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

Does A Very Strange Distribution Lead to a Sacrifice in the Hope of a More Interesting Endgame?

Brad DeLong notes an experiment subject (as is the wont of the Obama Administration to date) to regulatory capture:

In a surprising move, the Obama administration will extend special bonus payments meant to reward top-performing Medicare Advantage insurers to those that score only average ratings….The law says bonuses, which start in 2012, would go to insurers that scored at least four out of five “stars” on a set of quality measurements. Instead, a “demonstration project” authorized by Medicare officials will extend bonus payments to plans that score at least three stars. Based on this year’s star ratings, the change means 62 percent of all Medicare Advantage insurers…will qualify for the quality bonuses, compared with only 14 percent of plans under the health law provisions.

If those figures are accurate, then 48% (62-14) of all M.A. insurers are judged to provide “average” (three star) quality.

Perhaps more importantly, 38% (100-62) are judged to be substandard. (The good news is that those M.A. insurers have only 16% of the market. The bad news is that they have 16% of the market.)

In the optimistic version, the new structure facilitates culling the worst of the herd while not damaging that plurality of users who are receiving “average” care.

The pessimistic version is to suspect that those 16% who receive substandard care are in non-competitive markets, and will therefore end up, for the next three years, paying more for the privilege of being ill-served and then receive only marginal benefit from the HIEs.

I’m uncertain whether Dr. DeLong is a pessimist, or is just looking at the additional short-term spending and ignoring that the endgame is to have quality providers in the HIE, and punishing the bulk of the market for the ills of the few this early will make improvements later on less effective.

Then again, I’m uncertain whether I should trust that the Administration knows what it’s doing on its Signature Issue. Which is, as Digby noted in another context, rather more the problem for that Administration.

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…the sacrifices necessary…

Beat the Press Dean Baker November 22, 2010 says it well:

The Washington Consensus That Excludes the Overwhelming Majority of the Public

A front page Washington Post editorial * touted the “accord seen in debate over deficit.” It begins by telling readers that: “the sacrifices necessary to achieve those goals are coming into sharp focus.”

Included in the Post’s list of sacrifices are cuts to Social Security. It never mentions the fact that poll after poll continue to show that the vast majority of the public strongly opposes cuts to Social Security. It is only the select group of Washington insiders that the Post chose to cite that is agreeing on the “sacrifices necessary.”

It is also worth noting that the Post did not even mention plans by the Bowles-Simpson and the Pew-Peterson deficit commission to cut the annual cost of living adjustment. This change would reduce benefits by an average of 0.3 percentage point for each year that a worker receives benefits. This means that after 10 years their benefits will be 3 percent lower as a result of this cut. After 20 years the cut will be close to 6 percent. If the average beneficiary receives benefits for 20 years this means that the average benefit cut will be close to 3 percent.

For most retirees Social Security is most of their income. For the bottom 20 percent of the income distribution, it is almost their entire income. This means that the change in the Social Security indexation formula proposed by these deficit cutters would have almost as much effect on after-tax income for many retirees as the proposed ending of the Bush tax cuts for high income households, which would increase their tax rate by 4.6 percentage points on income above $200,000. While the Post has devoted endless news stories to the consequence of this change in the tax code, it did not even think it was worth mentioning the proposed cut in Social Security benefits.

It is also worth mentioning that the Post’s consensus on reducing the deficit excludes the proposal from the IMF for more taxes on the financial sector. Insofar as taxes on the financial sector are not being considered it is likely attributable to the fact that financial interests are playing such a central role in the debate. A newspaper would call attention to this fact.

*The article is here.

— Dean Baker

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E Pluribus Unum and Our Finest Hour

by Mike Kimel

E Pluribus Unum and Our Finest Hour
Cross posted at the Presimetrics blog.

But if we fail, then the whole world, including the United States, including all that we have known and cared for, will sink into the abyss of a new dark age made more sinister, and perhaps more protracted, by the lights of perverted science. Let us therefore brace ourselves to our duties, and so bear ourselves, that if the British Empire and its Commonwealth last for a thousand years, men will still say, This was their finest hour.

Winston Churchill, Speech to the House of Commons, June 18, 1940

Assuming, as many do, that the British Empire ended some time around the handover of Hong Kong, it did not last a thousand years. (Britain and its Commonwealth, of course, are still going strong.) Nevertheless, I suspect many would say that Churchill got his way, and that the Battle of Britain and the remainder of World War 2 was, in fact, the finest hour of the British Empire.

What about the American Empire? If we define that institution as existing from some time around the Spanish American War (1898) to the point where it was overextended and became unable to impose its will on friend or foe alike (i.e., some time around 2005), what was its finest hour? What were its most impressive achievements, those that will be written up in history books a thousand years from today?

I am not a historian, but I have a few guesses, in no particular order: (below the fold)

1. Serving as the arsenal of democracy in WW2
2. Putting people on the moon and bringing them safely back to earth.
3. The development of mass media and long distance communications.
4. Almost eradication of polio (yes, a worldwide effort, but just about every significant piece of the project was done in the US)
5. The Green Revolution (a little less US-dependent than the polio effort, but US entities played the biggest role)
6. The Manhattan Project and the development of nuclear energy
7. The early development of genetic engineering (I suspect US dominance in this field will be ending very soon)
8. Construction of the Panama Canal
9. Airplanes
10. An automobile in every driveway
11. The electric grid

I’m sure I’m forgetting something important, and there are, no doubt, things we regard as small that will be viewed as important one day. Still, I would be surprised if what is eventually viewed as the greatest achievement of the American Empire is not on that list. However, not all of the items listed will survive the test of time. Some will be forgotten, some may prove more or less irrelevant over the long haul, some will come to be viewed as a facade and some will be decried by our descendants. Still, its probably not a bad list, and I think its good enough for the purpose of this post, which is to note: the role of the private sector tends to play a relatively small role when it comes to the big achievements. Furthermore, the piece of the private sector that contributes the most to the big advancements, the ones that will be remembered, is the not-for-profit piece of it.

With the possible exception of 3, 9 & 10, the for-profit private sector played the role of sidekick or supporting actor. The main role, the driving force, the entity that either provided the original vision and/or drove that vision through to completion was the government, with much of the remainder provided by academia (heavily funded by the state whether public or private) or NGOs. But even where the private sector led the charge, the government’s role was huge. Henry Ford may have revolutionized the production of cars, but without the government producing roads (not to mention the freeway system), their development would be limited to where they could be used for local transportation. Most of the big achievements, and, I am comfortable making this statement, the finest hour of America, whatever that is judged to be a thousand years from now, are driven by government policy, government actions and government grants.

Why is that? After all, the private sector, after all, makes up the biggest chunk of the economy. Size alone doesn’t isn’t enough to create achievement – the most significant achievements in the private sector usually aren’t those produced by the biggest companies. Similarly, its hard to construct a story that involves the government coming into a field and bigfoots over the early efforts of the private sector. Instead, the government is providing a role that the private sector simply isn’t, cannot, and will not. Why? I have a guess. I suspect it comes to the profit motive. Projects of this nature are risky and costly and hard to make money off of for a very long time, all of which are factors that discourage the private sectors. But the private sector has another problem with “finest hour” type accomplishments, which is evident when you think of Britain and Churchill’s speech. Britain may have been, to Hitler, little more than a “nation of shop-keepers”, but those shop-keepers were willing to fight for an idea, a cause they all had in common. However, its hard to imagine a company providing a vision that unites a nation. Occasionally, a company is able to inspire its employees to greatness – think Hewlett Packard before Carly Fiorina and the era of continuous layoffs. However, even then, the reach of its vision, its ability to bring others on-board, is generally limited to that company itself. This is due to human nature. The geniuses – the Einsteins and Borlaugs and Salks aren’t in it for the money, and the rest of us aren’t going to get the warm and fuzzies from increasing the profits of a company for whom we don’t work and in which we don’t own stock.

The only force that can unite the country, that can create a cause around which everyone will rally around, and then only certain circumstances, is the government. E pluribus unum. But that is why the American Empire has been petering out. We are less than two months shy of thirty years from the day when Reagan told us the government is the problem, and we have bought into that mantra hook line and sinker. And in the Tea Party era, it is hard to see how that can be turned around. The long, slow decline is becoming inevitable.

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ABA TAx Section Pronouncement on Carried Interest

by Linda Beale

ABA TAx Section Pronouncement on Carried Interest
originally posted at Ataxingmatter (Nov. 10)

The American Bar Association Section of Taxaction has issued a letter on Comments on Carried Interest Proposals in senate Amendment 4386 to H.R. 4213 (Nov. 5, 2010).

As many are aware, a letter from the officers of the ABA Tax  Section is one that has been developed by a relatively small group of participants and submitted to the council of officers for approval.  Most members have little opportunity, if any, to comment on the statement, though one can assume that in many cases the statements are likely to represent the views of a majority of the membership.  The leadership is not likely to step lightly into territory that they do not think would be supported by a majority of the membership.

This letter went to the current chairs and ranking members of the House Ways & Means Committee and the Senate Finance Committee, with copies to staff directors as well as the Chief of Staff for the Joint Committee on Taxation.

The letter makes  recommendations about the proposed statute, which would apply to service partners in investment service partnerships to characterize income allocations as ordinary compensation income and defer losses, and impose self-employment tax on the service partner interests in such partnerships.

Preliminarily, it reiterates a position stated in prior comments that taxation of carried interest adds “burdensome complexities” and “alters fundamental principles of partnership taxation” and should therefore be reconsidered. Not a surprising position for tax lawyers.  We are in most cases as self-interested as the next guy or gal.  This provision would result in increased taxes for fund managers in partnerships that have claimed a significant rate and deferral preference for their income from services compared to the ordinary treatment of wages paid for services to less advantaged workers.  And of course there is a good bit of work for tax lawyers developing partnership agreements and doing adquisition and other tax work for private equity funds and other investment partnerships that have taken advantage of this “loophole” to create significant wealth for these managers. These service partners may earn this kind of compensation in the hundreds of millions of dollars annually.  It is very big business.

Nonetheless, there is an essential fairness issue at stake.  If you are relatively rich and a part of the financial institution world of investment partnerships, you can earn a very very good “salary” for your work but get deferral advantages compared to ordinary workers and preferential rate treatment, paying much less in income taxes than ordinary workers.  It is hard to see how, in conscience, Congress can avoid enacting a carried interest provision that will undo that unfair advantage.  And since it will likely raise revenues in an era of much complaint about deficits and debt ceilings, what’s not to like?

Secondly, the letter suggests that, if a carried interest provision is nonetheless to be adopted, the proposed statutory language is inadequate to the task.  It urges modifications to the scope of the proposal and to the treatment of qualified capital interests. Among other things, as to scope

  • the letter claims that the proposal does more than tax the compensation element as ordinary income, because of the application of loss deferral and manadatory gain recognition for C corporations.  Yes, the proposal does do more than just deal with the rate issue, since it also addresses deferal and required gain recognition.  Why is that inappropriate?  The letter doesn’t say.
  • The letter includes in the “scope” discussion the recommendation that “small businesses” be exempted from the provision because of the purported burden of compliance.  This is similar to the attack on many other business tax provisions–the argument that “small businesses” should be exempt because it is too complex for them.  But that is questionable here.  Businesses that use the service partner loophole already have been dealing with complex partnership allocation and distribution provisions.  This proposal has been gathering steam for some time, so that they should be prepared to deal with it.  They are well aware of the preferential treatment that the partnership arrangement currently provides and quite likely chose partnership form in order to get that treatment (among other advantages), despite the complexity.  They generally will have a firm that handles the tax matters for the partnership anyway, so this does not really add to the burden on the business.  This has the appearance of a red herring argument–as it usually is  when “you should eliminate the tax because the burden of compliance is too much” arguments are used against everything from the estate tax to the demand for 100% expensing. 
  • the letter criticizes the provision that treats all tiered partnerships as “bad” assets for these purposes.  It suggests instead a look-through approach.  There may be merit in that though there is a trade-off in the increased complexity due to the look-through rules.  Again, note that when it is to get a benefit for taxpayers, proponents tend to disregard the added complexity…
  • the letter argues for a provision to end the service partnership taint if the interest ceases to be an investment service partnership interest.   Taints often carry over to ensure appropriate treatment of income over the long term, but it is possible that a cut-off provision would be appropriate.  But again, there is a trade-off in complexity and lack of information about the circumstances in which interests would change into and out of investment service partnership interests.  Without such information, it might be better to stick with the bright-line taint rule.

As to “qualified capital interests”, the letter urges a much broader view of qualified capital (amounts as to which allocations will not be treated as compensation income).  For example, it includes the following recommendations (among others):

  • The letter urges that a partner who purchases an interest from an existing partner be allowed to treat the purchase price for the interest as qualified capital, rather than merely acceding to the amount of the qualified capital account of the transferor partner.  Note that the norm for capital accounts for purchased interests is that a purchasing partner takes the transferor partner’s capital account.  It is not clear why the ABA believes that the additional complexity a purchase-price-capital account determination would make would be reasonable, nor why purchase price should “count” as qualified capital when the transferor partner had a more limited qualified capital account.  Remember that purchasers of interests from interest holders do not add capital to the enterprise–they are merely putting money in the pocket of the interest holder that, presumably at least, the interest holder would eventually have received from the partnership. 
  • The letter argues against the treatment of qualified capital as limited to the original capital contribution if the partnership will make disproportionate allocations of income to original service partners once investors join the partnership.  In other words, under the proposed statute, the capital bookup for appreciation in real estate property held by the partnership and allocable to the service partner during startup is not treated as qualified capital when the investors join, but the letter proposes that it should be.   The letter argues that “the value in a partnership at any such time is economically indistinguishable from value held outside the partnership that a partner could contribute in exchange for qualified capital.”  Doesn’t that miss the point?  If the original partners contribute equally but one provides all of the services for the real estate purchased with that original contribution, then surely the increase in value allocable to the service partner is attributable to the services provided as well as capital.  Tax rules often take an “all or nothing” stance, accomplishing with “rough justice” what would otherwise require intricate bifurcation rules or rough injustice results (here, that none of the increment in value to the service partner would be treated as payable for the services of the service partner).  The fact that a purchased item worth 250 would be “economically indistinguishable” from a purchased item originally worth 100 that has increased to 250 with services from the purchaser misses the point of attempting to account for the compensation received by the servicer the way we account for compensation of others.  And note that the letter’s recommended position would result in a significant long-term advantage, in that much more of the “disproportionate allocations” that the service partner will receive henceforward would be attributed to qualified capital rather than payment for services.
  • the letter also objects to the inconsistent application of section 752, the rule relating to the treatment of increases and decreases in liabilities, which are viewed (outside of this new statute) as contributions and distributions, respectively.  The proposed provision does not treat increases in the service partner’s share of partnership liabilities as a contribution of money to the partnership (created increases in qualified capital), but does treat decreases in a partner’s share of partnership liabilities as distributions out of capital, thus reducing the qualified capital account.  The statutory inconsistency reflects many other anti-abuse rules in the Code, such as the ones that disallow loss recognition but permit gain recognition.  While consistency is generally preferable, the ABA tax section should have provided some discussion of the likely rationale for not treating increased liability responsibility as a contribution of qualified capital in these cases, rather than merely arguning for consistency for consistency’s sake.

The letter ends with a restatement of concern about increasing complexity

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What is the difference between a multinational corporation and a trans-national corporation?

US firms warn Irish over tax move

The Irish government has been given a stark warning from some of the biggest American companies in Ireland on the risk of a mass exodus if the country’s low corporation tax rate is raised.

What is the difference between a multinational corporation and a trans-national corporation? And what will be the growing consequences for US firms as voters imagine they are versus changes happening at an accelerating pace in real terms?

In that I am not going to answer this question this morning, I believe it is a topical discussion. Could use some links, however.

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Ireland Will Apply for Bailout Package

The NYT notes this morning:

Ireland Will Apply for Bailout Package

Irish finance minister Brian Lenihan confirmed today that
Ireland had formally applied to Europe and the International
Monetary Fund for a bailout package.

He would not give an exact figure but said the amount would
be in the tens of billions of euros and that the final figure
was still subject to further negotiations.

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…being a good mother

by Linda Beale
crossposted with Ataxingmatter

Friday Animations–being a good mother

These days the tea partiers and libertarians have tended to mock those who think that we should all tax ourselves to take care of those who are less fortunate, and that the wealthiest amongst us–corporate managers, private equity managers, and shareholders–should pay more in taxes. Libertarians claim that everything they have “earned” is theirs, and that the government is stealing from them. They forget, or fail to notice, that nothing they have earned would have been possible without roads, contracts, internet, schools, disease control, decent food, clean air, clean water, clean soil, etc. Those are the things we want government to do for us–protect and preserve the environment that nurtures us, protect and preserve the infrastructure that gets us to and from our work and homes and lets us socialize with our friends and co-workers, protect and preserve our sources of food, clothing and housing. Help those of us who are most vulnerable whether from inherited traits or catastrophic illness or unfortunate accident or lack of work or old age. Protect and preserve.

So this struck me as a good video feature for today–a pup whose young ones had grown up and been adopted, willing to mother some motherless kittens who needed milk and warmth and pulling out of danger. Mothering. Maybe that isn’t far from what is at the heart of good government, community spirit, and neighborliness –caring and showing a willingness to help others, to protect them, and preserve for them a home.

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TEA Partiers for Tax Increases (on the rich too)

Robert Waldmann

The gap between public opinion and elite opinions about public opinion never ceases to amaze me. The policy elite seems to have decided that Social Security old age pensions have to be cut. The public is adamantly opposed. It is even more striking that a strong majority supports lifting the payroll tax ceiling (66% favor 27% oppose). This is demonstrated by the latest Lake Partners exit poll of 2010 voters (warning pdf from a secondary source). That’s a poll of voters, not adults or registered voters, but the people who just elected a Republican majority in the House of Representatives.

The amazing result is that 59% of self identified Republicans support the tax increase and 60% of self identified Tea Partiers support the tax increase.

There it is, 60% of Tea Partiers support a tax increase. Some of the people whose taxes would go up are not rich, but the taxes of rich people will go up. Tea Partiers support higher taxes and a more progressive tax code so long as they are told that the point is to shore up Social Security.

Full data here (warning 21 page pdf)

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Banks walk away from houses

Tom aka Rusty Rustbelt

The Un-foreclosure

What could be worse than a foreclosure? An Un-foreclosure (HT: Columbus Dispatch) also known as a dropped foreclosure or a bank walkaway.

Although exact statistics are hard to come by, the un-foreclosure is apparently become very common in Ohio, Michigan and Indiana. At some point the bank decides the economics of taking title do not justify further action, and walks away.

The General Accountability Office is investigating the problem, and believes as many as 50% of the drops are in these three states. Senator Sherrod Brown (D, Ohio) has gotten involved.

The mortgage servicer forecloses on the property and evicts the former owners, but then fails to take title to the property, leaving the property in limbo. No owner equals no property taxes paid, no insurance, and probably no maintenance. The property is left to rot, damaging the neighborhood. Ironically, due to the failure of the bank to take title, the former owner may still be on the hook for property taxes, and not know it.

The bad news just keeps on coming.

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Open thread Nov.19, 2010

Premise: The difference between the Irish and U.S. situation is in the breadth of institutions (smaller financial institutions still intermediate and control capital usage), not the foolishness of the leaders in committing to make the banks whole.


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