Relevant and even prescient commentary on news, politics and the economy.

Romney’s association with corporate tax shelter schemes

By Linda Beale

Romney’s association with corporate tax shelter schemes

Bloomberg’s Jesse Drucker has been doing some research into presidential candidate Mitt Romney and come up with some interesting information–at least for those of us who find corporate involvement in aggressive tax shelter phantom loss generating schemes a worrisome problem. See Drucker, Romney as Audit Chair Saw Marriott Son of Boss Shelter Defy IRS, (Feb. 22, 2012).

Mitt Romney has been on the board of Marriott INternational Inc. on and off since 1993, and has served as chair of the audit committee for 6 years. During that period, the company has used aggressive tax avoidance deals, including (i) the “Son of BOSS” tax shelter structure for generating artificial losses that could be used to offset gains from other sources, thus reducing taxable income and tax liabilities and (ii) shifting profits to a Luxembourg shell company. Marriott’s effective tax rate has been as low as 6.8%, even though the federal statutory rate for corporations is 35%.
These factoids demonstrate two things.

First, as the article points out, Romney claims that his business experience is the primary reason that Americans should want to see him in the White House. Contrary to his claim, it seems to me that the more we hear about his business experience the less I think he is suited to the White House.

At Bain Capital, as at most private equity firms, Romney was willing to reap millions from taking a stable, operating company and turning it into a bankrupt by leveraging it up, firing employees, and otherwise destroying the stable business. Yeah, sometimes the “creative destruction” worked and the company exited making profits. But often it didn’t, and the company wasn’t a loser until Bain Capital got hold of it. Further, Romney doesn’t appear to have developed much of a sense of corporate social responsibility through his “earning” of multi-millions taxed at low rate through Bain Capital. So he didn’t see anything amiss in the very aggressive tax planning engaged in by Marriott when he served as a Marriott director with oversight responsibility–of which he certainly knew, as head of the audit committee. Even John McCain was aghast at Marriott’s wanton use of tax shelters, when he complained about the federal tax credits Marriott claimed in an accidental loophole in the law on synthetic fuels. As the piece notes, McCain called Marriott’s use of this loophole to claim the credits an “expensive hoax” or “scam.”

Do we want as president a man who thinks it is okay for taxpayers to gin up artificial losses to reduce their tax liability or use provisions of the Code in ways that clearly go against their underlying purpose to get an unintended subsidy from the Federal government? I don’t think so. Such a person would likely be quite willing to see further cuts to the corporate taxes and taxes on the wealthy, no matter what that does to the federal fisc. And Romney has certainly demonstrated his willingness to cut taxes even in the face of deficit claims that are being used to demand privatization of Social Security and cuts to Medicare. (See his plan for a 25% corporate rate, a zero percent estate tax, a lower top rate on earned income for the wealthy, and other items.)

I want a president who considers that every taxpayer has an obligation to the integrity of the system, and who would not look kindly on businesses that engage in aggressive tax minimization transactions that don’t hold up to the laugh test.

Second, major corporations aren’t paying enough–much less too much –in taxes these days. We have a statutory rate of 35%, but most very profitable corporations end up paying very little in taxes, through a combination of excessive loopholes built into the Code by their accommodating buddies in Congress (quid pro quo for campaign contributions or, after Citizens United, “independent” super-PAC donations?) and outright tax sheltering through aggressive customized transactions intended to generate tax benefits.

Why in the world would anybody in his/her right mind propose cutting the corporate tax rate in this context of minimal tax payments by corporations? Makes no sense at all. Get rid of the loopholes. Bear down with enforcement clout on the phony tax-loss shelters. But don’t cut the corporate tax rate. There’s absolutely no substance to the constant whine we hear from corporate lobbyists that the corporate tax code is “too complex” (my JD students in corporate tax are quite capable of understanding it, so I am sure Corporate Tax Counsel are, too); or that the corporate tax code is “anticompetitive” (Marriott is making a fine rate of return); or that the corporate tax code is “preventing investments” (corporations have lots of cash floating around–if they want to make expansion investments, they can do so already).

Tax policy should be based on reasonable considerations of efficiency and simplicity, not exorbitant and unfounded claims of how the tax code is wrecking business. But even more importantly, tax policy should be based on fairness considerations. And Romney hasn’t shown much understanding of what fairness is, or how to make the tax code fairer rather than even more of a government program for redistribution upwards.

crossposted with ataxingmatter

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Politicians’ wealth and the tax policies they support

by Linda Beale

Politicians’ wealth and the tax policies they support

A story in the Boston Globe by Britt Peterson on Feb. 19, 2012 explored “Why it matters that our politicians are rich” (available here on A key point–the four remaining GOP presidential candidates all are millionaires, with most making more than a million a year and worth multiple millions, while the median net worth of members of Congress is “$913,000, compared with $100,000 for the rest of us.” Id. That should worry us because, as the article reports, studies have shown that rich people become  more focused on their own well-being, less empathetic with the suffering of others, more likely to view their own wealth as due to merit (and others’ lack thereof to reflect lack of merit), and ultimately to make them “more callous, self-absorbed, and self-justifying than the people they represent.” Id.

In 2009, Michael Kraus, Paul Piff, and Dacher Keltner, all then of Berkeley (Kraus is now at University of California, San Francisco), published research that divided up sample groups by family income as well as self-reported socioeconomic status. People of higher socioeconomic status were more likely to explain success or failure as a result of individual merit or fault; lower-class people, on the other hand, felt less control in their own lives and were more likely to blame events on circumstance. In other words, higher-status people were more likely to feel that they’d earned their high place in society, and that poorer people hadn’t.

More recently, similar research—involving not just surveys, but heart-rate measurements —has found that higher-status people tend to be less compassionate toward others in a bad situation than people of lower-class backgrounds.
The result of these differences, say researchers who work on money and social class, is that people who are confident in their status have a completely different worldview from those who lack that confidence: more self-involved, self-justifying, and even, as the dehumanization study suggests, crueler. And the higher up the spectrum you get, the stronger the effect . . ..
Power itself can trigger similar changes. . . . Gaining a sense of power, then, even if it happens through random selection in a lab, alters you on a very basic level, making you “less attentive to others, more free to act, and more free to act in a way that doesn’t take account of other people,” said Adam Galinsky, a psychologist at Northwestern’s Kellogg School of Management who has been studying the effects of power for a decade. Id.

That sense of personal merit (and lack of responsibility in others) can lead to disastrous policy choices. The “ownership society/personal responsibility” mantra of the Bush presidency justified heaping tax breaks on large corporations and their owners/investors at the top of the income distribution while preaching deunionization, privatization, and safety net withdrawal. It permitted a method of bailing out “too big to fail” banks from the financial crisis they caused by profiting immensely from risky speculation (made possible by deregulation) in ways that didn’t require a clawback of the rentier profits received by the “ownership class,” resulting in privatization of gains/socialization of losses. In essence, the “ownership society/personal responsibility” mantra provides justification for class warfare on the middle class and poor who happen not to be as well-off as the rich.

Similarly, Congress’ inability to empathize with ordinary Americans has led to significant numbers of Congresspeople (particularly members of the GOP) who support privatization of Social Security, reduction of benefits under Medicaid and Medicare and unemployment insurance at the same time that they continue to argue for zero taxation on the unearned income of the rich. And each of the GOP presidential candidates reflects that overarching goal of reducing taxes on the ownership class. See, e.g., Gingrich’s “optional 15% flat tax” (zero tax on unearned income); Cain’s 999 transitioning to a national retail sales tax proposal (a flat consumption tax that would be heavily regressive and leave rentier profits of the wealthiest essentially untaxed); Santorum’s tax proposals (even less protective of the poor than Gingrich’s), Romney’s tax proposals (including zero taxation of estates, extraordinarily low taxation of corporations, etc.). Rather than supporting a repeal of the “carried interest” loophole that allows private equity fund managers like Romney pay ridiculously low tax rates on their very high compensation income, these candidates and politicians support continuing the tax policies of redistribution upwards that have led to the decline of the middle class as the “ownership class” gathers for itself all the productivity gains of the economic system.
crossposted with ataxingmatter

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Links worth noting

by Linda Beale

Links worth noting

Lynn Parrymore (Alternet, Naked Capitalism) on the difficulties in putting a stop to congressional insider trading: Can Rep. Bacchus and his money-crazed congressional colleagues be stopped from insider trading?

OMB Watch BudgetBlog, Small Biz Owners: Big Businesses, Millionaires Not Paying Fair Share (showing that small businesses are more aware of problems of corporate loopholes and more supportive of having big businesses and wealthy pay higher taxes)

Brad DeLong, Grasping Reality, Heartening News about what Economists Think (Feb. 16, 2012) (noting that a recent Chicago forum found most economists admitting that the 2009 stimulus bill had kept unemployment lower than it otherwise would have been)

Trudy Lieberman, The case of the missing premium, Columbia Journalism Review (Feb. 16, 2012) (hattip Naked Capitalism) discusses new disclosure rules purportedly designed to help contain health care costs by permitting purchasers of insurance to do more comparison shopping. The article notes a fatal flaw in the disclosure requirements–no one has to reveal the actual insurance premium.

But insurers and employers do not have to tell consumers how much a policy costs—in other words, no premium information has to be given. Yep, that’s right—the key piece of information needed to make a good decision is missing. When insurers design a policy, they consider the interplay of coinsurance, copays, deductibles, coverage, and, of course, the premium, which lets them know what price point will make a consumer say “yes.” Price is the bottom line for consumers, but it’s poison for sellers, who fear a shopper might choose a policy with a lower price, other things being equal. So much for that price competition that was to solve all the ills of U.S. health care.
Jost told me “premium disclosure is not required by statute.” Chalk that up to clever bill drafting. The administration was trying to add it to the proposed regulations circulated months ago, but Jost said “plans and employers pushed back. It was one place to give.” HHS official Steve Larsen did his media walk-back. “People have premium information. They will have that. The goal of this provision was to focus on coverage, benefits and how they interact,” he said.

Citizens for Tax Justice, Tax Justice Digest, Quick Hits in State News: Tax Victory in Iowa, and More (Feb. 17, 2012), provides more evidence that cutting taxes isn’t the way to achieve broad-based tax growth:

Gardner [of Institute on Taxation and Economic Policy] writes that Georgia lawmakers “wanting to join the non-income tax club are simply idolizing the wrong states. Most states without income taxes are doing worse than average … and the states with the highest top tax rates are actually outperforming them.”

Citizens for Tax Justice, Tax Justice Digest, New Fact Sheet: Obama Promoting Tax Cuts at Boeing, a Company that Paid Nothing in Net Federal Taxes Over Past Decade (Feb. 16, 2012). The key fact you need in addition to the information in the title–that Boeing has $32 billion in pre-tax U.S. profits in those years.

Mark Thoma, Economist’s View, NBER Research Summary: Offshoring, International Trade, and American Workers (Feb. 19, 2012) (excellent exercpting from academic work on offshoring and the impact on American workers).

Tax Policy Center, Roberton Williams, Tax Rates on Capital Gains (history of tax rate fluctuation over the last century).

crossposted with ataxingmatter

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The relation between high college tuition and low state funding of higher ed: the right’s austerity agenda

by Linda Beale

The relation between high college tuition and low state funding of higher ed: the right’s austerity agenda
As certainly everyone should be aware by now (after almost 20 Republican candidate debates and months of negative campaign ads), the GOP candidates all think that we need to prescribe an austerity budget for state and federal governments. “Too much spending” they yell. “Too high taxes”, they scream. “It makes our big corporations uncompetitive”, they whine. “We need to break the backs of unions so public workers are as poor as workers in private industry, but still give tax cuts to the wealthy”, they assert, “so jobs can trickle down to the poor”. See, e.g., Arthur B. Laffer (yes, he of the laughingstock napkin-drawn Laffer “curve” projecting his view that cutting revenues from taxes increases revenues), “The States are leading a pro-growth rebellion,” Wall St. Journal, Feb. 11-12, 2012, at A11 (lauding the move to free-rider states, where stingy workers can get the benefits from the results of collective bargaining agreements without paying for the costs of supporting the union that got those benefits from them, thus starving and “busting” the union; gloating over the fact that California didn’t adequately fund its state workers’ retirement plans and that the anti-tax movement will keep it from doing so now).
That’s a prescription for disaster.

What our representatives in Congress need to do is look around them–preferably after driving at least 100 miles outside of the insulated Beltway and seeing some of the real country and its people.

We need federal programs that ensure a minimum standard of living for our people. We need a universal, “single payer” system of health care that kicks the insurers out of the profit-from-my-life-threatening-condition rentier existence and resigns them to offering supplemental insurance for those that want cushier than the universal coverage. We need federal enforcement of anti-trust, so that multinationals lose their aura of quasi sovereign status and can’t get “too big to fail”. (if anything is a short catchy phrase for what anti-trust should aid at, too big to fail seems to capture it.) We need to reinvigorate unions, so that ordinary Americans have a chance to grab a slice of the American pie.
Instead, states are putting on the austerity brakes. By keeping state taxes too low–cutting business taxes, cutting taxes on investment income and otherwise generally failing to adopt a steeply progressive tax system that could ensure they have adequate funding for important programs, states are sacrificing their futures. For example, states are forcing students to pay way too much for state universities (while they coddle private universities that should be making it on their own). Tuition has gone up by about the same amount that state support has gone down. States are firing state workers, or making them absorb a pay cut of 10-20% (in the name of making them pay more into their retirement plans while the states pay less, or making them pick up all of the incremental costs of health care coverage). The trickle down effect of those cuts is a slashing of small business in localities throughout the states. States are taking away public bargaining rights–moving us back to a neofeudalism where workers like peasants have to take whatever scraps the big boss throws their way, from cutting wages in half to tossing out the pension plan that the boss never fulfilled his promises towards. They are using a divide and conquer strategy–tell private workers [whose unions were long ago weakened by Taft-Hartley’s provisions and by concerted employer action to impede union formation and lobby for provisions that make it harder to unionize (such as the fight against the ‘card check’ rule)] that it isn’t fair for public workers to still be able to have unions and have good wages and benefits. Bring ’em all down to the dog eat dog world where the 1% will lord it over and the 99% can grovel.
There’s a good letter to the editor in the New York Times Friday 2/10/12, at A22, on the Cost of Public Colleges: easing the burden, by Mark Steinberg, history professor at the University of ILlinois in Champaign-Urbana (my stomping ground before my move to Detroit). He hits it right on.

“Punishing” schools that have partly filled the gap [left by the erosion of state support] with higher tuition may make education cheaper but will surely damage that education. College teachers across the country have seen many of these ‘more cost-effective ways to deliver education’: bigger classes taught by overworked and lower-paid adjuncts, more online courses, freezing the pay of faculty and staff, and other measures that control costs at the expense of quality and access.

Steinberg proposes two solutions to ensure that more money is spend on the “primary mission–serving the public good with new knowledge and educating citizens regardless of income”. The solution is to help states restore higher education funding, and to end the “jack and the beanstalk” growth of administrative positions.
Hear, Hear. Michigan, for one, needs to move to a progressive income tax and use the increased revenues to re-fund its state universities, which have moved from about 60% state funding to about 30% state funding in the last few decades.
If we don’t, we will see the proliferation of preferential treatment of the elite 1%, and the mashing down of most of the ordinary folk to low services. See Peter Funt, How Government Coddles the 1%, Wall St. Journal, Feb. 11-12, 2012, at A22 (noting that purchased privileges like California’s creation of “high roller lanes” for the wealthy who pay a fee and speedy airport screening for the rich are “dangerous precedents” for a country that has long considered the community of sharers of the public good to be undifferentiated by class. What’s next, he asks–public libraries where goold card holders get first crack at new titles; public parks, where the elite get the cleanest, greenest spaces; public beaches, where premium members get the best spots; public memorials, where the elite get the red carpet? As we move in that direction, we not only define an upper class but we place everyone else in a lower caste.

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Santorum’s Tax Returns Out

by Linda Beale
Santorum’s Tax Returns Out

News Sources report Santorum has released tax returns. I’m on my way to San Diego for the ABA Tax Section meeting, so haven’t had a chance to peruse. But a tax rate of around 25-27% for 2007-2010 on income ranging from $659,000 in 2007 to more than a million in 2009 shows Santorum paid a considerably higher share of his income in taxes than did Romney (at not quite 14%).

See Exclusive: Santorum Releases 4 Years of Returns, Politico (Feb. 16, 2012) (the returns are accessible at links on the Politico website).

crossposted with ataxingmatter

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Misleading Tax Rhetoric Abounds

by Linda Beale

Misleading Tax Rhetoric Abounds

I got the same piece of mail that my colleague and fellow blogger Jim Maule got–a disturbingly misleading rant trying to make a case for zero taxation of unearned income. I started to write a post about it, since this is the kind of material that gets my ire up. It is written with what appears to be an intent to confuse or mislead. It applies vague language when that suits the writer, and fails to explain even the simplest transactions acceptably.

Maule beat me to it. He has an excellent post on Issue 9.04 of Tax Bytes, put out by the Institute for Policy Innovation (a think tank on the right): When Double Taxation Doesn’t Exist, Mauled Again (Feb. 8, 2012).

The problem with the IPI starts with the title of the piece–“when investment earns you additional–not lower–taxes”. Right there they are conflating two things–the original amount earned that was put into the investment, creating a “tax basis” that will not be subject to tax on any disposition of the investment; and the return on the investment when it is sold (or when dividends are paid on it), creating additional “gross income” that will be subject to tax, though at the preferentially low, low rate currently applicable for capital gains.

As Maule points out, the piece seems to be written to try to make the unknowing reader think that all the proceeds of a disposition of an investment will be taxable, not just the NEW income represented by the gain –the increase in value of the investment over the original basis.

The fact that a think tank could publish this kind of tax rhetoric, with so many misleading or erroneous statements, is just one more reason that I have urged my colleagues here at Wayne Law to require all our students to take at least the basic federal income tax course. No student will come out of that course making the mistakes the IPI made in its piece on the taxation of gains from investments. And every lawyer ought to have that foundation, so that they don’t make such foolish statements as those in the IPI piece.

crossposted with ataxingmatter

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U.S. Chamber and corporations fighting for low preferential capital gains rates

by Linda Beale

U.S. Chamber and corporations fighting for low preferential capital gains rates

A coalition of the U.S. Chamber of Commerce and large multinational corporations such as Altria Group Inc. and Excel Energy Inc. is trying to pressure Congress to retain the extraordinarily low current tax rates on unearned income that will expire at the end of 2012 without action.

The alliance sponsored a report by Robert Carroll and Gerald Prante of Ernst & Young that develops the idea of an “integrated tax rate on dividends” that includes the taxes paid by the dividend-paying corporation, the federal income taxes paid by the recipient, and the state taxes paid by the recipient. See Carroll & Prante, Corporate Dividend and Capital Gains Taxation: A Comparison of the United States to other developed nations (Feb. 9, 2012), Higher Capital Gains and Dividend Taxes Would Put U.S. Further Behind International Competitors, Alliance press release (Feb. 9, 2012); Richard Rubin, Corporate Coalition Says Obama investment taxes Near World High, (Feb. 9, 2012)(republished on the Alliance website). The report claims that the U.S. has an “integrated” rate of 50.8%. The report claims that such a rate “discourages capital investment, particularly in the corporate sector, reducing capital formation and, ultimately, living standards.” Richard Rubin, Corporate Coalition Says Obama Investment Taxes Near World High, (Feb. 9, 2012).

Robert Carroll is a former Bush administration official who regularly presents on behalf of corporatism’s Holy Grail of lower corporate taxes, lower dividend rates, and/or change to a territorial tax system for U.S. corporations. See, e.g., Charting a Course for Tax Reform–Moving the U.S. Towards a Territorial Tax System (Jan. 2012); Considerations for a Value-Added Tax (July 26, 2011) (arguing that a VAT-type consumption tax could permit lowering corporate tax rates). Carroll’s VAT article makes the same argument as here–that taxes hurt investment and therefore jobs.

Greater reliance on value-added taxes, or other consumption-type taxes, to fund government can help improve economic performance because consumption taxes do not tax the return to saving and investment. By not taxing the return to saving and investment, these taxes reduce the cost of capital and lead to greater investment. Greater investment means more capital formation, and, ultimately, higher labor productivity and living standards than otherwise. Id.

But these arguments ignore the distributional impact of shifting taxes from corporations and wealthy stock traders to everyday Americans who make 30,000 or 50,000 or 75,000. The drive by the GOP and big corporations to save the wealthy from paying much in taxes shows no concern at all for the fact that the tax burden would be shifted to low-income Americans.
Not surprisingly, the tax rate analysis in this “for hire” E&Y report is highly misleading. Let’s note the reasons, yet again.

  • The report assumes that shareholders bear the full brunt of the corporate income tax. Yet there is no conclusive evidence about the incidence of corporate tax. Many shareholders such as pension funds are tax exempt and pay no tax on the corporate dividends.
  • The report assumes that corporate income is taxed at the federal statutory rate of 35%, whereas in reality the vast majority of corporations pay zero federal income tax and those that pay tax pay an average around 24% effective tax rate (with many lower). Aggressive tax planning, cross-border tax credits, and various deductions (including greatly accelerated depreciation and expensing compared to actual economic wear and tear) allow corporations to reduce their tax liabilities much below the nominal statutory rate. While a chart on page 4 (showing a $100 income amount suffering the 35% corporate rate, an average state corporate rate, a 15% shareholder federal tax and a 4% assumed average shareholder state tax) indicates this is the “top” rate, most of the report discusses this “integrated” rate as though it were the actual rate paid.
  • The report disregards the fact that capital gains are also earned outside of corporations (as Dan Shaviro noted in the Bloomberg piece). It suggests that the corporate level tax will impact “each worker”:

With less capital available for each worker to work with, labor productivity is lowered, which reduces the wages of workers, and ultimately, Americans’ standard of living. Report at 5.
Yet much of the work done in this country is not done for major corporations. There are partnerships and S corporations and sole proprietorships all operating businesses and providing capital gains in appropriate contexts. (And of course most of the capital gains that are being taxed aren’t earned from money that was invested in corporations but rather from corporate stock bought in the secondary market. All this talk about capital for workers is irrelevant to those secondary market trades. See this point below.)

  • The conclusions disregard the fact that investors can defer taxation of capital gains indefinitely by choosing when to sell, and that many gains are never taxed at all over multiple generations, since heirs receive corporate stock (and other assets) with a step-up in basis. (Text accompanying footnote 5 merely mentions that the effective rate “might” be lowered by this fact; the footnote notes that “common practice” for determining the impact would give an integrated tax rate of 43.1%.)
  • Chuck Marr, at the Center on Budget and Policy Priorities, also indicated that “the report also ignores the total tax burden around the world. In 2009, U.S. tax revenue of 24.1 percent of gross domestic product was 9.7 percentage points below the unweighted average of countries in the Organization for Economic Cooperation and Development.” As a result, “the United States is actually a very low-tax country compared to all these other countries.” Richard Rubin, Corporate Coalition Says Obama Investment Taxes Near World High, (Feb. 9, 2012).
  • The report purportedly compares top integrated tax rates among the developed countries. But does it really include all the relevant taxes for other countries? It is not clear that the VAT, for example, has been included in countries where a VAT is a significant addition to regular income taxes: the report mentions only corporate income tax rates and dividend tax rates in discussing other countries’ “integrated” rates.
  • The report ignores the fact that there is at best a very slim correlation between the transfer of funds to a business entity for use in running the business and capital gains taxation. Most corporate stock is purchased in the secondary markets, not at IPOs. Most of the gains that are taxed are therefore just accretions in value as corporate stock changes hands from one investor to another. There is no benefit of capital formation for the corporation from the trade–the money goes into the pockets of the one who sells, possibly to be reinvested offshore in an emerging market economy or to purchase the stock of another U.S. MNE.
  • The report assumes that half of any increase in dividend taxes is absorbed into share value but the other half “influences investment decisions”. n.12. This is one of those “anything goes” assumptions that is so annoying about supposedly empirical work that tries to “predict” how behavior will be affected by taxes.
  • The report discusses a “marginal effective tax rate” and suggests that corporate capital will be reduced by that rate, resulting in less expansion and less job creation. But that rate as shown here includes the statutory tax rate on the corporation’s profits and the shareholders’ tax rate on its unearned income from holding corporate stock. Even if one thought that using the statutory rate to discuss corporate tax burdens was reasonable (which I do not), this mingled rate is not the relevant rate that the corporation would consider in determining whether it was profitable and could expand and add on workers or jobs. The corporation may retain its profits and use them to expand or provide working capital, and not pay dividends to shareholders. Many corporations have in fact foregone dividends and instead invested in share buybacks, which give a perceived benefit from reducing the total number of outstanding shares. Interestingly, while the report uses this mingled rate to argue that taxes are bad because it will keep corporations from investing and hiring (pp5-6), it also argues that taxes on unearned income of shareholders from corporations will mean corporations will retain those earnings and “overinvest” in the corporation (p7). Talk about trying to have your pie and eat it too.
  • The argument that fungible investor capital will necessarily flee the country if capital gains rates are allowed to go back to at least the level they were under Clinton, as GOP representative Peter Roskam from Illinois suggests, id., simply misundersands what drives investment decisions and the way our tax system works.
    • Many other factors drive investors to purchase stock, whether in IPOs or in the secondary market, including the stability of a country’s markets, the vigorousness of economic growth, the price-earnings ratios of corporate stocks, the economic outlook for particular industrial sectors, etc.
    • Americans are taxed on their worldwide income, so they don’t avoid the US tax on capital gains unless they expatriate.
  • Taxes are just one factor, and in fact corporate stocks traded quite well when capital gains taxes and dividends taxes were much higher than they are now. Many experts think that removing the preferential rate for capital gains would be the most reasonable way to level the playing field for workers and managers/owners, while raising billions to offset the federal deficit.
  • The distributional effects of very low capital gains tax rates are detrimental. Most of those who benefit from the preferential capital gains are the wealthy who own most of the financial assets, with about 2/3 of the benefit going to millionaires, according to the Tax Policy Center. Id.

Taxes on earned income–salary and wages–are graduated, rising to a maximum of 35% for top income earners. Taxes on unearned income, such as dividends from qualifying corporations or gains from sales of corporate shares, are only 15%. This significant disparity in rates (35% compared to 15%) means that the wealthy who own most of the financial assets and have most of the capital gain income enjoy an extraordinarily preferential tax rate. The result is that wealthy individuals like Mitt Romney can end up paying a significantly lower tax rate than construction workers, firefighters and schoolteachers. That’s unreasonable: the nation would be better served by eliminating the capital gains preference and using those funds to rebuild public infrastructure.

Additional information:
Alliance Statement on Capital Gains and Dividends Tax Provision in the Republican Jobs Committee Proposal (Nov. 2, 2011) (same assertions as in the E&Y report that lowering taxes on unearned income will have wonderful trickle-down effects on the economy)

originally published at ataxingmatter

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The 1% are the only beneficiaries of Greek austerity, not ordinary Greeks

by Linda Beale

The 1% are the only beneficiaries of Greek austerity, not ordinary Greeks

An interesting post over on Naked Capitalism on the Greek austerity measures being demanded by the EU leaders (Germany, mostly) and the IMF: Marshal Auerback: Greece and the Rape by the Rentiers (Feb. 10, 2012).

The austerity demands, in order for a sovereign nation to pay back its debt to mostly big banks that lent money recklessly in the leadup to the financial crisis, make no sense at all. If you impose austerity, you clamp down on the economy. If you clamp down on the economy, the poor and near-poor who are already struggling will struggle even more. Unemployment will increase. Desperation will set in and crime or revolution will follow. The 1% at the top do okay at least for a while–after all, they’ve been hogging all the good stuff for a decade at least, and many of them (if the scofflaw wealthy in this country are any guide) will have sequestered funds away in hidden offshore bank accounts to bide them through the rough times or even support them if they expatriate to avoid the mayhem. When austerity measures include privatization of public assets, that same top 1% is able to acquire very valuable assets for a song and then charge “rentier” rewards for the public to use their own assets.

That’s the story that Auerbach tells for Greece, as he wonders why they don’t just get the hell out of the Euro zone and go back to their own currency. They probably will default anyway. But they will have paid a high price for trying to avoid default–the huge cut in wages, increase in unemployment and suffering going on now, and the privatization of even more of their public goods. Greece plans to sell six national companies–energy companies and refineries are included. The banks must be shitting in their pants in excitement.

originally published at ataxingmatter

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Finance moves transportation bill–revenue sources at issue

by Linda Beale

Finance moves transportation bill–revenue sources at issue

Senate Finance committee approved on a 17-6 vote the transportation financing proposal (13 Dems and 5 GOP voting yes; the GOP were Snowe, Crapo, Roberts and Thune).
The GOP –Jon Kyl a favorite spokesperson–claimed that the Committee’s rush had “lost the opportunity to have a truly bipartisan deal.” See BNA Daily Tax RealTime 020712. What that means is that the GOP doesn’t like the revenue provisions in the bill (surprise). In particular, they don’t like the “black liquor” provisions (see my earlier post about that) and the pension provision.

What’s the pension provision? It is expected to raise about $4.648 billion over ten years. It provides that inherited IRAs and 401(k)s must pay out (and therefore be taxed) over a 5 year period instead of over the expected life of the beneficiary, unless the beneficiary is the account holder’s age, a child with special needs, or past 70 years old.

Those Congressmen interested in protecting fat cat privileges can be expected to boo-hoo over the poor beneficiary who inherits a windfall of cash and, gee, has to pay tax as it gets paid to him over 5 years instead of getting to defer most of it by taking it into acccount over his lifetime. But taxing that to the beneficiary up front is clearly the right answer. The beneficiary did nothing to earn it. It is funds that have been accumulating over time in the IRa without tax. If beneficiaries are allowed to keep it in the IRA and continue the tax-free growth over most of their productive lives as well, they really receive a windfall–millions of tax free accumulation. See Richard Rubin, Senate Baucus Eyes Inherited IRAs for $4.6 Billion, (Feb. 7, 2012).

As the Bloomberg story notes, the intended purpose of IRAs is as a retirement planning tool, not a way for wealthy estate holders to pass even more of the estate to beneficiaries essentially tax free. Ending that tax bonus makes sense. Not unexpectedly, estate planners don’t like the idea: one estate planner objected that this deal would be a “non-starter” because “there’s too much invested in the whole stretch IRA concept.” In other words, wealthy people like their perks, so the Congress won’t have the guts to eliminate a provision that made no sense as a policy provision from the outset!

originally published at ataxingmatter

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Why we don’t need corporate tax "overhaul":

by Linda Beale

Why we don’t need corporate tax “overhaul”

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

Just a couple of examples from a recent Bloomberg piece:

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

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

On Complexity:

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

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

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

As a result of the contingent liability shelters, Congress added various Code provisions, including section 358(h) (having to do with the basis for corporate assets in transactions with significant liabilities) and section 357(d) (having to do with calculating the amount of liability assumed).
Complexity, in other words, is not an evil in itself. Sophisticated taxpayers aren’t harmed by complexity, and in fact complexity is needed to provide sufficient detail to prevent sophisticated taxpayers (with the help of their tax advisers) from cheating. There is generally less complexity in provisions that are relevant for unsophisticated taxpayers, though it is more clearly an obstacle to good tax compliance behavior there.

On Competitiveness:

Competitiveness is used so frequently that it seems doubtful that anybody really knows what they mean by it. If one company destroys a union and is able to pay their workers lower wages as a result, then a company that produces a similar product will claim that “competitiveness” requires that they be allowed to do the same. Of course, another approach would be for the company that retains an active union, and continues to provide pension and health care benefits could lobby Congress to enact stronger laws protecting worker rights to pension and health care benefits. In other words, competitiveness is consistently used as an argunent, when it comes to corporations, for taking away benefits to workers, communities, states and the nation for the benefit of the corporations.

Competitiveness could just as easily be used to argue for maintaining programs, procedures and benefits for workers, communities, states and the nation by considering what would be necessary to buttress the system that supports those benefit levels. And in fact that view of competition–that we are competing globally to create both profitable companies AND a secure and well-paid workforce that can support a healthy economy that can in turn support a quality of life in all dimensions–would lead to different decisions not only about taxation but also about anti-trust, excise taxes, trade treaties, environmental protection, and many regulatory projects.

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

On Rate Structures:

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

We are not in the same situation today. We have very high deficits because of an economic crisis caused by two interwoven problems–(i) the lax regulatory oversight of 40 years of Reaganism, which permitted the financialization of the economy and led to excessive incomes for people at the top (managers and owners, hedge fund and equity fund managers, and speculators generally) and excessive debt for banks and especially people not at the top (because of their stagnant or reduced incomes in the face of growing costs, caused in part by the relaxation of regulations and anti-trust activity coupled with the anti-union attitudees and activity); and (ii) the success of a radical right-wing fringe in characterizing government and business as having adverse interests and progressive programs supporting social well being (from Social Security to Medicare to Medicaid to (modest) heatlh care reforms intended to reign in the cost of medical care to unemployment benefits to efforts to reign in contracts of adhesion in the consumer credit markets) as “unmerited” “entitlements or costly and anti-competitive regulation of businesses that counters the “free market” that will ensure “growth and jobs”.

The result of the rhetoric is a citizenry that is ignorant of the actual income distribution, tax burdens, and impact of government spending on jobs and the health of the economy. The result of the 40-year “reaganomics” effort from the right to cut regulations, cut taxes, privatize and militarize is that this is no context for rate reduction but in fact a context in which those who can afford to do so–for sure those individuals and households in the top two quintiles of the income distribution that comprise the upper middle class and the upper class and all profit-making corporations–should be paying taxes at HIGHER rates, not lower rates.

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

originally published at ataxingmatter

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