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

What is a Bank, then?

I was trying to avoid mentioning this, partially because I half-suspected it was deliberately over the top, and I’m not reading tone well these days. After all:

Virtually every BHC has elected to become an FHC. Under 12 U.S.C. § 1843(k)(4)(H), FHCs are allowed to make “merchant banking investments” in nonfinancial companies, on a principal or agency basis, through affiliated private equity funds or other invesment funds. (Private equity affiliates are dealt with at length in 12 C.F.R. § 225.173.) Goldman carried out the investment in Greely Automotive Holdings through one of its private equity funds, GS Capital Partners VI Fund LP.

I find it very difficult to believe that any serious bankers, no matter how “annoyed,” wouldn’t have known this. [links in original]

is difficult to treat seriously, given the infodump being followed by the snideness. But so it goes.

Until today, when Brad DeLong made it ones of his links of the day. Because now we have to go into context and depth, and remember a year ago.

Bear was sold to JPMChase in March. Six months later, IBs still had not lowered their leverage ratios, and credit was more difficult to find. So the IB that had six months to return to some semblance of sanity—Lehmann Brothers—dangled on the edge for a while and finally fell off, “murdered” we’re now told. (Whether it was murdered by its own CEO is left as an exercise.) But the best was yet to come.

So the weekend was going to be a rocky one. And various plans in various stages were executed:

  1. Endangered IB #3, the successor firm to Merrill Lynch Pierce Fenner & Smith, looked around for a sucker, saw Ken Lewis, and locked in their bonuses.
  2. Endangered IB #4, the successor firm to Dean Witter Sears, teetered on the edge, hoping for a life preserver. And, apparently, it was more like Leo-in-Titanic than anyone wanted to admit.
  3. Endangered IB #5, The Vampire Squid, called its buddies at Treasury.

Maybe it didn’t go exactly like that, but by the end of the weekend, there was the declaration that, so long as they re-incorporated as a Bank Holding Company (BHC), IB#4 and IB#5 would have full access to lootsupport from the U.S. Treasury.

And now we are told—in answer to the question Simon Johnson initially raised:

If this is temporary, is it envisaged that Goldman will cease being a bank holding company, or that it will divest itself shortly of activities not usually allowed (and with good reason) by banks? Or will all bank holding companies be allowed to expand on the same basis. (The relevant rules appear to be here in general and here specifically; do tell me what I am missing.)

Increasingly, the issue of “too big to regulate” in the public interest is being brought up – an issue that has historically attracted the interest of the Department of Justice’s Antitrust Division in sectors other than finance. Should Goldman Sachs now be placed in this category? [italics mine; links, again, from the original]

The response appears to be that those regulations can be circumvented with impunity. Or, as Simon unbelievingly snarked initially, Goldman is doing nothing any other bank cannot do.

But all that does is beg the question: if a BHC can do everything that GS used to be able to do, what was the actual cost to Goldman and Morgan Stanley of converting their business. Or was it just a way for the Fed to save face while letting the taps flow wide?

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Baucus Mark: CBO Preliminary Score

by Bruce Webb

CBO letter to Baucus

Estimated Budgetary Impact of the Amended Chairman’s Mark According to CBO and JCT’s assessment, enacting the Chairman’s mark, as amended, would result in a net reduction in federal budget deficits of $81 billion over the 2010–2019 period (see Table 1). The estimate includes a projected net cost of $518 billion over 10 years for the proposed expansions in insurance coverage. That net cost itself reflects a gross total of $829 billion in credits and subsidies provided through the exchanges, increased net outlays for Medicaid and the Children’s Health Insurance Program (CHIP), and tax credits for small employers; those costs are partly offset by $201 billion in revenues from the excise tax on high-premium insurance plans and $110 billion in net savings from other sources. The net cost of the coverage expansions would be more than offset by the combination of other spending changes that CBO estimates would save $404 billion over the 10 years and other provisions that JCT and CBO estimate would increase federal revenues by $196 billion over the same period.1 In subsequent years, the collective effect of those provisions would probably be continued reductions in federal budget deficits. Those estimates are all subject to substantial uncertainty.

For some reason the Table came out smaller than usual, in any event click to enlarge.

I haven’t read through this and will make only two preliminary notes. One the bill leaves $81 billion in wiggle room to allow changes and still not break Obama’s (rather foolish in my mind) demand that it be deficit neutral. Two is that on the cost side it is way under Obama’s $900 billion leaving plenty of room for additions as long as corresponding funding is found for any thing proposed in excess of the $81 billion. Now if the Senate Finance Committee can just get this thing voted on and approved we could get this show on the road.

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by Rebecca
Cross posted from Newsneconomics

These are interesting times in global economics, especially from the policy perspective. And although there was a sense of global urgency across the G7 (Canada, France, Germany, Japan, Italy, UK, and US) and the G5 (Brazil, People’s Republic of China, India, Mexico, and South Africa) late in 2008 and early in 2009, policy makers now face very different economic circumstances. The global downturn was (mostly) ubiquitous, but the upswing will not be. The G5 are likely to initiate explicit exit strategies before the G7, as growth, domestic demand, and inflation rebound first.

The downturn in the developed world was very severe, as illustrated by the sharp contraction of GDP of the G7 countries. And across the G5, some countries experienced similar declines, however given the nose-dive that was global trade, the economic resilience via expansionary policy in India and China has been rather remarkable. 

Domestic demand, underpinned by robust fiscal and monetary policy pushed auto sales forward in the G5 and simply offset some of the decline in retail sales in the G7 (see charts below). I used auto sales in the G5 as a proxy for retail sales, as I could not access a retail sales in India (not even sure they offer the statistic). Impressively, though, retail sales remained strong in the UK. Auto sales in China, Brazil, and India have been hot – the real question here is: what is the underlying demand for goods and services in these countries, especially in China.

Monetary policy – driving down interest rates in order to stimulate consumption via the credit markets – was very successful in the G5, but much less so in the ailing G7.

And finally, inflation has been quite resilient in some countries, notably in the UK and India. As such, the Bank of England has a real trade-off with which to contend: inflation (as measured by the CPI), 1.6% over the year, remains sticky and remarkably close to target, 2.0%. The Reserve Bank of India is seeing food prices drive inflation steadily upward. expect India to be one of the first emerging markets to start tightening (The Bank of Israel was the first).

There are a lot of question marks right now – the biggest is when central banks and fiscal authorities start to pull back. Especially in the G7, too early and one risks the feared W, but too late, and inflation becomes an issue.
Across the G7, rate hikes are unlikely to occur until well-into 2010, and maybe even 2011 for some. Across the G5, however, late 2010 is more likely an upper limit, however, some countries like Mexico are seriously struggling and policy will remain loose for some time. (See RGE Monitor Nouriel Roubini’s latest, “Thoughts on Where We Are” – unfortunately, a subscription is required.)

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Medicaid Dilemmas – Part 1

by Tom aka Rusty Rustbelt

Medicaid Dilemmas – Part 1

Medicaid is a federal/state program covering poor people, with general services for all ages and long-term care (nursing home) services for the indigent elderly.

State budgets are extremely tight, and many states are cutting reimbursements, including nursing home reimbursements.

The majority of long-term nursing home residents (as opposed to short stay rehab patients) end up being Medicaid funded.

A typical long-term resident is an 84 year widow, suffering from moderate senile dementia, having ambulation problems and problems with activities of daily living (eating, dressing, bathing), with late onset diabetes symptoms, osteoarthritis and congestive heart failure. So, grandma is not a candidate for home care or assisted living.

Many residents are in much worse health. Some receive joint services from the facility and from hospice.

Nursing homes have the toughest regulatory regimen of any health care providers, including piles and piles of mandatory paperwork by nursing and administrative staff.

So, not much room to cut (the best profit comes from selling the facility later). Now what?

In Part 2 we will discuss the possible next phase for state Medicaid budgets.

(The wife, aka the world’s greatest nurse, works part time in long-term care, and will now do more work and take a pay cut. She understands the deal, but one of these days she is going to hang up her stethoscope, a real tragedy for the elderly. Maybe she will become an investment banker – nah, too honest.)
Tom aka Rusty Rustbelt

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The Logan Act…if you are curious


The Logan Act has remained almost unchanged and unused since its passage. The act is short and reads as follows:

Any citizen of the United States, wherever he may be, who, without authority of the United States, directly or indirectly commences or carries on any correspondence or intercourse with any foreign government or any officer or agent thereof, with intent to influence the measures or conduct of any foreign government or of any officer or agent thereof, in relation to any disputes or controversies with the United States, or to defeat the measures of the United States, shall be fined under this title or imprisoned not more than three years, or both.

This section shall not abridge the right of a citizen to apply, himself or his agent, to any foreign government or the agents thereof for redress of any injury which he may have sustained from such government or any of its agents or subjects.

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Labor market rents can cause business cycles

Robert Waldmann

I’m not sure whether (more likely wherE) this has been noted in the literature, but wage differentials not due to differences in workers’ skill are enough to generate a business cycle. A verbal “model” after the jump.

update: additional model with fixed capital added.

The key reference from which this is not quite obvious is Kevin Murphy Andrei Shleifer and Robert Vishny (1989) “Industrialization and the Big Push” Journal of Political Economy vol 97 pp 1003- which contains three models only one of which is The Big Push. Another discusses wage differentials not due to worker characteristics. Since Murphy is one of the authors, they are assumed to be compensating differentials not labor market rents but it doesn’t matter (except for welfare analysis).

OK the problem: Assume that workers all have the same skill yet different wages are paid in different industries. Can this imply multiple Pareto ranked steady states ? Can this imply that there are sunspot equilibria in which GNP changes just because people expect it to change ?

To make the problem hard, assume that everyone is rational, that there is perfect competition (except for the wage differentials) and that all goods are non durable so consumption must equal production and the real interest rate just makes aggregate demand equal aggregate supply.

The last assumption is needed, because a model with two sectors can have a sunspot equilibrium due to the effect of (spontaneous just because people expect it) sectoral shifts on the real interest rate (Boldrin and Rusticchini in Econometrica). I find models which rely on the effect of changes in the real interest rate on the rate of growth of aggregate consumption or labor supply to be unconvincing as there is almost exactly no sign of such effects in the data (that criticism applies to 3 published papers with my name on them).

OK the “model.” Time is continuous. People are free to borrow and save at interest rate r. They have a rate of time preference rho

There is no capital. There are two non-durable goods produced with labor alone. There is nothing odd about good 1. One unit of it is produced with 1 unit of labor.

1) C_1 = L_1

where C_1 is consumption of good 1 and L_1 is employment in the sector which produces good 1.

The price of good 1 is normalized to 1. There is perfect competition so w_1 (the wage paid in sector 1) is equal to 1.

One unit of labor is needed to produce good 2

2) C_2 = L_2

total labor supply is fixed L_1+L_2 = L

However for some reason (it’s ok except for the welfare analysis if its a comepensating differential, that is it is more unpleasant to work in sector 2)

3) w_2= a > 1

there is perfect competition so the price of good 2 P_2 = a.

update 5: I am assuming that each individual worker moonlights working in both sectors and that they all spend the same fraction of their time in each sector. In other words I am making assumptions so that all individuals have exactly the same income. This is silly but makes things simpler.

Now a knife edge very special case for clarity. The goods are perfect substitutes

U = aC_2+C_1

This means that any C_2+C_1 = L can be a steady state equilibrium.

Welfare equals (L + (a-1)C_2)/rho = (aL-(a-1)C_1).

For this knife edge special case, there are a continuum of Pareto ranked steady state equilibria. People are better off if they work in sector 2. Any number can work in sector 2.

Well that’s an extreme example. Now how about this one Good_1 is an inferior good. This means that for fixed relative prices (and relative prices must be fixed) there is an interval of total consumption over which consumption of good 1 declines.

update 3: I think I was totally confused here
update: Assumption immediately below is a correction of the assumption in an earlier version. Sad to say the new assumption is the assumption which I hate.

Consumption/permanent income decreases as the interest rate increases

permanent income is the expected discounted value of the flow of income. Call it pY.

Oh no now I need a graph.

Figure 1

figure 1

Consider possible steady states. Consider income and consumption of good 1. The line shows income as a function of consumption (and production) of good 1 . The curve shows consumption of good 1 as a function of pY.

Note there are two steady states and one is Pareto better than the other (C_2 is higher).

OK now figure 2 shows Y as a function of pY.

figure 2

Define total consumption as C = C_1+aC_2

So there are two steady states one with high output Yg and the other with low output which I will call Yb.

What’s more the economy can jump from one to the other. let’s say it switches according to a poisson alarm clock with the sunspot causing a switch arriving at rate p. Or hell let’s say time is discrete and they switch each period with probability p.

In each steady state consumption equals to income so that the identity C=Y and the equations which give C_1 and C_2 as a function of y (for P_2 fixed and equal to a from the supply side) and Y as a function of C_1 and C_2 both hold.

Furthermore the economy can jump stochastically from one to the other. How ? Well lets say we are in the good state. The national income identity means C=Y. However individuals are free to borrow and save at interest rate r. They decide consumption given permanent income. This means that r can’t equal rho. They know that their income might fall so if y=Yg all agents will try to save if r=rho. They can’t. we must have C=Y because there is no way to invest.

So r must be lower than rho. This means that they are satisfied if the expected marginal utility of consumption increases. It does it jumps up to the higher marginal utility of consumption in the bad steady state with rate p. For any p r can be calculated so that people neither want to borrow nor save if they are currently at the good steady state.

Similarly at the bad steady state. Here r must be greater than rho since income and consumption might jump up.

update 4: Now I add capital to the model. The model above is very strange as there is no fixed capital or trade so consumption must always be equal to production. Also one of the stylized facts about wages, and, in particular, wages which are surprisingly high given worker characteristics is that they are high in industries with a high capital labor ratio. In the model above, both industries have a capital labor ratio of 0.

So now there is a third good K in addition to C_1 and C_2. At any given time total capital equals K = K_1+K_2 where K_i is capital used in sector i. Y_1 and Y_2 are production of each type of good no longer equal to C_1 and C_2. Y = Y_1+Y_2 and C=C_1+C_2

The assumption about wages becomes

5) w_2 = (w_1)a

since now wages depend on the capital labor ratio.

I will assume that the share of capital is constant and the same in each industry. This means that the relative prices of the goods will be constant. For further simplicity I am going to make assumptions so that constant is 1 so P_2 = P_1. This is all for tractability and is not realistic. In fact not only is K/L high in high wage industries but so is the share of capital (capital income)/wL which will be just rK/wL here. But I assume that rK/wL = alpha in both sectors cause it makes things easier. I equations I assume

5) y_1 = A(L_1)^(1-alpha)(K_1)^alpha


6) Y_2 = A(aL_2)^(1-alpha)(K_2)^alpha

So both sectors have similar Cobb-Douglas production functions. For the same amount spent on labor and capital (which means fewer physical hours of work in industry 2 since each gets a higher wage) the sectors have the same output so the two goods are sold for the same price which I set to 1. This makes everything relatively simple and means that the crude definitions like Y = Y_1+Y_2 make sense.

I want to keep things simple so I will assume that you can create 2 units of K from 1 unit of good 1 and one unit of good 2. This is an absolutely rigid no substitution allowed leontief type function. capital depreciates at rate delta. so

5) dK/dt = -deltaK + 2min(Y_1-C_1,Y_2-C_2)

This means that

6) dK/dt = -deltaK + (Y-C)

and the price of one unit of capital is 1, that is equal to the price of one unit of consumption good 1 which is equal to the price of one unit of consumption good 2.

I assume that delta is high enough that no one ever wants to convert K back to consumption goods (or that they can do that which is silly but standard). Also I assume either that delta is high enough that no one ever wants to take capital from sector 1 and add it to sector 2 or that this is possible. Again silly but standard.

Note that a shift of labor from sector 1 to sector 2 will increase demand for capital and will give a higher marginal product of capital r for the same total amount of capital K.

Finally I will make an assumption about tastes. For p_1/p_2 = 1 (which it must be given the supply side) C_1 and C_2 as a function of total consumption are given by figure 3. As C goes up from zero the ratio C_2/C_1 is constant for a while, then C_2/C_1 increases then it is constant with a higher C_2/C_1.

In the regions where C_2/C_1 doesn’t change with total consumption C, this model behaves just like a standard Solow model. However, when C_2/C_1 is higher it is as if there has been labor augmenting technological progress since labor is more productive in sector 2.

Recall I am assuming all workers divide their time and work in both sectors and have equal identical income. I also they are the saver/ investors and all have equal wealth so everyone always has the same income. Silly but standard in macro.

This means that, for the right a and assumptions about tastes, there can be two steady states again. In each steady state the real interest rate is equal to the rate of time preference r=rho, but in the good steady state C_2/C_1 is higher than in the bad steady state so the K/L needed to make r=rho is higher and output is higher and consumption is higher so, given tastes the ratio C_2/C_1 is higher.
Define the two steady state levels of capital as Kg and Kb with Kg>Kb and may use the subscripts the same way for other variables.

It is no longer possible to jump from one steady state to another. K is a state variable and changes slowly. C can jump.

There is a sunspot equilibrium where the economy spends much of it’s time near one of the steady states.

If K is just above the good steady state K (Kg) then rrho.

If it jumps the economy finds itself on the path of dC/dt and dK/dt which leads to a point with K just below bad steady state K. Once it gets real close to this point, the sunspot begins giving a jump up signal which arrives at rate p again. This makes consumption remain constant if the jump up signal doesn’t arrive at a point where r>rho so K below Kb.

If the jump up signal arrives then C jumps up to the region with high constant C_2/C_1 to exactly the point where the dC/dt and dK/dt equations lead it to the original point with K a little bit greater than Kb.

Also now the economy can have much more complicated dynamics. It is possible to make an equilibrium in which it can jump at any time and not just when close to a steady state.

update 3: I think everything below is totally confused

Note again two steady states. Also note that for the Pareto better steady state (with higher Y) dY/dpY >1. This means that this steady state is a stable steady state with Y = Yg (for good). if Y starts slightly above steady Yg then it will converge to steady Yg. This means that there is a sunspot equilibrium in which Y bounces around Yg just because people expect it too (rational animal spirits).

update 2: The assumption which I hate that, given permanent income, consumption decreases in the interest rate is not needed for there to be a stable steady state and sunspot equilibria. It is just needed so that the good steady state is stable. If, in contrast, consumption increases in the interest rate for given permanent income, then the bad steady state is stable. There is a very general result that when you pass from zero steady states to two (as in the figure) then one of the steady states is stable and one is unstable.

I will attempt to discuss the dynamics of Y near a steady state. I will use linear approximations (I have to do this to have any hope of writing out the explanation with plain ascii. That approximation is not necessary for the result.

There are two steady states Yg defined above and the one with lower Y which I now name Yb.

I will try to find the time derivative of Y, dY/dt for Y near a steady state. If d(dY/dt)/dY is negative then when Y is above the steady state Y falls down to the steady state. This means that the steady state is a sink, it is stable. It means that there are sunspot equilibria where the economy bounces around the steady state.

I will make an assumption about the utility function. First define total consumption

C = C_1+aC_2

note that C=Y.

Given the relative price P_2 = 2P_1, C_1 and C_2 are functions of C.

I assume that
the marginal utility of consumption of good 1 is equal to

4) U_1(C_1,C_2) = C^(-sigma)

This must be equal to (1/a) times the marginal utility of consumption of good 2.

Now consider the real interest rate r. Even though there is no saving and investment, there is a market clearing r such that no one wants to save or borrow.
Equation 4 implies that

5) (dC/dt)/C = (r-rho)/sigma = (dY/dt)/Y

(recall the national accounts identity is just C=Y).

now consider constant r (just for now)

permanent income at t (pY_t) is the integral as s goes from zero to infinity of exp(-rs)Y_(t+s)ds

Given 5 that equals the integral as s goes from zero to infinity of

exp(s(r(1-sigma)-rho)/sigma)Y_t so

6) pY_t = Y_t(-sigma/(r(1-sigma)-rho))= Y_t(sigma/(rho+(sigma-1)r)

if r = rho then pY_t = Y_t(sigma/sigma) = Y_t

if sigma is greater than 1, then pY_t/Y_t decreases in r. If sigma is less than one then pY_t/Y_t increases in r. Let’s assume that sigma>1 (the assumption I like). This means that Yb is a stable steady state.

OK so that wasn’t very hard, but the problem is that r_t changes as Y_t changes.

I’m working on it (update 3.1 not any more. I realize I was assuming that there was some way to save.

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FTC/Blogger Silliness Defined

Mark Cuban gets the FTC’s artificial distinction between bloggers and journalism exactly correct.

Full disclosure: I had a Press Pass to the Clinton Global Initiative, and got things such as a disc copy of Financial Football* and a video ostensibly about the Rwandan National Forests (sadly, not so interesting) as a result.

*It’s not my fault Visa describes it as “Financial Soccer” on the U.S. edition of their website.

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QOTD: There are Shareholders and then there are Share Holders

The Epicurean Dealmaker notes that the stock market “game” is irrevocably rigged against the individual investor, and the best thing anyone can do is realise that is so:

I believe [Leo E. Strine Jr, vice chancellor of the Delaware Court of Chancery]’s analysis should conclusively disabuse participants in the current debate over financial regulatory reform of two related notions….The second is the canard that all public shareholders are alike, and they all share the same interests and motivations.

Realizing that the second of these is false, and that Fidelity Investments and SAC Capital do not have the same investment timeframe and objectives as Aunt Millie or even the Ohio Teachers Pension Fund, would have a highly salutary effect on the beliefs and behavior of truly long-term shareholders.

If nothing else, getting Aunt Millie to realize she is the only one in the shark tank without a safety cage should do her a world of good. [emphasis mine]

Read the whole thing, as well as Mr. Strine’s piece in the NYT’s DealBook that inspired it, for a glimpse of the soft, white underbelly of corporate governance and management.

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The Maine Chance

Robert Waldmann

One strange thing about the health care reform debate is that insurance companies claim to support reform. I have tended to suspect that they are just playing possum.

Now I find positive proof that WellPoint is willing to do what it takes to make sure health care reform passes — they sued the state of Maine claiming they have a constitutional right to make a profit !?!

In fact they seem to support a public option. It will be a bit hard for Sens Snowe and Collins to explain why they think no public option is needed after this.

I have a challenge. Can anyone think of anything anyone could do which is better for the public option that this ?

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What’s Your Top Ten List for Tax Reforms?

by Linda Beale
(cross posted with ataxingmatter)

What’s Your Top Ten List for Tax Reforms?

Tax Prof’s ongoing discussion of potential tax reforms to be suggested to the Volcker Commission got me thinking what my own “top ten” would be. I’ll list them here, but I invite readers to provide their own as well. (Much of my reasoning is expanded in prior posts on most of these issues.)

1. Eliminate CG preference (and in the process repeal 1(h)(11) providing dividend taxation at preferential rates).
You can read my prior posts on this, too, of course. But briefly:

Capital gain preferences are enjoyed primarily by the wealthy, who hold the vast majority of the financial assets. The country has witnessed massively increasing inequalities, with ordinary workers’ wages stagnating while top earners salaries and bonuses soar to egregiously overblown heights (especially when one considers that those very earners are often the ones whose speculation was a key factor in the Great Recession). The theory behind capital gains preferences–according to all those pundits, Chicago School economists, and conservative supporters–was that it would free up capital for entrepreneurial investment, creating broad-based economic growth that would benefit everyone with jobs and better standards of living. Well, we tried that experiment for several decades. It simply hasn’t worked. What better proof than the Great Recession, which took place after eight years of generous tax cuts for capital?

Given the power of corporations and their managers’ and shareholders’ abilities to use the corporate form to aggrandize and use that power, I do not think that corporate integration is the right answer. Even if we don’t eliminate the capital gain preference, we should eliminate section 1(h)(11) preferential treatment of corporate dividends.

2. Tax holdings of marketable securities under 475 mark-to-market accounting

Those who hold lots of stocks and bonds of publicly traded companies currently get to defer their tax until they have some reason to dispose of assets–which may be to recognize a loss that they can use to offset other income. They currently can cheat fairly easily if they want to on the amount of gain reported, since third parties don’t track and report their basis. (Academic studies say significant cheating on basis takes place.) If they are lucky (and many are), they will not sell much of their holdings and will pass on the assets at a stepped up basis at death to their heirs, who can then sell tax free. Ordinary workers, however, must pay tax concurrently on receiving their income (and it is even taken out by withholding). This timing favoritism for capital income should end. Mark to market accounting for publicly traded financial assets would be relatively simple and permit third party reporting. (This is something that Mary O’Keeffe and others have recommended before.)

3. Repeal the R&D credit

Much of the basic research that underlies real development is done by universities anyway. Drug companies shouldn’t get an R&D credit for adding a tiny change to a patented compound in order to extend a patent beyond its current life, etc.

4. Repeal the special manufacturing deduction section 199

This is easy. This manufacturing deduction is really just a complicating corproate tax giveaway. Set the rates where they should be. No reason for manufacturers (especially as defined in this code section) to get special breaks.

5. Repeal the various subsidies for the natural resources extractive industry

If we want clean energy, we need to direct our incentives towards developing clean energy. Why don’t we let the energy department do that with directly funded subsidies–can you imagine the increased citizen involvement and transparency that would result? Get rid of these subsidies in the Code–especially for the dinosaur technologies that are wreaking havoc on our environment, from mountaintop coal removal (and stream destruction) to deep water oil drilling.
6. Phase out the mortgage interest deduction

This subsidy was a part of the housing bubble that was a part of the systemic financial system disruption that cause the Great Recession. It benefits the wealthiest taxpayers the most. It’s time to phase it out and quit using the code to support real estate developers and construction companies.

7. Increase rates for estate returns back to 2001 levels (maybe with a $2M exemption).

I’ve written about this many times before. In an age of growing inequality, the estate tax is one way to tamper down the power and wealth of the superrich. We should let the 2001 law return, at most with a slightly increased exemption amount.

8. Increase the number of rate brackets by at least 2 or three levels, so that CEOs making $700 million pay about 55%

Base broadening is all fine and good, but the fact is that the compensation to those at the top–whether salaries of CEOs making 400 times their average worker (compared to less than 30 times their average worker in the 1970s) or capital income to those with substantial financial assets–is so high that a return to the higher tax rates that existed before the 1986 tax reforms could serve an important stabilizing function. Democracy has trouble existing in a context ripe for oligarchy/plutocracy.

9. Enact partnership reform so private equity/hedge fund managers and others who earn a “profits” interest for services are taxed on that income at ordinary rates

When a service partner gets paid for services and is able to claim capital gains rates (as well as deferral), something is wrong. Let’s fix it. Service partners who get profits interests should be treated as receiving only ordinary income distributive shares on those profits interests.

10. Rethink corporate restructurings. Maybe we should enact a continuity of interest provision for reorgs that requires 80% continuing shareholders to qualify for reorg treatment—except for truly divisive spins (ie spins that do not include the acquisition of either controlled or distributing in a related transaction).

This relates to the first point. Given the power of corporations and their managers and shareholders and the systemic risk caused by monster industries (think—investment banks, car manufacturers, oil companies) that are no longer capable of flexibly responding to changed economic contexts, it is possible that the tax code should encourage the development of smaller, more entrepreneurial firms, rather than relying on the “economies of scale” notions that have underlain permitting corporate consolidations on a tax-free basis.

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