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Linda Beale on NH Public Radio…flat tax is back

The Flat Tax is Back

Moderated by  Laura Knoy on Wednesday, October 26, 2011
(follow link)

Quote:
“In past presidential cycles, the idea of fixing the tax code by charging everyone the same rate has caught on like wildfire, only to die out later. This Presidential election season, candidates Herman Cain Rick Perry, and Newt Gingrich are promoting flat tax plans. We’ll look at this concept…why it remains popular…and why it hasn’t yet become law.”

Guests


Linda Beale - associate professor at Wayne State University Law School. She contributes to the economics and finance blog, Angry Bear.


Chris Edwards – director of tax policy studies at the Cato Institute and editor of the website, downsizinggovernment.org
                                                                                                       

                                                                                                      (loonyhiker< /a>via Flickr/Creative Commons)

Of course Linda’s thoughts on the matter appear in more detail at Angry Bear and ataxingmatter

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Perry’s Flat Tax Proposal

by Linda Beal

Perry’s Flat Tax Proposal

The Atlantic has a good summary article contrasting Perry’s Flat Tax proposal (an alternative choice to the income tax, that is modeled after Steve Forbe’s flat tax, which will result in much lower taxes for the wealthy because of the deductions it retains along with the zero taxation of capital income) and Cain’s 9-9-9 intermediary proposal as well as Cain’s ultimate goal of the so-called “FAIR tax” –a national sales tax at a tax-inclusive rate of 23%–both of which will result in much lower taes for the wealthy because of zero taxation of capital income.  Of course, along the way to his purported “FairTax”, Cain will put us through his wacky 9-9-9 plan that includes a VAT (but one that has solely a wage base), an individual Flat Tax (but one whose provisions to benefit the poor are uncertain–some kind of poverty exemption and impoverished district exemption, without much information about how it works or how much it helps), and a FairTax (without any relief from the lumpiness of the tax that causes it to be particularly unfair to the poorest of the poor).  See Derek Thompson, Perry Tax, Flat Tax, Fair Tax, VAT (Tax): What’s the Difference?, The Atlantic (Oct. 25, 2011).

None of these proposals are revenue neutral (they will raise less revenues than raised under the current tax system).  Either the rates would have to be increased or the government would be forced to operate in deficits (as it was pushed into doing with the Bush tax cuts where the $1.2 trillion cost over ten years of the 2001 bill moved the nation from surplus to deficit in one fell swoop).

None of them are distributionally fair–they shift the tax burden (to whatever extent the federal government is allowed to exist) down to the middle class and maybe the poor, while giving the rich extraordinary tax reductions through complete exemption of their main type of income.

None of these proposals are “simple” in any meaningful way They all require similar tax administrative apparatus to the current system (or, in Perry’s case, duplicative administration to take care of the choice of Flat or Income tax), involve the same calculations about timing, amount and character of income necessary under the income tax (but now fraught with more potential for abuse through mischaracterization, since one type is entirely tax free), and require the same procedural due process and penalty mechanisms, as well as forms, instructions, guidance and audits that are required under teh current system.  The only sense in which the Flat or FAir tax or VAT is simpler is when you mean by simpler that the wealthy pay less in taxes.

So if we are to judge the proposals by their results, it would seem that these two right-wing contenders for the GOP presidential nod think that two things are immensely important:

1) reducing taxes on the uberrich, and

2) reducing revenues available to the government to fund important programs.

That fits, since the right wants to “drown” government (and get rid of the New Deal earned benefit programs of Social Security and Medicare that aren’t needed by the elite who fund the right) and wants to cut taxes on the rich/big corporations as close to zero as it can get away with.

Let me repeat.  The arguments used to support all of these consumption-type taxes are fundamentally flawed.  They are not simple–they will involve the same hair-splitting on categorization of income as the current income tax, the same forms, timing issues, accounting issues, tax procedures for due process, and tax administration as the income tax.  They are not fair–they push the tax burden off on the middle class (and the poor, especially under some of the variants) and give the wealthy inordinate tax breaks by not taxing at all their most common type of income from capital.  They will not bolster growth and result in superb “trickle down” effects for the poor–tax cutting measures simply cannot do this because the theory that says they can is based on flawed assumptions about real life and flawed judgments about what matters.  They will hurt government programs that are vitally important to quality of life.  They will exacerbate the inordinate inequality already hurting the US society by making the wealthy even wealthier, and push us even further towards outright plutarchy (plutocracy and oligarchy at the same time, where a wealthy and prestigious elite holds all the reins of power). They will result in the dismantling of the New Deal from Social Security to Medicare, accompanied by gleeful sounds of delight from the radical right that supports the corporatist state and moans of pain from the vulnerable, the poor, and the elderly who are thrust back into neofeudal serfdom under the corporate masters of the universe.

Michael Kingsley and Francis Wilkerson agree with me on the latter issues.  I just found their Bloomberg opinion piece on flat taxes:  Flat Tax Proposals are Perpetual Font of False Promises, Bloomberg.com (Oct. 24, 2011).

originally published at ataxingmatter

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Presimetrics Review

Noted for the record: author Piaw Na reviews Mike Kimel‘s Presimetrics at Piaw’s Blog:

This is a great book to read if you’ve got a statistical bent and are willing to follow the data rather than your pre-conceived notions….Many people like to say that they’re data-driven, but most people actually have prejudices that lead them to believe what they believe, as opposed to actually looking into data and correlations. This book goes a long way towards providing those who want data the actual data with which to base their beliefs on….This is the kind of book that deserves to sell better than it does. Highly Recommended.

I left out all the good parts, so Go Read the Whole Thing.

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Perry Proposes (no surprise) a flat tax…

by Linda Beale

Perry Proposes (no surprise) a flat tax….

Rick Perry, one night after what has been termed an ‘invigorated’ debate performance, has climbed on the flat-tax bandwagon (presumably meaning a flat-rate consumption tax a la the national retail sales tax idea).  See Tumulty, Rick Perry to Announce Flat Tax as Part of Economic Plan, Washington Post (Oct. 19, 2011).

See prior posting on ataxingmatter regarding Cain’s 9-9-9 plan and generally about the flat tax, here and here and here and here and here and here and here and here and here and here…..

Put briefly, having as the sole source of revenue for the federal government’s environmental protection, disease control, anti-trust, bank regulation, securities regulation, tax enforcement, consumer protection, military and defense functions a regressive national sales tax that would stifle the consumerism that accounts for about 70% of our economy would likely be quite harmful to the U.S. economy and to the overwhelming majority of Americans who earn less than $100,000 a year.

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Herman Cain, funded by Koch Bros, Says "Let the Little Guys Pay Taxes

by Linda Beale

Herman Cain, funded by Koch Bros, Says “Let the Little Guys Pay Taxes (not the uber-rich)

The New York Times’ “Room for Debate” ran a ‘mini-op-ed’ segment on Herman Cain’s 9-9-9 tax plan, called “What’s So Bad About a Flat Tax?” New York Times (Oct. 14, 2011) (with the subtitle: Isn’t Herman Cain’s ’9-9-9′ plan essentially what fiscal conservatives and good government advocates have always wanted?). Yours Truly was one of those invited to participate: others include Kotlikoff, Ulbrich, and Gale.

I wrote, in A Plan for the Uber-Rich, that “there’s a lot wrong with flat taxes” (a term used to cover both the flat rate income tax and the flat-rate national sales tax ideas).

Either type of flat tax is regressive, in that it places a high tax burden on the most vulnerable at the lower income scales, for the simple reason that most lower income people use all of their income to pay for food, clothing, shelter and other consumption whereas members of the upper class have lots of cash to spare that they are unlikely ever to consume in their lifetimes. There are additional significant flaws in those tax schemes, like unrealistic economic assumptions, difficult transition paths, rosy revenue scenarios, misleading propaganda about rates and the probability that a national sales tax that cuts deeply into lower income finances will repress consumption that fuels small businesses.

Cain’s plan is even worse, since it:

  • exempts capital income from taxation
  • eliminates the estate tax
  • imposes a flat rate on wage income with no deductions (and apparently only some exemption for the poorest of the poor in certain ‘zones’ defined by the national government, so that if you are poor and live with lots of other poor people, you may not have to pay as much in taxes, but if you are poor and live where there aren’t enough poor people, tough luck)
  • shifts the burden from rich to poor since the rich will only pay on their compensation income and some small additional portion due to consumption taxes, while the poor will pay on all of their income and all of their income again in consumption
  • and continues the regressivity with some type of value-added tax that will also fall mostly on wage earners.

Added since the original positing is Dan Mitchell–conservative spokesperson for the Cato institute, who lauds the flat tax in “The Beauty of the Flat Tax” as “desirable” for its “simplicity, fairness, and transparency.”

  • Actually, the national sales tax version of the ‘flat tax’ supported by Mitchell is anything but simple. It results in the government taxing itself and counting the revenues as a gain. It calculates the tax rate in a way intended to be deceptive and likely to be far too low to raise the claimed amounts of revenues. Since it is a sales tax, we normally discuss that as a tax on top of the price, so a price of $100 and a tax at 23% means a final price including tax of $123. But the way the national sales tax has been discussed is different: they say a tax of 23%, but they calculate that rate by taking the ratio of the tax to the price plus tax–so the rate looks lower than it would look calculated as a ratio of tax to price! In fact, most objective analyses of a national sales tax have suggested that the rate (as a tax to price ratio) would be at least 40% and possibly 50% or even higher, meaning that something purchased foa $100 sales price would have an added national sales tax (not taking into account local and state sales taxes) of betwen $40 and $50 or more. And, worst of all, it will inevitably require an exemption for the poorest of the poor (if not as broad an exemption as currently permitted), thus requiring poor people to pay up front, retain all of their receipts and file a very complex return that will be a request for a refund of the tax. It will, though, be quite simple for the uberrich–they will not have to file income taxes and then would consume only a small amount of their income (and probably even there find all kinds of ways to get around paying their fair share of that limited tax burden). Further, part of the “simplicity” assumption about the tax is that you can get rid of any federal tax collection bureaucracy and that tax enforcement will be minimal. Both of those assumptions are either naive or intentionally misleading: the tax collection responsibilities will fall to the states (imposing significant costs, especially with state systems that still rely on income taxation) and the federal government will nonetheless have to retain a national enforcement system. Most experts say the opportunities for crookedness will be as big in the sales tax system as in any other tax system.
  • What about fairness? Well, fairness is one thing that the flat tax cannot offer. The rich get off super cheap, and the poor pay through the nose. Everybody pays only on what they consume (that is actually collected at the point of consumption), but the rich can choose whereas the poor consume all of their income. Accordingly the national sales tax is highly regressive, compared to our somewhat progressive system today. And with the elimination of the income tax and the estate tax, the role that the tax system plays in pushing against gross inequalities will be eliminated.
  • Transparency is missing as well. The points about simplicity should answer that question head on. It is not a transparent system at all, for much the same reasons that it is not a simple system.
    • Mitchell praises the “repeal of most forms of double taxation” in Cain’s 9-9-9 plan. What he is calling “double taxation” is the fact that people currently pay some tax (though too low) on income earned by capital as well as income earned by labor. Cain repeals all taxes on income earned by capital (and taxes income earned by wages particularly hard–at about 27%, with the “income” tax on wages only, the VAT-type business tax which deducts investments but not wages, and the sales tax (on consumption, which for most wageearners is on all or most of their wage income). But the tax on capital is NOT “more than one bite of the apple” as Mitchell asserts. If you invest 20 and that 20 earns 5 in interest, then the 5 in interest is new money that should be subject to tax, just as 5 earned in payment for labor is new money. The idea that any tax on income from capital is a double tax is just “free market” doubletalk to justify the elimination of taxes on the wealthy. Although economists like to say that “only people pay taxes” and use that to justify allocating all corporate income to shareholders and then asserting that shareholders pay the corporate taxes paid on that corporate income, that is an a priori decision that ignores the reality of perpetual life, managerial renttaking, and “personhood” of corporate quasi-sovereign entities in today’s “free market” globalized economy.
    • Mitchell then asserts that getting rid of deductions and “other distortions in the tax code” will mean that “people will make decisions on the basis of good economics rather than clever tax planning.” Wrong on two counts. First, most businesspeople still do not make most decisions based on tax planning. They want to make money in their business, and if a plan will make money, they will do that plan (even if it also means paying some taxes. Second, some deductions are merely common sense–for example, not allowing businesses a deduction for wages will encourage layoffs in favor of capital investments/robotics, which will accelerate job reduction in the US, not create jobs.

Today’s Associated Press revelations about Cain’s longtime ties to controversial Koch brothers’ group key to his surging presidential bid, AP (Oct. 16, 2011) show a harmonious fit between Cain’s 9-9-9 plan, Cain’s various comments scorning the non rich and his links to wealthy plutocratic anti-populists like David and Charles Koch, billionaires who “bankroll right-leaning causes through their group Americans for Prosperity” Id. (The Koch-funded group would be more aptly named America Run for the Super-Rich, since it lobbies for the right’s agenda of New Deal elimination and targeting of earned benefits of ordinary Americans through a campaign for zero taxation on capital, deregulation, militarization, and privatization .)

AFP tapped Cain as the public face of its “Prosperity Expansion Project,” and he traveled the country in 2005 and 2006 speaking to activists who were starting state-based AFP chapters from Wisconsin to Virginia. Through his AFP work he met Mark Block, a longtime Wisconsin Republican operative hired to lead that state’s AFP chapter in 2005 . . ..

The article notes the many people in Cain’s organization now or earlier with links to AFP, including Rich Lowrie, the accountant/investment manager who serves Cain as chief economic adviser.

And the Koch brothers have a quite clear record of wanting to abolish Social Security, all kinds of federal welfare, minimum wage laws, and similar programs intended to redress the economic imbalance that has grown in our economy since the advent of winner-take-all economics in the Reagan era.

originally published at

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Barney Frank and the need for a risk-based bank fee

by Linda Beale

Barney Frank and the need for a risk-based bank fee

That post about the McCain-Paul environmental devastation and revenue decimation bill (somehow mistakenly given the label of a “jobs bill” by the misguided pair ) suggests the unprecedented extent to which our Congressional reps now believe they can use and abuse national resources for the benefit of crony capitalism.

At least there still seem to be some who are interested in directing their firepower at those who have caused the recession and job losses and whose activities could well cause further harm.  Barney Frank has written a letter to the so-called ‘supercommittee’ asking that they include  the risk-based bank fee assessible against ‘too big to fail’ banks as part of the deficit reduction package.  See Letter.  Given that the very existence of too big to fail banks implies that the government will again have to come to their aid, it seems entirely appropriate to have these banks pay into the Treasury to recognize the guarantee they are being provided.  Further, banks have made good profits since the crisis because of their ability to borrow money extraordinarily cheaply from the Fed, and they have nonetheless continued to demand fairly steep returns for their lending and other activities.  Having them return part of that largesse through a risk-based fee is a reasonable approach that should also help to discourage the excessive speculative risk-taking in which they engaged.

originally published at ataxingmatter

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Senators Levin and Isakson: millionaire surtax vs corporate repatriation subsidy

by Linda Beale

Senators Levin and Isakson: millionaire surtax vs corporate repatriation subsidy

The PBS News Hour last night interviewed Senators Levin and Isakson on the jobs bill (video and transcript available here).

Isakson was first off.  He sounded like a right wing sound bite machine: we’re overregulating businesses so we need a “time out” on regulation.  And we need to pass a repatriation tax holiday so businesses can get the money they need to invest and create jobs.

Levin was asked what he thought about that.  He didn’t even comment on the repatriation sound-bite–after all, he has a report just out that investigates the idea of repatriation and concludes it was a losing proposition.   See  Repatriating Offshore Funds: 2004 Tax Windfall for Select Multinationals, Permanent Committee on Investigations Majority Staff Report, Senate (Oct. 11, 2011) (listing a series of findings showing that repatriation failed to accomplish its goals).**

But Levin did respond to the “it’s regulations and taxes that are killing job creation” GOP mantra.  A recent poll of small business owners showed that small business owners aren’t worried about regulations or taxes.  They just need customers.   So you can help things out by helping small businesses and helping people become customers.

Makes sense, doesn’t it?  It’s certainly an argument made here on ataxingmatter many times: the way to create customers is to stop the collapse of the American middle class with programs like infrastructure projects.

Woodruff then asked Isakson what he had to say to that.  His response–yeah, well, the vote we have tonight is the pay-for–a surtax on millionaires.  And there are 392,000 small businesses that a surtax on millionaires is going to hurt.

So now Woodruff asks Levin what about this argument that the surtax is gonna hurt small businesses.

Levin set the facts straight on his colleague’s claim that a surtax on millionaires would hurt all those small businesses.  He said quite clearly that the facts show that only a very small percentage of small business owners earn the million that would put them in the group subject to the surtax.  So the issue is taxing millionaires, whose share of the income has skyrocketed in the last few years compared to the middle class, which has stagnated.  The surtax would mainly hit the overpaid CEOs of big corporations, etc.

Funny, Judy Woodruff (an undergraduate classmate of mine back at Duke, by the way) didn’t blink an eye.  You’d think the next question to Isakson would be–given the fact that only a tiny proportion of small businesses would be subject to the millionaire surtax, Senator, a fact that has been pointed out numerous times, why do you insist on claiming that it would hurt all small businesses.  But she didn’t.  The PBS station is worried about appearing “balanced” and that means you can’t call a fact a fact and point out that a presenter is stating something that isn’t supported in the facts.  You let an interviewee do it, if they can get it in, but you let the other side get by with continuing to repeat its fact-less sound bites.

So Senator Isakson’s response was:

[Senator Levin's] response to that question just proves this is all about political messaging and really doesn’t have anything to do with purpose, because if they really cared about small business, they would exempt limited liability corporations, S-corporations and sole proprietorships from the application of this tax. Then they’d only be taxing millionaires. But they’re going after small business as well.\

Now, folks, that’s a ridiculous response.  (Woodruff didn’t say that, but I will.)  It’s ridiculous because Levin gave the facts–small businesses don’t complain about regulations, most small businesses don’t make millions and wouldn’t be subject to the surtax.  And Isakson had the gall to call that factual response “political messaging” , even while Isakson continued with his GOP soundbite political message campaign of implying that small businesses need to be protected from the millionaires surtax!

Note also that Isakson suggested that tif there had to be a surtax, it should exempt LLCs, S corporations and sole proprietorships.  He offered no justification whatsoever for that terribly broad exemption (other than the proffered “it’ll hurt small businesses that Levin already soundly defeated).  If you’re making millions from your business, you are successful enough to pay the tax.  If you are not, you won’t have to pay the tax.  If you exempt LLCs (mostly operated as partnerships) and S corporations and sole proprietorships, you are exempting a lot more than small businesses!  Those include hedge and private equity funds (some managers of which make hundreds of millions a year), real estate partnerships, huge businesses operating as sole proprietorships, and  people like John Edwards who make millions through their S corporations etc. etc. etc.  If you couple that with the zero taxation on capital gains that most on the right are pushing for, that’d likely mean that the CEOs of multinational corporations would be the ONLY millionaires and gazillionaires that the tax would hit!

But did Judy follow up along those lines?  Nope.  Instead she asked Isakson whether the country doesn’t need stimulus rather than cutting at this fragile time for the economy.

His response was to deliver the right wing political message yet again:

1.  the right’s response to the fact that the last stimulus made a huge difference–a claim that it didn’t solve tthe problem permanently (with the implication that we might as well not have done it).  Says Isakson (paraphrasing):  Last bill paid teachers, but once the bill is gone, there’s no money to pay them.  (Implication–the stimulus was useless.  I doubt that the teachers whose jobs were saved for a few years would agree or the students who were saved from overcrowded classrooms or the lack of a music program.)

2.  the right’s response to the need to enact a stimulus rather than cutting–we’ve got a debt problem and a debt crisis.   Isakson says “we’re at the breaking point on leverage” so he wants to “inspire the private sector to reinvest in our country and reinvest in businesses.”   (of course, this overlooks the fact that the “debt crisis” was caused by right-wing obstructionism. or that the US Treasury can borrow now at the cheapest rate we can expect to see forever once this crisis ends–we should borrow cheap while we can, spend it on infrastructure and job creation.  It also roundly ignores the historic pattern that businesses won’t invest in US business when (a) we allow them to expatriate assets to create businesses abroad without taxing them on the built in gains in those assets, (b) we allow them to fire workers with ease because we’ve so weakened our labor laws that workers find it almost impossible to form unions and have any negotiating power with their bosses and (c) we continue to give businesses tax breaks for mergers and consolidations that create multinational super businesses that have no loyalty to the country  (Jeff Immelt said as much in the previous night’s NewsHour broadcast).

_______

**The report lists the findings as follows:

1. U.S. Jobs Lost Rather Than Gained; 2. Research and Development Expenditures Did Not Accelerate;  3. Stock Repurchases Increased After Repatriation; 4. Executive Compensation Increased After Repatriation; 5. Only A Narrow Sector of Multinationals Benefited; 6. Most Repatriated Funds Flowed from Tax Havens; 7. Offshore Funds Increased After 2004 Repatriation; 8. More than $2 Trillion in Cash Assets Now Held by U.S. Corporations ; 9. Repatriation is a Failed Tax Policy

originally published at ataxingmatter

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GOP Representative moves to increase deficit–and aid the investor class

by Linda Beale

GOP Representative moves to increase deficit–and aid the investor class

The GOP has made lots of fusses lately about the deficit. According to the party line, earned benefits that Americans rely on for health care and retirement income just “have” to be reduced, no matter how painful it is to the GOP-controlled House to do it, because of the unrelenting deficits that are destroying the US economy.

How then can any GOP member of the House think it is reasonable to introduce legislation that institutes a permanent tax cut that will cost the government billions will benefitting primarily the very rich investors in corporate stock?

Peter Roskam (Republican from Illinois and member of the House Ways and Means Committee) introduced legislation–H.R. 3091 (for those with BNA access)– on Tuesday that would make the ridiculously low Bush tax legislation provisions for capital gains and dividends permanent. A 15% rate on the main source of income that the uberrich enjoy, while the rest of us pay regular ordinary income rates on our wages.

How does Roskam justify this further giveaway to the rich, this further example of governmental capture by oligarchy? He claims that this revenue reduction that benefits mostly the very rich will –yes, you guessed it–help generate U.S. investment and create jobs. Making this giveaway rate permanent for everybody will “foster a culture that encourages investment, capital formation, and economic growth”, he says. BNA Daily Tax Report, Oct. 5, 2011.

Balderdash. Low capital gains rates have nothing to do with encouraging investment or capital formation or job creation. They mostly reward investors in the secondary market on their trades. They let the rich get even richer and make more investments–probably in emerging markets rather than in the US.

It is true that having more cash on hand because you didn’t pay as much taxes means you’d have more to spend. So why not encourage economic growth by putting cash in the hands of the middle and lower income classes through the payroll tax reduction proposed by Obama? (Yes, it should be temporary–as an economic stimulus.)

This is just another example of class warfare in action in the right-leaning House GOP. All the fuss about deficits. All the economic terrorism about the U.S. debt limit. But reducing revenues still more in order to benefit the wealthy–well, the Mr. R. just can’t wait to do that one.

originally published at ataxingmatter

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More on Repatriation–WIN America corporatist lobbying group’s strike back on Heritage

by Linda Beale

More on Repatriation–WIN America corporatist lobbying group’s strike back on Heritage

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

ataxingmatter

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More on Occupy Wall Street–Stiglitz and Madrick add their voices

by Linda Beale

More on Occupy Wall Street–Stiglitz and Madrick add their voices

Jim Swan, the Not-an-economist blogger who writes about “economics and the economy in the wake of the financial crisis”, is definitely a supporter of the Occupy Wall Street protest movement.

In an earlier post, I noted the addition of labor concerns to the voices supporting the movement–important, because so much of the impact of financialization of the economy has been to create a two-tiered social structure of privileged banker/investor/managers versus marginalized worker. Decades-long actions have undermined unionization–by limiting secondary strikes, by empowering employers to dominate workplace discussions, by weakly enforcing labor laws, by disempowering workers from forming unions, and now by the right’s efforts in the states to gut collective bargaining by public workers, in the process using a divisive technique of pitting private workers whose efforts to unionize have been hardest hit by the weakening of labor protections against public workers whose unions have given them more ability to claim decent wages. As a result, the vast majority of Americans find themselves with declining standards of living as wages stagnate or decline, while heads of big business rake in a bigger and bigger share no matter how the company actually fares, resulting in ridiculous golden parachutes for failed executives.

Notaneconomist notes the importance of progressive economic thinkers paying attention to the Occupy Wall Street group: see Occupy Wall Street? It’s About Time!, providing video and transcript links covering progressive economist Joe Stiglitz and economic historian Jeff Madrick addressing the group October 2. Part of the post follows.

Two excerpts from the Wall Street event (October 2):

Stiglitz: Our financial markets have an important role to play. They’re supposed to allocate capital and manage risk, but they’ve misallocated capital and created risk. We are bearing the cost of their misdeeds. There’s a system where we’ve socialized losses and privatized gains. That’s not capitalism! That’s not a market economy. That’s a distorted economy, and if we continue with that, we won’t succeed in growing, and we won’t succeed in creating a just society….

Madrick: The FBI actually told the powers that be that there was an epidemic of fraud in 2004 in the mortgage market. Washington and the Federal Reserve had the power to do something about that. They did not. The more bad mortgages went on, the predatory lending got worse, and the powers that be—in particular and let me name names, Alan Greenspan, the Chairman of the Federal Reserve—was able to retire in glory. Is there something with this picture? There sure is…

My only question is why the demonstrations didn’t happen sooner. Perhaps it has taken this long for it all to sink in. Not only did Wall Street recklessness create the crisis as government regulators looked on, but now bankers are back playing the same game and complaining of government interference, with no acknowledgment of the bailout that pulled them back from the brink.

Speaking of the bankers lack of acknowledgement of the bailout, Swan goes to NPR’s interview a year ago with Wall Street bar patrons (an investment banker, an institutional investor, a credit rating agency quant). That’s definitely worth reading in full at NotanEconomist (linked again in case you want to), but here’s the key part. After the interviewer suggests that the interviewees should acknowledge that all three benefited from the massive government intervention to protect the financial system, one of them says that the reason he still had a job was “because I’m a smart person”, not because Wall Street was bailed out. They view the fact that the industry was bailed out as irrelevant to their situation–they just used their smarts to take advantage of the situation and land well-situated.

originally published at ataxingmatter

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