corrections Corp of America or a casino operator like Penn National Gaming Inc. that have active business income from operating prisons and casinos be eligible for the REIT break if REIT status is supposed to be for landlords that get rent income?  It all depends on whether the business can successfully define its income as "lease" income from real estate (with incidental service income) rather than business income from providing services or running businesses(that take place on physical properties owned or leased by the companies).  The IRS has actually been rather flexible in its application of the REIT rules to date, considering cell phone towers "real property" for this purpose, etc.  As the journal notes, "some analysts argue that some companies are stretching the definition of landlord."   But "stretching definitions" is the key to the tax minimization game, and tax lawyers, accounting firms, and others will keep doing it unless Congress or the IRS narrows the definition (or eliminates the issue entirely).

 It seems quite appropriate that the IRS has launched a review "to define what type of companies can qualify as real-estate firms" for this purpose.  Even more appropriate is the House Ways and Means Committee's review of the wisdom of providing this preferential tax expenditure for any industry, even if they really are landlords.  The SEC has already noted that companies that hold lots of interests in real estate mortgage investment conduits (REMICs) might better be treated as mutual funds rather than REITs, for the safety of the financial system.  Id.  Rethinking REITs could lead to better securities regulation policy and better tax policy.  Elimination of this tax subsidy --which amounts to tax favoritism for  these real estate companies, casino and prison operators, and outdoor space advertising businesses--would be the fair thing to do.

Related articles

Equinix (EQIX) Comments on REIT Conversion, Expects Delay

Iron Mountain shares tank post IRS/Real Estate trust delay

REIT Conversion Risks Not Just for Iron Mountain

It's a REIT Bonanza Out There: Equity Volumes at Record Rates

Two REITs Set to Make Big Profits Off Retirement Boom Ahead

Why Congress Is Targeting These Dividend Favorites

Social Security Meets Real Needs

Sometimes when you look at the hype on Social Security from the right, you wonder what in the world is going on in the heads of the hypers.  Here's the way it tends to go:

1) Social Security is meant to be an insurance program that pays for itself.

2) Down the road in 20 or 30 years it is predicted by Social Security trustees (using prudently conservative estimates based on present valuing for infinity the obligations of the trust fund) that Social Security will be {pick your term: insolvent, bankrupt} and as a result , the program will, at that future date, be able  to pay only about 75% of the benefits promised to retirees (which will, nonetheless, exceed the benefits that are currently being paid to retirees).

3) So therefore we should "save" Social Security by "reforming" it now : the way to do that reform is not by lifting the cap (so the rich pay into the program the same way everybody else does) but by cutting benefits so that the program starts paying less benefits today to retirees.

When you write it out in stark terms like that, it becomes strikingly clear how idiotic these "reforms" are and how unprincipled the purported "reformers" are.  As Paul Krugman noted in an earlier New York Times opinion piece, Krugman, The Geezers Are All Right, New York Times, Opinion (June 2, 2013), they are proposing preemptively decimating benefits today because the program might reach a situation decades off where benefits would be partially reduced of necessity if nothing at all is done. 

 [I]t does look as if there will eventually be a shortfall, and the usual suspects insist that we must move right now to reduce scheduled benefits. But I’ve never understood the logic of this demand. The risk is that we might, at some point in the future, have to cut benefits; to avoid this risk of future benefit cuts, we are supposed to act pre-emptively by...cutting future benefits. What problem, exactly, are we solving here? Id.

This is not unlike policies of voluntary war--we'll suffer a great harm now (going to war, with the huge cost now in weaponry and lives and the huge cost in terms of long-term care of injured vets later) because we might have to suffer it in the future.  As we found in Afghanistan and Iraq, that speculative concern is a very poor excuse for going to war: the result of overthrowing a dictator may be extraordinary costs to the overthrower and the overthrown people and the result may breed more enemies than it kills them.  Preemptive war mostly aides warmongers in the military-industrial complex and the private companies (mercenaries and arms dealers) that make money off of war. 

Similarly, preemptive reduction of benefits in a program that does not yet require it to "save" us from having to make reductions in the future (since they've already been made and caused even more suffering in the here and now) is absurd.  It smacks of no reason other than:

(i) the real possibility of so fooling so many of the people so much of the time,

(ii) being able to gain "kudos" with the government-and tax-haters, and (likely the real purpose, these earlier just being gravy to the doing of it)

(iii) protecting the real clients who are the corporatist wealthy campaign donors who want to see these social welfare (they like to call them "entitlement") programs ended so that their own true "entitlement" programs --preferential capital gains rates; preferential "carried interest" taxation of compensation for service to private equity funds; preferential retirement programs; and preferential taxation of offshoring and Big Oil, Big Pharma, Big IP and similar industries--can continue unabated.

Remember that Social Security serves real needs.  To arrive at a decision to cut benefits, just because it seems to be the politically expedient thing to do given the anti-tax furor stirred up by the likes of the Koch brothers and Grover Norquist and the Tea Party groups, is penny-wise and pound foolish--and smacks of class warfare.  Do we really want to return to the pre-Social Security situation of a large population of seniors with too little to eat and nowhere to live?  Continuing to reduce benefits when wages have been declining for most ordinary Americans (while the tiny number at the very top of the wage pyramid see their wages mushroom) would be disastrous.  Just look at the story in the New York Times today about the near-crisis situation for most retirees, even with Social Security.  Jeff Sommer, For Retirees, A Million-Dollar Illusion, New York Times (June 9, 2013), at BU-1. 

"We're facing a crisis now, and it's going to get worse," said Alicia Munnell, director of the Center for Retirement Research at Boston College.  "Most people haven't saved nearly enough, not even people who have put away $1 million."

***

And if you're not close to being a millionaire--if you're starting, say, with $10,000 in financial assets--you've got very little flexibility indeed.  Yet $10,890 is the median financial net worth of an American household today . . ..

***

Social Security is going to be a major, and maybe primary, source of income for people, even for some of those close to the top." [quoting Edward N. Wolff, economics professor at NYU]

 

The "cut benefits" rhetoric is made even worse when "protecting future generations" is added as to the mix as a "principle" that is claimed to underlie Social Security, as in the following

4) And we should do this in the name of caring about future generations, who should not "on principle" be "paying more" to support their parents' or grandparents' generations. 

See, e.g., Robert Shiller's op-ed, Want to Fix Social Security? Use the Right Wrench,ⁿ New York Times (June 9, 2013), at BU 4 (claiming to be supporting a fundamental "principle" of Social Security that "one generation shouln't be more burdened than another").   The problem with claiming this principle as an underlying principle of Social Security is that  the original legislation provided benefits to a slew of seniors who hadn't paid into it anywhere near what they would be getting out of it (even with the then-likely life expectancies) which was made possible, of course, by demographics that led to increasing numbers in the workplace. 

And it isn't clear that there is any reason to consider it essential as an underlying principle now.  If we have an economy in which there is sufficient resources to support increased benefits for an aging baby boomer population--even if that means that current workers should be more highly taxed than workers were 20 years ago--why not do so? 

We know that we could increase the amount available by simply removing the payment amount cap on wages taxed, while continuing a payout cap based on a reasonable index --ideally, a more generous one than currently used.  That just requires the really rich to participate in the insurance system in a way similar to everybody else.  We could also make the system more intentionally redistributive, with significantly higher payments in the "bottom bracket" of paid-in amounts (to everybody) and rapidly descreasing payments in additional brackets of paid-in amounts.  After all, most insurance is redistributive according to the degree of loss, with higher payments to those that suffer great losses made possible by the more or less consistent premiums paid by everybody, including those who suffer few losses.

 

ⁿ The footnote

I've put a footnote indicator at the Shiller article because there is a lot more about this Shiller op-ed worth pointing out.  Shiller is a Yale economist--a profession that too often seems to be at the center of all discussion of tax policies but that tends to spend too much time trying to sound scientific (by reducing everything to equations) and thus missing the mark on truly understanding economies. 

• Shiller's op-ed starts out talking about the "mere 20 years" when Social Security is predicted to run out of reserves and noting the proposals for addressing that problem. 
• His second sentence states as near fact that "the public [is] apparently opposed both to tax increases and benefit cuts" to address the problem.

That raises red flags for me.  I'm not convinced of the truth of the statement on increasing taxes.  I consider it quite plausible that a survey in which the public was asked, in a reasonable framework, about increasing taxes to support Social Security benefits would yield a majority that favor removing the cap on wages to which the Social Security tax applies.  If you gave people enough information, it might even be likely that a majority would support removing the preferential rates for capital gains and applying the Social Security tax to all income. 

• He gets something right:  "[t]he purpose of Social security is to help families."

This is something that many on the right tend to ignore when talking about Social Security--it's all treated as a matter of "personal responsibility" (the dislike for so-called "entitlements"--even though these entitlements are earned benefit programs and the push for privatization--as though that would automatically make people able to save enough to take care of themselves no matter their actual financial condition) and fiscal sanity (the tendency to emphasize the potential future shortfalls in benefit payouts as a justification for reducing benefits today, and the implication that otherwise we will face an unimaginably steep deficit, etc.).  Very little is about the importance of a social safety net to ensure that our seniors (and children) are not left in dire circumstances, poverty-stricken in a rich country.

• He spends the first third of the article seemingly moving towards providing a solution to "the problem"--that if nothing is done, "the Trust Fund runs out in 2033" and the system would only be able to pay about 75% of promised benefits.  He discusses the current indexing system, Obama's proposal (which would reduce benefits, stupidly), and then his "alternative" proposal--to index benefits to GDP, leading to increases in growth periods and potentially cutbacks in recessions.
• Then he admits that his "alternative" (offered as an alternative to suggestions for changing the index to address the problem of insolvency, since tax raises and benefit cuts are disliked by everyone) doesn't  address "the identified problem" of potential future insolvency
• But he claims the change should be adopted because it would instead "support the principle that one generation shouldn't be more burdened than another." 

This is said as though this "principle" is something everyone recognizes.  But let's be clear--there is no per se reason that one generation should be less burdened than another.  It depends on need and ability to pay. 

As we came out of the Depression and WWII, the younger generation was quite clearly the one burdened with paying for the older generations who had contributed very little for the benefits they were receiving, appropriately so.  Even if we end up with fewer workers supporting more baby boomers during the baby boomers retirement years, that's okay--especially if we are wise enough to remove the cap (as suggested above).  There is no inherent injustice in that.  The injustice would only come into play if the sacrifice asked of a later generation was so great that it outranked the offsetting sacrifice that would be asked of the earlier generation in cutting benefits.  That is hard to measure, for sure, and not obviously true merely if later workers pay slightly more in taxes to support earlier workers.

Now, there may be some good reasons for changing the index to a dirrect correlation to GDP, as Shiller suggests.  But the op-ed left me wishing he had just addressed that.  All his cloaking of his proposal in language that would get the attention of those on the right--talk of insolvency, talk about tax increases not being on the table, talk about the current proposed solutions to the "problem" and his "alternative", which turns out not to be an alternative solution but an alternative indexing proposal that is being proposed for different reasons than the ones that underlie the proposals his is an alternative to--distracts from the meat of his article.

Related articles

Another reason for NOT cutting Social Security benefits--seniors poorer than you think

Robert Reich: Chained CPI Makes No Sense For Seniors

'Scrap the cap' to keep Social Security fair

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

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

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

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

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

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

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

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

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

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

3. cutting out corporate taxes means increasing the deficit

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

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

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

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

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

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

Related articles

$2 Trillion Wasted In Tax Breaks For Wealthy

NY Times on Corporate Tax Planning/Tax Avoidance

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

Kevin Brady's misleading Wall St. Journal op-ed

Today's Wall Street Journal features an op-ed by Kevin Brady, right-wing Texas Republican who chairs the notorious "Joint Economic Committee" that has been a notorious producer of anti-tax propaganda-driven studies over the years of Republican hegemony in the House.  See "Tax Reform Needs Accurate Tax Tables", Wall Street Journal (May 6, 2013), at A15.

The op-ed spends a lot of time denouncing information about tax rates.  It suggests that the entire US tax system is far too progressive in nature, because "one of the most salient characteristics of the U.S. tax code [is] the decreasing share of taxes paid by the bottom 50% of taxapyers and the increasing share of taxes paid by the upper 1%."  Of course, Brady mentions nothing about the accelerated growth of inequality of income in that same period, resulting in the upper 1% controlling so much more of the U.S.'s wealth and income compared to that bottom 50%.  In fact, the upper group pays less than it should given the enormously increased bite of wealth and income, a fact that Brady conveniently overlooks.

The op-ed also talks only about the income tax rates, thus appearing to suggest that the income tax is the only relevant portion of the U.S. tax system and that rates, rather than base, are the most significant factor.  In fact, there are a range of taxes--income, estate, payroll, excise/sales taxes.  Regrettably, the income, estate and payroll taxes are much too lenient on the highest paid groups.  

The shrinking of the income tax rate structure (from many different rate levels in the 1970s to our minimal group of rate brackets today) is highly favorable to the highest income group.  The rate levels off at less than half a million, while the highest paid CEOs are making 20-30 or 40 million a year.  As a result, those in the top 1%--and especially those in the top part of that 1%--are taxed at the same rates as people who make a "mere" $400,000 a year.  Further, the base on which that rate is applied to determine tax liability is notoriously laden with tax expenditures that primarily benefit that same group at the top, beginning with the charitable deduction for non-taxed appreciation and continuing through Roth IRAs/ IRAs /generous pension plans to too-high mortgage interest deductions and others.  Only those in the top 30% even bother with itemizing deductions.  And among those, it is those at the top who garner the enormous benefits of deductions from those tax expenditure provisions.

The estate tax is similarly designed to provide special benefits to the wealthy--from the lack of a progressive rate structure that ensures that the wealthiest tycoons who've amassed fortunes from loopholes like the carried interest provision will pay peanuts on an estate hardly taxed during their lifetimes,  to the various gimmicks for evading and deferring estate taxes-- including various kinds of trusts,"family" partnerships  and irrational "discounts. 

On the other hand, the sales tax is a mere gnat for the wealthy while its expansion cuts into essential living expenses for the growing legions of the poor and nearly poor.  The payroll taxes for the working poor and the middle class take a significant bite out of their labor's rewards, while the wealthy CEOs and directors pay Social Security only on a miniscule portion of their wage income. 

But Brady's most misleading statements are those that repeat the tax-cutting mantra that the GOP has pushed for well-nigh four decades now, beginnning before Reagan but put into overdrive during the George W. Bush administration--the idea that tax cuts stimulate economic growth, and especially that tax cuts on the capital income of the wealthy will stimulate growth, create jobs, and increase wages for the majority of Americans who are not wealthy.  Here's what Brady says (notice how the statement presupposes the truth of his claim):

The most important defect of tax-distribution tables is that they cannot help one to assess how proposed tax changes will affect economic growth.

Suppose Congress eliminated the double taxation of capital income by doing away with taxes on capital gains and dividends at the individual level.  Current tax distribution tables would depict this change as a reduction in progressivity due to the large share of capital gains and dividends attributable to the top income quintile.

But doing away with taxes on capital gains and dividends would significantly lower the after-tax cost of capital for new business investment in buildings equipment and software.  New business investment increases the demand for and productivity of labor, driving real wages higher. 

For households in the bottom 50% of the income distribution, the benefits are significant but indirect--more jobs at higher real wages.  Id.

The fact is, we have been following this agenda of reducing taxes on capital income for decades.  The result has been an unprecedented growth in inequality and the continuing decline of wages for the vast majority of Americans who work for their income.  The right's "philosophy" of low taxes on capital and high taxes on labor doesn't work and never will.  Brady doesn't appear to much care --his arguments seem designed to justify the right's continuing push for policies that create an oligarchic elite served by an increasingly indebted worker class with few employment rights as the courts favor Big Business over the people this country was founded to protect.  Brady's op-ed, in other words, is just another volley in the right's class warfare against American workers.

Related articles

Big Business believes in taxpayer subsidies, not "free markets"

Joe Stiglitz Blasts Our Wealthy-Coddling Tax System for Increasing the Returns on Rent-Seeking

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.

Right-Wing Mythology 101: the MYTHs that the right-wing scam is built upon

 There are so many untrue views taken as "God's truth" on the right that it makes one's head swim.  And they are often repeated in newspaper and magazine stories without a question. 

I plan to do a series of posts on the right's anti-factual economic/tax myths as the foundation on which the right-wing policy ideology depends.  For now, here's my list of the "top fifteen" anti-factual economic/tax myths of the radical right (not necessarily in ranked order). 

Right-Wing MYTH 1: Higher taxes on the wealthy result in less revenues, because rich people flee from high-tax jurisdictions to low-tax jurisdictions.

Right-Wing MYTH 2: America is a classless society, with considerable mobility between income distributions from year to year, and an opportunity for anyone to make it to great riches on his or her own merit. Anybody who pretends otherwise is engaging in class warfare.

Right-Wing MYTH 3: There is an ideal rate of income tax, based on the "Laffer curve" theory, that shows that income taxes need to be relatively low, else the "confiscatory" nature of income taxation will drive those high ability "job creators" to do less work, resulting in a poor economy with fewer jobs for ordinary people.

Right-Wing MYTH 4: The US has the best health care system in the world because of private competition, so the best way to ensure decent health care for all is to make it even more competitive, by eliminating employer-provided health insurance and forcing Americans to take greater personal responsibility for their medical decisions.  (This is an example of the way corporatism favors big institutions over individuals)

Right-Wing MYTH 5: The U.S. debt burden is unsustainably high and will cause the economy to crash--like a family, the US government should not use debt to make up for revenue shortfalls to pay for the budgeted spending.

Right-Wing MYTH 6: The best thing for the economy would be to cut Social Security and other "entitlement" spending that grows apace with the growth of the population.

Right-Wing MYTH 7: Government spending is always worse than private spending (this is one version of the "privatization" leg of the reaganomics economic stool)

Right-Wing MYTH 8:  Estate taxes are unfair because they take away family farms and for others result in double taxation --once during the decedent's lifetime, and once upon death. 

Right-Wing MYTH 9: The preferential taxation of capital gains is necessary to level the playing field with the taxation of wages, since holders are otherwise penalized by inflation.

Right-Wing MYTH 10: A national sales tax would be a simpler and fairer way to fund whatever federal government activities are needed.

Right-Wing MYTH 11:  It was the quasi-governmental Fannie Mae and Freddie Mac that precipitated the mortgage loan crisis.

Right-Wing MYTH 12:  Unions are harmful to the US economy, and it is important not to allow a "card-check" system for union approval, in order to protect employees from a union they don't want.

Right-Wing MYTH 13: Workers in states without "right-to-work" laws are forced to pay union dues but get nothing for them; workers in states with "right-to-work" laws are protected from paying for something that does them no good.

Right-Wing MYTH 14:  A truly free market is the secret of a great economy, and the free market economy works best when taxes are very very low.

Right-Wing MYTH 15: The wealthy are the job creators.

Please add your candidates in the comments, and any studies you have found that directly counter them.

Related articles

Red state tax "reform" and "economic growth"

Social Security/Medicare vs Corporate Welfare

Fred Lundgren: The Myth of Social Security's Insolvency

The tax flight myth

Charitable Contribution Deduction--Camp Hearings Feb 14

Rep. Camp's Ways & Means Committee held hearings today on the charitable contribution deduction. To watch the hearings, you can go to this website. Camp is planning a tax code rewrite, which he says is intended to lower rates, simplify the code, and curb some tax breaks. 

Regarding those Camp objectives--they are not generally the right ones.

• Lowering rates is the wrong objective.  We already have very very low tax rates, especially when you consider that we do not have a VAT alongside the income tax as most European countries do.  The primary motivation for lowering rates appears to be to cut revenues even more, in another ratcheting up cycle of the GOP "starve the beast" game.  Lowering rates allows wealthy taxpayers and corporations to retain more of their profits, when they already garner a higher share of that income than average Americans who toil in their businesses as regular employees.  Lowering rates also results in less revenues and increased borrowing, resulting in higher deficits and higher debt, contributing to the right-wing demand for cutting safety net programs like unemployment insurance, Medicaid, Medicare and Social Security.
• Simplifying the Code is the wrong objective.  About 70% of US individual taxpayers do not itemize, meaning that their tax returns are quite simple.  For the 30% of taxpayers who do itemize, the complexity is necessary to prevent scams, manipulation and unreasonable subsidization of those who don't need it.  A tax system intended to cover the many complex transactions of today's globalized economies cannot be simple without being naive.
• Curbing some tax breaks is a good idea.  But it should be more than "some" and it should be vigorously done to shift the tax burden towards the upper class and business and away from those in the lower and lower-middle income distributions.  The tax breaks that should be curbed are the ones that are most regressive in nature--i.e., the ones that provide the majority benefit to the very rich.

The hearing today included lots of representatives of charities who were arguing their interest--keeping the tax-incentivized flow of money coming.  The typical argument from charities is that the tax deduction is necessary to incentivize the transfer of money to charities.  If it weren't there, the argument goes, rich people might not give at all, or at least not nearly so much money. 

There's not a whole lot of empirical evidence to back this up.  On the one hand, there are studies showing that  non-rich people give much more of their limited assets away, proportionately, than the richest people (though of course it amounts to much less in absolute dollars), and many of them don't get any break at all because they don't itemize. Furthermore, rich people like the names-on-gold-plates-on-opera-house-chairs a heck of a lot, too.  Maybe they give most of the money they give because of the status, the recognition, the remembrance-in-perpetuity, and to get to attend the events they've sponsored, which are usually the kinds of cultural events that they enjoy (opera, ballet, elite art museums, etc.).  Does what a rich person says about why he gives hold a lot of weight in this debate?  I'd argue it should not, since those who give typically want to be thought of as important philanthropists and not as status-greedy opportunists who are just giving the minimum amount to get their name and face plastered all over the New York Times.....

Does the tax incentive come into play in determining how much a person will give?  Indubitably.  But it isn't clear that people who want to give $20 million to their alma matter wouldn't do so even without the charitable contribution deduction!  All that put together suggests that the deduction is highly inefficient.  Most rich people would give money anyway to the things that bring them prestige and status and recognition and that accomplish what they want to accomplish now that they are rich and can afford to spread money around.

In addition to the inefficiency of the charitable contribution deduction--at least in amounts above some reasonable amount to allow to those who are NOT in the top quintile (say, 10%  of  adjusted gross income), there is also the problem that the deduction is primarily beneficial to the very wealthy.  They pay tax at the highest rates (well, except when the system doesn't work well because they have mostly preferentially taxed capital gains) and they get the most bang from the buck for the dollars they contribute.  They invariably itemize, whereas most lower-bracket taxpayers do not.  They give in ways that gives them prestige (there is really a quid pro quo for much of their giving, though it may not be financial).

Another complaint from charities and wealthy donors is that the absence of a charitable contribution deduction will result in the government just taking all that money that would have otherwise gone to the charity, because of higher taxes.  The implication is that such a result is disastrous, putting the recipients of the charity's charitableness at risk.  But the truth is otherwise.  The government may be more likely to support the poor and downtrodden than the wealthy are through charitable donations.  How many wealthy are making contributions to Museums and Opera Houses and Elite Universities, versus a local homeless shelter or similar programs for the needy?  And the decision of what to support, when made by a democratically chosen government, should more accurately reflect the will of the people than the decision of the one (wealthy) donor who gets the tax benefit of a deduction (though of course in these days of partisan gridlock and GOP obstructionism, that is regretably less true).  Shouldn't democracies favor taxation and redistribution via program selection over subsidizing the wealthy's favored charities?

So some new, reasonable limits on the charitable contribution deduction make a lot of sense from the perspective of democratic egalitarianism.   My suggestion would be to limit the deduction to  10% of the adjusted gross income reported on the tax return. (Ideally, such a modification to the deduction would be accompanied by a rethinking of the estate tax, to limit the amount that can be passed on to heirs without tax to an amount that more or less approximates the average estate of a taxpayer in the fourth quintile of the distribution.)

What about other changes that would be easier to pass and make lots of sense? 

• Prime amongst them would be the elimination of the fair-market-value deduction (rather than basis) for contributions of certain properties.  This is a sheer giveaway to the wealthy that cannot be justified.  It allows zero basis stock where there is no remaining unrecovered capital investment to be contributed and yield a deduction for the full value, whereas if the person sold the stock, they would at least have to pay capital gains tax on the value.  This provision should simply be deleted from the Code.  That's one simplification that would actually result in more fairness.
• Another area to tighten is the rules governing private foundations, to prevent the kinds of abuses (where 20 family members receive exorbitant salaries) that give charities a bad name.
• And Congress should eliminate the tax giveaway to large corporations (enacted in the Tax Reform Act of 1976) that permits them an enhanced deduction for donations of excess inventory--a deduction in excess of their cost basis and for more than the value of the inventory.  It's not clear that the deduction incentivizes any additional donations--if a corporation has excess inventory, it will either give it away (which can serve a significant PR function) or sell it at fire-sale prices (which can serve a negative PR function).  IN most cases, it would likely give it away without the enhanced deduction.  Of course, instead of urging Congress to eliminate the large busienss excess inventory special treatment, small businesses (mainly, S corporations with wealthy shareholders) are whining about how tough a time they have and arguing that they should be given a "level playing field" by letting them get the enhanced deduction too.  See NAEIR President Gary Smith's comments, below (in email).

  Congressman Schock and Mr. Smith agree that the bill [H.R. 2592, introduced in the 112th Congres by Schock] would greatly benefit the small business community by establishing parity for S corporations and other small businesses and as such a level playing field with larger regular corporations.  In addition to the principle of fairness inherent in this legislation in the tax benefits it extends to the small business community on par with larger corporations, Mr. Smith notes that “The impact of this legislation must be understood on the grassroots level: promoting greater collaboration between businesses and charities at the local level.”  In brief, several million struggling small businesses and millions of individuals served by our nation’s charities would benefit through previously unavailable access to a wide variety of free donated products.  (NAEIR email release Feb 14, 2013)

Not surprisingly, NAEIR is busy promoting the "enhanced" tax deduction (for up to two times the value of the excess inventory) to businesse--see here.

Related articles

The Inequality Gap

House Holds Hearing Today on Tax Reform and Charitable Contributions

TurboTax - Charitable Contributions You Think You Can Claim but Can't

JFNA joins array of charities testifying in favor of deduction

Congress Starts Examining Changes to Charitable Tax Break

Feeding America Urges Protection Of Charitable Giving Incentives

Lew's Senate Finance hearing as Treasury Nominee

Jack Lew, former budget director under Clinton and Obama and former Obama chief of staff, answered questions at Senate Finance today in his bid to succeed Tim Geithner as Treasury Secretary.  See, e.g., Rubin & Klimasinska, Lew Says He Didn't Know Money-Losing Investment Was in Caymans, Bloomberg.com (Feb. 13, 2013) and other related articles linked below.

When he was first nominated, I noted that I found his candidacy somewhat worrisome.  While there are a number of considerations that suggest a decently competent person, there are also some suggestions of a person who has lived in the "Wall Street" flow too long and thus falls into line with the typical Wall Street/mainstream economics thinking--thinking which ultimately supports policies that will continue to slide towards oligarchy.

The hearing focused on several interesting aspects of Lew's career and investment choices.

1) Investing in the Caymans.  Lew made an investment of 50 to 100 thousand in a Citigroup fund based in theCaymans while he was at Citigroup, and claimed that he didn't know it was an offshore investment.  He got out of it when he went into government and lost money on it. 

ME:  There we have it--like most rich people, he just didn't care enough to consider closely whehter his investment was in a tax haven country and certainly didn't ponder the negatives .

2) Compensation at Citigroup.  Lew got a "bonus" of $940,000 in January 2009 when Citigroup was receiving federal bailout funds.  He defended it as being paid in the same way other private-sector employees in similar jobs were paid. 

ME:  But there was a ridiculous racheting up of financial sector compensation during the years when the big banks were feeding at the trough of easy mortgage securitization money and derivative speculation.  Shouldn't someone that we hire as the head of Treasury have been more aware of that speculative binge?    Or shouldn't that person be at least somewhat ashamed now that such an exorbitant "bonus" (10 times what most Americans receive in annual pay) should have been funded, in essential part, by taxpayer bailouts of his institution?

Now, Orrin Hatch (GOP-Utah) tried to make a big deal out of Lew overseeing the Financial Stability Oversight Council in administering the Volcker Rule limiting proprietary trading, saying that "it could lead to an awkward situation in which, in your role as chair of the FSOC, you would effectively be saying to financial firms: 'Do as I say, not as I did.' "  Hatch claimed that this issue "bear[s] directly on your qualifications."  I'm not so sure that is such a big worry since I think it is advantageous if Treasury has some understanding of how big banks trade, but it is just one more piece of Lew's overall nature of being well-attuned to Wall Street (and not so well-attuned to Main Street).    

3)  Corporate taxes.  Lew suggested in the hearing that Republicans and Democrats could "work together" so that changes in the international tax scheme could lead to lighter burdens on some foreign income of US multinationals.  The Bloomberg report notes that he supported a global minimum tax, but indicated that could be nominally territorial, with limits on offshoring income to tax haven countries. 

4) Earned benefit programs.  Lew is one of those Democrats who is more right of center than the party's base.  He still mentions the need for "entitlement" program changes as well as additional revenue increases as a part of "balanced" deficit reduction.

ME:  This is one of the most disturbing aspects of the Lew nomination.  He is pushing the GOP agenda of deficit reduction and "entitlement" reform when instead he should be staunchly defending the New Deal against the oligarchs who want to shrink government, diminish the safety net, end any support for innovative environmental and energy progrms, yet continue to reap benefits from the long-term government subsidies for Big Oil.....We should not tamper with Social Security--and there is no deficit reason for doing so. 

Related articles

More on Jacob Lew: Does His Background presage failure to protect New Deal programs when the right hollers about debt and deficits?

Lew almost official as nominee for Treasury Secretary

Lew Stresses Bipartisanship As Republican Questions Start - Bloomberg

Treasury Nominee Lew Says US Economy in 'Better Position'

Lew Sees Bipartisan Chance to Rewrite US Tax System - Businessweek

Grilling for Lew on bank job during bailout

Let the Wars Start--only when we are willing to pay for them

The op-ed page of the New York Times often has some thoughtful items worth reading.  Russell Rumbaugh's A Tax to Pay for War, New York Times (Feb. 11, 2013), at A17 is one of them.  As Rumbaugh notes, the slight delcine in military spending since 2009 has provided some breathing room on solving the fiscal crisis, but that breathing room could quickly vanish if we undertake new military interventions.  As he notes

[W]ar spending--like all government spending--wrecks public finances only when more money is spent than is brought in.  ...Three years ago, the Senate Budget Committee adopted a bipartisan amendment requirement that wars be paid for.  ...[But] none of these proposals resolved the question of whether to pay for future wars through spending cuts or raising more revenue."

Rumbaugh urges that we "make a choice and require a tax surcharge to pay for any military operation." 

He offers three primary rationales for instituting a war surcharge: 

1) Historic norms and traditions for financing wars:  we have historically made major changes in tax poli:y in connection with undertaking wars, from the development of the income tax initially in the Civil War to its permanent inclusion in the US Code during WW I to the use of withholding in WWII and the enactment of a tax surcharge during Vietnam to pay for that war. 

2) Ease of implementation: The "savings" from leaving Afghanistan coupled with the passage of the Budget Control Act with a cap on military spending offer a similar opportunity for a war surcharge.  Any "necessary" military spending above the cap would result in an automatic surcharge to raise the necessary revenues. 

3) Proper consideration of the costs and benefits of war:  Rumbaugh notes that a surcharge will mean that argumnents for military action "would explicitly include a call for increased taxes, forcing the question of whether the stakes in the military situation are worth the cost.  If the American people agree they are worth it, the president will get both the political support and [the] financing he needs."  After all, "[i]f military action is worth our troops' blood, it should be worth our treasure, too."

 These arguments seem sound.  Certainly one factor in causing the Great Recession we are still coming out of was the decision to go to war in Afghanistan and Iraq--wars likely to be long and costly in terms of technical equipment as well as lives and costs of caring for wounded soldiers (physically and psychically) afterwards--and just put it on the credit card by LOWERING taxes at the same time for the very wealthy amongst us in particular.  Whereas tax rates in war have been very high in the past, the Bush wars of choice were fought with borrowed money.  And perhaps those wars were more easily entered into because there was no direct cost obvious to Americans at the outset.  The use of a volunteer armed force left most of us more removed from the conflict; the use of "embedded" journalists who did not have the opportunity to capture iconic images of the war outside the scope of what the Pentagon wanted to be seen left most of us with uncertainty about what was really going on in the war zones; and the use of borrowed money to fund the wars meant Americans could go about their daily lives with little recognition that we were a country engaged in a very costly military battle.

PS I would note that government spending even when it is based on borrowing doesn't necessarily "wreck" the economy as he implies--Krugman, Stiglitz and other economists will tell you that it is much better to borrow and spend after a recession than to adopt silly austerity measures.  When the private sector isn't spending, government needs to.  But we should spend wisely--infrastructure spending, for example, might make a lot more sense than military intervention spending, as Blodget suggests in the post linked below.  Even wiser--tax ourselves to pay for whatever wars we decide to fight.  The war tax is a win-win Tobin tax--if we go to war, at least we have the revenues to pay for the war.  If the potential tax take discourages us from going to war, then we have less war, which I suspect most of us would think is a pretty good outcome......

Related articles

A Tax to Pay for War - NYTimes.com

A Tax to Pay for War

Yes, Of Course We Should Cut Military Spending!

Links Worth Noting

Simon Tilford, Workers Must Get a Bigger Slice of the Pie, New York Times Op-Ed (Nov. 22, 2012).

Over the last 30 years, wage growth has lagged behind productivity across the industrialized world, leading to a steep fall in wages, salaries and other employee benefits as a proportion of G.D.P.

Simultaneously, there has been a big rise in inequality as the benefits of economic growth have accrued to those at the top of the income scale, as well as a steady increase in corporate income and profits. These trends have gone hand-in-hand with a steady decline in business investment.

***

There is no doubting the need for reforms aimed at increasing competition and opening the way for the adoption of new technologies. But governments need to combine market-led reforms with measures aimed at preventing a further decline in labor’s share of the pie.

With households now highly indebted across the industrialized world, a sustained recovery in private consumption will require a rise in the share of national incomes accounted for by wages and salaries.

The op-ed goes on to suggest a number of actions that governments should take:  redoubling efforts to ensure that students complete school, providing that executive compensation relates to performance rather than stock prices, making tax systems more redistributive (including increasing the tax burden on capital and reducing it on labor), ending their "obsession with 'competitiveness'" and instead "boosting domestic demand", and  being more "skeptical" of business lobbying.

Sound advice, I'd say.

Peter Diamond, Down with Supercommittees, New York Times op-ed (Nov. 19, 2012).

Diamond suggests that our government's fascination with commissions charged with coming to grand bargains on federal fiscal policy and congressional super-committees similarly charged cannot succeed.

Discussion of the debt trajectory is focused on some sort of grand bargain. Even if one is achieved, there’s reason for pessimism: any bargain is likely to sidestep, or even enshrine, many of the root causes driving inefficiencies in our nation’s spending and taxes.

***

Instead of wide-ranging, politically motivated panels, we need narrowly targeted commissions, without sitting members of Congress, modeled on the successful Base Closure and Realignment Commissions of recent decades.

***

 What we need ... is a set of narrowly targeted commissions, each with a clearly articulated task and the ability to require a no-amendments, up-or-down vote — and all without sitting members of Congress.

 

Related articles

Peter Diamond Advocates for Getting Rid of Democracy

a message from Bernie Sanders

Op-Ed Columnist: The Twinkie Manifesto

More on the Threat to Social Security and Medicare from the so-called "Fiscal Cliff"