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Trump’s “Give the Rich a Break” Tax Plan

Trump’s “Give the Rich a Break” Tax Plan

National GOP leaders on Wednesday released a 9-page document that they called a tax “framework” (available here on the Washington Post site) describing in vague terms how they intend to cut taxes for the nation’s wealthiest people while doing very little that serves the government needs. Overall, the GOP framework would amount to about $2.2 TRILLION in less revenue to support federal programs (like protecting the environment from corporate pollutants, supporting higher education loans for students, funding basic university research) (assuming $5.8 trillion loss to lowering rates and shift to territorial system and maybe $3.6 trillion recouped by eliminating as yet unspecified deductions).  See GOP proposes deep tax cuts, provides few details on how to pay for them, Washington Post (Sept. 27, 2017).

  • They promise 3 rates (12%, 25% and 35%, without stating what the applicable income brackets for those rates should be).  That lowering of rates is primarily beneficial to the wealthiest, since the people who just barely get by on their wages (especially with the new corporate regime of calling people in for short shifts, as needed, rather than paying them a regular full-time job) are hit hardest by the payroll taxes that won’t be lowered at all under this plan.  That is, ordinary wage-earners in the middle and lower classes are generally already taxed on a consumption basis–they spend what they earn and have little left for saving for the future.  They pay relative low income taxes but pay significant payroll taxes through withholding on their wages (with no deferral).  This is another excursion into the current GOP’s ‘alternative fact’ universe, where huge tax cuts mainly benefiting the wealthy are sold as a ‘simplifying’ reform that will benefit ordinary people.


  • Although the lowest rate is higher than the poorest wage-earning taxpayers pay now, the planners claim that this is still a tax cut because of the “doubling” of the standard deduction for those taxpayers that do not itemize.  However, the personal exemptions are eliminated, so that the combination of the standard deduction and the higher rate is likely to be at best a minimal cut for small families and an actual tax increase for larger families.  See, e.g., this article.


  • They promise to eliminate the “alternative minimum tax”, a tax provision that was enacted as a safety provision to ensure that wealthy taxpayers who can afford tax planning and generally can most easily benefit from the various loopholes and tax subsidies written into the code would pay some modicum of taxes rather than get off scott-free from any tax burden. The “framework” (page 5) claims that “it no longer serves its intended purpose and creates significant complexity.”  It is admittedly somewhat complex, but not unduly so with modern tax preparation software which makes that complexity a minimal problem.  I have been required to pay the AMT, and it hasn’t made my life or tax return filing more complex.  In fact, the people who owe the AMT should be paying more tax than they would pay without the AMT, and that means it is in fact serving its intended purpose of ensuring that taxpayers cannot aggregate too many of the various haphazard subsidies in the Code to permit them to essentially escape a reasonable tax burden on their economic income.  Elimination of the AMT is a tax break for the well-to-do:  Trump, for example, has had to pay the AMT (real estate developers are one of the much-favored groups in terms of various tax expenditures in the Code that benefit them).

Town Hall Meetings on the Ryan Budget Raise Concerns

Various congressional representatives held town hall meetings recently, and the news channels and print media were abuzz with the lively give-and-take, including shouting matches. See, e.g., House G.O.P. Members Face Voter Anger Over Budget, New York Times, Apr. 26, 2011; Republicans facing tough questions over Medicare overhaul in Budget Plan, Washington Post, Apr. 22, 2011.

The issue–the House’s adoption of the Ryan budget proposal and its clear agenda of overturning New Deal safety nets embodied in the current understanding of Medicaid, Social Security and Medicare.

Those at or near retirement are worried that the Ryan proposal will hurt everybody. The Ryan proposal comes with frequent disclaimers about protecting the already older population and needing to act now to protect our grandchildren, a clear effort to massage the message to appeal to current grandparents. See, e.g., House G.O.P. Members Face Voter Anger Over Budget, New York Times, Apr. 26, 2011 (noting Webster’s statement that “not one senior citizen is harmed by this budget” while implying that it is necessary to prevent grandchildren from “looking at a bankrupt country”); Congressional Republicans go home to mixed reveiws,, Apr. 26, 2011 (noting North Carolina GOP Rep. Renee Ellmers’claim that “If you’re 55 and older, your Medicare and Social Security will not change”).

But the Ryan proposal clearly envisions mechanisms that would likely lead to decimation of these programs–either through turning them into limited vouchers (Medicare proposal); turning the funds over to the states to use as they see fit (Medicaid proposal) or limiting benefits (Social Security proposal) in ways that will –probably sooner rather than later– hurt everybody.

  • These proposals take place in a context of expansive, concerted attacks on these “entitlement” programs, often failing to acknowledge the historic support for these programs or their foundation in the recognition that federal support is required to protect against the abject poverty and humiliating degradation that accompanied the Great Depression;
  • Benefits for elderly and sick Americans are cut to provide savings to offset some of the loss of revenues from tax cuts for Big Business and the wealthy, both of whom already pay relatively low taxes, in what hardly seems a bargain to the working poor, the elderly or in fact the overwhelming majority of Americans who are not in the top 15% income or wealth distribution. (This in spite of Ryan’s claim that there is no huge tax cut for big corporations and the wealthy–he asserts that the proposed 25% rate is “in exchange for losing their tax shelters”. See, e.g., Evening News coverage of Paul Ryan holding Wis. town meetings, at;photovideo )
  • In spite of the high cost for the vulnerable poor and elderly of these budget proposals, they don’t appear likely to achieve their proffered rationale of reducing debt and deficits–in fact, the CBO has said that the Ryan budget proposal will result in higher deficits and bigger debt burdens over the next decade.
  • It appears shortsighted to wring one’s hands about a “bankrupt country” while considering only one potential solution, especially when that solution is highly detrimental to the most vulnerable populations, and without considering the full facts regarding the amount of debt, the ability of the U.S. to weaken the dollar further to aid unemployment and debt payment, the ability of the U.S. to raise taxes judiciously rather then merely cutting spending, or the ability of the U.S. to let the tax law play out as it is currently slated to do (with the Bush tax cuts that were extended 2 more years over their originally intended short life due to sunset in 2012). As Jim Johnson, a former Ryan supporter who has “grown increasingly disgusted” with Ryan noted, “[Ryan] says Medicare is unsustainable. I’m thinking, ‘Yeah, it’s because medical costs are out of control.’ …Why isn’t he attacking it at that level?” Congressional Republicans go home to mixed reviews, CBS
  • Any voucher system for health care will inevitably fail to cover increasing health care costs, resulting in rationing even the most basic health care by socio-economic class–the very problem that Medicare, Medicaid, and the limited health care reforms undertaken by the last Congress were intended to address. The Center for Budget and Policy Priorities concluded that out-of-pocket medical costs would skyrocket for low-income seniors; the Washington Post’s Fact Checker Glenn Kessler (in GOP Lawmakers tout Medicare reform by stretching a comparison to the health benefits they receive, Apr. 29, 2011) notes that the CBO analysis concluded that the Ryan Medicare system would pay only 32% of health care costs by 2030, compared to 70-75% if traditional Medicare remained in place.
  • Addressing the problems in the U.S. health care system solely by market means that put the onus on health care recipients to seek cost-savings has failed miserably over the last forty years and cannot help but fail more spectacularly when the Medicaid backup is weakened and the nature of health care needs is such that one of the best antidotes to market problems (the only one permitted in radical market thinking that objects to regulatory safeguards)–informed consumers who can review options and select among competing providers–is simply not applicable. Car accident victims don’t shop for surgeons; cancer victims don’t know enough to select based on price; etc.
  • The Ryan proposal appears one-sided in its decision to cut spending on potentially vulnerable populations rather than to address the means through which health care is provided or to consider ways to control profit-taking in the health care system. The market ideology of the proposers leaves many options that might work better off the table (single payer; tax on excessive compensation; revamping the non-profit hospital system; attaching strings to the R&D and other tax expenditures in the tax code; using the clout of a national system to negotiate better doctor and drug pricing for Medicare and Medicaid, etc.);
  • Many of those states that would acquire more control over the use of Medicaid funds are controlled now, as is the House, by people who have announced their intent to cut taxes on the wealthy and business while cutting or taxing pensions and health benefits for public employees and cutting funds available for Medicaid and other poverty-directed programs; it is not a difficult leap to see the interrelationship of these trends;
  • Plans to cut benefits for those who may enjoy them in the future pave the way in at least two ways for decisions shortly thereafter to cut benefits for those who currently enjoy them: first, by creating lowered expectations; second, by creating an unfair disparity that supports an “us against them” attitude between the current elderly and those who will get lesser benefits in the future. (Note that this resembles the way the right has encouraged an “us against them” attitude of private workers, who have been deprived of union benefits through the harsh anti-union tactics used by Big Business, against public employees, who have generally benefited in the past from more reasonable attitudes towards unions fostered in legislative bodies that have, in the past, understood the nature of the bargain that public employees make (which might be summarized as ‘work hard, get paid less than you could in the private sector, and accept later benefits in pensions and health care for lesser salary/percs now).

Is is surprising that left-leaning activist groups like Move-On point to the Ryan budget proposal as a “naked, unapologetic attack on working Americans for the sake of Big Insurance and the riches of the rich” (quote from Move-On email on this matter)?

Inequality–does it matter? should taxes address it?

Bruce Bartlett’s December 15, 2009 piece, Inequality: A Problem?, states Bartlett’s agreement with Dalton Conley that

“the left should stop worrying so much about inequality per se–its costs are overstated, as well as the benefits of greater equality. Instead …
liberals should concentrate more on helping the poor and less on beating up
the rich.”

Now, before we even get into the inequality stuff, you’ll notice that the statement above is loaded with presuppositions. It pre-supposes that liberals are extraordinarily focused on “beating up the rich” and that they are not currently very interested in “helping the poor.” Further, it presupposes that whatever “beating up on the rich” involves, it cannot “help the poor.”

Are liberals focused on “beating up on the rich”? I expect Bartlett would point to bloggers (such as myself) as examples. I have rather persistently argued for higher taxation of the rich and super-rich through more progressive rates and elimination of the capital gains preference which results in low effective tax rates on those whose income is predominantly income from financial assets. The income tax changes over the last four decades have eroded progressivity–instead of the 70% or 90% rate that we had at times in the past on very high incomes, the super-rich with multimillions of adjusted gross income pay the same marginal rate as the merely rich who have more than about $350,000 annually. The rich and super-rich derive the most benefit from the biggest loopholes in the tax code, like the mortgage interest deduction, the charitable contribution deduction, and the property tax deduction. They are the ones who buy muni bonds and get to exclude the interest from income, so that the rate of return on munis is set with the rich as the targeted customer (high enough sp that the exclusion makes the return on munis (with no tax) better than the return on corporate bonds (after tax)). Is that line of argumentation “beating up on the rich”? No, quite assuredly it is not. The wealthy don’t merit punishment for being wealthy. But taxation is not punishment. Taxation is merely the exaction of appropriate tribute based on societal members’ ability to pay, to ensure that the state can continue to function appropriately in service to all its citizens. Making the case that the status quo is overly solicitous of the rich and super-rich is not “beating up” on the rich.

Are progressives not “helping the poor” and in fact beating up on the rich rather than focusing on the poor? No and No. There are lots of ways to help the poor, including volunteering, giving to charities, and others. Many progressives are engaged in all of those ways of helping the poor. We mentor in schools, give to food kitchens as well as to environmental organizations, donate canned foods at Christmas, and work in our communities for better schools, better transportion, better jobs, better shelters, less discrimination. But none of those are enough in a society that has become stressfully bipolar between the well-to-do and the rest (not to mention, the making it okay and the truly down-and-out). Progressives, that is, cannot easily help the poor and ignore the way that wealth has eroded the democratic society in which we all exist, because that erosion is eating away at the possibilities for the poor to pull themselves out of poverty.

Bartlett goes on to say:

I think he is right. I have never understood how I am worse off if
the top 1% of households increase their share of national wealth or income as long as the absolute level of wealth and income of the other 99% is
unchanged. It may be aesthetically displeasing, but it doesn’t impose any
actual costs on anyone as long as the pie is not fixed.”

(Beale here again) The growing income disparity is not merely aesthetically displeasing (which it is) or environmentally harmful (which it is, as the wealthy consume many times their share of the world’s resources in rambling from one multi-million mcmansion to another) or humiliating for many (which it is, especially for those growing numbers in the “servant” class who work at the whim of the wealthy and live in unsatisfactory conditions while watching the wealthy waste in a night what could feed their children for a year). It does impose costs, even if the pie is not fixed. Those costs include the long-term impact to broad-based growth when wealth becomes more and more concentrated in the hands of a very few. And one is worse off when the top 1% of the households increase their share of national wealth to the detriment of everyone else. A society with such wealth imbalances is a society that also has enormous power imbalances. Wealth creates power, and that power is almost invariably used to further the aims of those holding it. Democratic institutions are particularly vulnerable, since wealth and power permit the capture of agencies and legislatures, so that the institution is thwarted from serving the broader constitutency in order to do the bidding of the wealthy oligarchs who hold the reins to power. It is this sense in which the populist anger expressed by the teapartiers is most distressing–it is misdirected, seeing evil per se in government and good per se in “private enterprise” and unable to understand the important role of government in standing as protector between the private corporatocracy and citizens.

Bartlett continues:

[N]either does it follow that there is no limit to how much we can soak the
rich without average people suffering some of the consequences. We really
don’t want the rich spending all their time figuring out how to hide their
wealth from the tax man or engaging in conspicuous consumption; we’d rather that they invested their wealth in businesses that will increase their wealth but also create jobs and income for the rest of us, too.

Hmmm. First, we are nowhere near “soaking the rich” in this country. IN fact, we have been making sure, with almost every change to tax policy undertaken in the last four decades, that the rich sat high and dry and comfortable. Moving them down a notch or two to the benches on the same level with the rest of us won’t begin to soak them–it will, in fact, hardly be felt. Second, while we definitely don’t want the rich spending all their time hiding their wealth, telling them that they can just keep it all without paying a fair share of taxes is not the alternative. Decent enforcement rules will go a long way to solving the problem of hiding wealth–broker reporting, which most think is going to happen this year, will help, but restoring funding to the government’s collection efforts and requiring more audits of the wealthy than of the Earned Income Tax Credit would be the best ideas. (I’m not even so sure that I don’t want the wealthy engaging in conspicuous consumption. AT least that way there would be less to pass down to heirs and less possibility of sustainable oligarchy.) Taxing the wealthy moves the dollars to the government, which moves the dollars out into businesses that provide services the government buys, and then those businesses invest the dollars. I like that better than depending on the wealthy to invest and create jobs for the rest of us. I fear they are just as likely to invest as they so often have in the past–in emerging economies where they suck out the natural resources and leave those populations without jobs or much to show for their foreign input, without doing a thing to create jobs here either.

Farther on, Bartlett suggests taxes cannot assist a move to less inequality because their only effect is “by discouraging the rich from earning income.” There the Chicago School thinking comes out–the idea that taxes distort decisions, and if you tax the income of the rich, they just will do without the income. No one has yet satisfactorily explained why the rich don’t still like 50% or 65% of $X better than 0% of new $X. The substitution of leisure for income is a possibility, of course, but that would actually not be bad at all, if it succeeded in capping the amount of wealth for one family and created a gap into which someone else could step to earn money.

Finally, Bartlett suggests that we should do what Europe has done, suggesting that Europe has accepted the compromise of VATs as a conservative tax along with extensive social welfare spending from that tax. This is misleading, since Europe generally has a VAT as a supplement to the income tax (and, in the case of France at least, a bunch of other taxes as well). And it is disingenuous, since tax policies that Bartlett has supported (zero taxation of capital gains) or, apparently, VAT instead of an income tax, would not raise enough in revenues to fund the huge military obligations of Iraq and Afghanistan as well as an improved welfare state. Methinks Bartlett’s version of acceptable social welfare spending would be significantly lower than most progressives’.

There is a lot in Bartlett’s statement that is worrisome, but perhaps the most for me is the disregard for the impact of inordinate inequality on democracy. Most of us don’t think about democracy very often, and we seldom talk about it among diverse groups in ways that can enhance its institutions and its sustainability. A discussion of inequality that so completely disregards the impact of the kinds of gross inequalities that we are seeing more of in this country–where a CEO may earn in half a day what an average worker in his company earns in an entire year, where every single member of the national body that is most influential on our laws (the Senate) is in the highest bracket of the income tax and “rich” in any reasonable measure of the benefits and burdens of society that they bear– is itself cause for concern for our future.

Another writer this month had similar thoughts. Christopher Hayes ends his article on “The Great Leap”, a story of China and its growth and expansion as a world financial power, with the following paragraph comparing the trends in the U.S. and China.

We tend to view China as posing an alternative and threatening model for
the future, one that’s by turns seductive and repulsive, the source of envy and contempt. But after a while I wondered if we aren’t in some way converging with out supposed rival. China has managed the transition from a
repressive, authoritarian, impoverished country to an industrial, corporatist oligarchy by allowing a loud and raucous debate while also holding tightly onto power. Perhaps we are moving toward the same end from a democratic direction, the roiling public debate and political polarization obscuring the fact that power and money continue to collect and pool among an elite that increasingly views itself as besieged on all sides by a restive and ungrateful populace. Hayes, the Nation, Jan. 11/18, 2010, at 17.

Agribusiness, Food, Vegetarianism—-and Taxes

[cross-posted on ataxingmatter–see posting there for additional comments]

As some of you may know, I am one of the many people who eat a vegetarian diet. I don’t eat cows, pigs, fish, whales, sharks, chicken, turkey, sheep, wild game, tame game… As I sometimes say when people ask me about my diet, I eat everything you eat, except for a very short list of items–the critters that can move themselves from one place to another (or move their appendages) under their own propulsion.

(Note that we often have two words for animals that we eat–their live-form word –e.g., cow, sheep, pig– and their edible-corpse form word –e.g., beef, mutton, pork. That evolved when we borrowed the Romance language word for what we ate but kept the Germanic language word for the animals.)

It started when I was a child–I was one of those who would cut the meat into tiny pieces and then spread it all over my plate so it looked like I’d eaten it. The idea of eating a cow, with those beautiful liquid brown eyes, was repulsive. (My father came from a family with thirteen kids in the hills of Tennessee, so I’d seen cows up close.) I even took a whole piece of veal once and hid it behind the dining room cabinet (taking it out to the wastebasket after it dried)! I refused to eat the squirrel and venison that my dad brought home from hunting trips (mostly, if not always, somebody else’s kill). I even refused to let my cocker spaniel share in that dead stock.

But now that I’m an adult, why do I maintain that diet? I get asked that a lot.

Funny, nobody says (with shocked exression)–“Gee, you eat meat? Why would anyone ever want to eat a toxins-laden dead corpse of an animal that lived a horrendous life and suffered an agonizing death? ” But they do often ask–usually treating it as a good-natured tease about a wacky alternative diet–why I’d want to avoid eating corpses.

James McWilliams got me thinking about this again this morning, when I read his “Bellying up to environmentalism” in the Washington Post for Nov. 16, 2009, where he noted that we should be asking questions in the reverse, that make meateaters feel uncomfortable at defending their own meateating. After all, there’s really no good reason for eating meat other than that someone is so addicted to its taste that he or she can’t exert the willpower to do without it.

The whys for not eating meat, on the other hand, are legion. Let me just list a few here, from the mundane to the truly significant:

1. cooking is easier–throw veggies in a pot and steam them; throw veggies in a pot and make soup, throw veggies in a fry pan and fry them, throw beggies in a pot and bake them; and variants thereon

2. clean-up is a lot easier–none of that icky clinging greasy layer of animal fat on every pan

3. refrigerated leftover use is easier–throw the leftovers in a pot and steam them (etc. from one above) and there’s none of that congealed lard on top of the leftovers in the fridge

4. rotten vegetables in the fridge are less disgusting than rotten corpses in the fridge

5. a decent diet is generally considerably cheaper

6. the more people who adopt a vegetarian diet, the more people who are currently going hungry could be fed

  • one of the many articles I’ve read said something that stuck with me (sorry, don’t have the cite)–that it takes the same resources to feed one meat-eater that it takes to feed about 80 vegetarians.
  • That’s because of the huge waste as you use up primary foodstuffs to feed the animals that will be slaughtered, then use up primary energy stuffs to slaughter, process, ship and deliver the meat to the meat eater, compared to even transported vegetables (localvore, with vegetables, is even more saving of resources)

7. without meat-eating, there are no feedlots where animals literally eat and sleep out the remainder of their short lives in their own shit

8. you can have a small flock of hens who live out their natural lives with nice living conditions (indoor/outdoor)

  • disclosure: I had one hen who lived to be 22; she was still laying eggs up until the week or so before her death from natural causes

9. Hens lay bigger and bigger eggs each year that they live past the first year w(hen most are slaughtered) and they still lay fairly regularly

  • disclosure: 6 eggs every 7 days was typical in my experience

10. Even hens have personalities

  • disclosure: when I lived in upstate New York, I had one named Gumption who loved to fly up to the top of a two-story house and survey her domain, and another named “kiss me” who would follow me around all day like a pet dog

11. Animals that we eat are as smart as–or smarter than–animals that we keep for pets (pigs compared to dogs, for example)

12. Animals care for their young and suffer when their young are taken from them (think dairy cattle and the young that are bred so that the mothers will give milk)

13. Some eating of animals is even more obnoxious than the norm (think “veal calves” that are taken and put in tiny sheds to they can fatten without any musculature development or “foie gras” where geese are fattened by having food stuffed down their throats with a tube)

14. Life is precious: there is no reason to sacrifice animal lives to lead a decent human life, so why do it?

15. Agribusiness–the main way that animals are raised and sold for meat–is an environmental nightmare

  • use of fertilizers to grow the grain that is fed to the cattle that are fed to the humans results in polluted land, water and air and uses up petroleum and other resources
  • consolidation results in long transportation (inhumane to animals; wasteful of oil and gas resources)
  • the subsidies (including some tax expenditures) for agriculture have gotten out of control–costly, misdirected, ill-conceived, and essentially now a form of corporate welfare for huge agribusiness enterprises

16. A meatless diet is healthier for humans than a meat-based diet, so we could cut health-care costs by simply cutting out meat

17. The process of butchering animals is a cruel leftover from the dark ages–people who work in slaughterhouses are inured to suffering, and that may well spill over into their “normal” lives outside work

18. The process of butchering animals is itself a source of harm–

  • sick animals are slaughtered, making it possible that eaters of that dead flesh will be sickened as well (mad cow disease);
  • animals are slaughtered in the midst of their own excrement, and some of that excrement gets into the food chain (making people sick as well);
  • the leftovers from the animal slaughter have to be gotten rid of somehow, leading to even more water, land and air pollution
  • workers are exposed to awful conditions–not just the process of mercilessly killing animals day in and day out, but also the risk of infection and injury on the line

19. The use of antibiotics in animal feed (given to healthy and unhealthy animals alike) ensures that resistant strains will develop even more rapidly, while leaving excess antibiotics not absorbed by the animals to pass out in their urine and excrement and into the land and water to act as toxins to others (including fish and birds and humans) leading to additional environmental nightmares…

20. Agribusiness pig farms and cattle feedlots are a blight on any humans within their vicinity (as well as a disaster for the natural world, noted above under environmental problems) from the stench of the manure (that can pollute the countryside for miles around) to the ugliness of the barren, treeless manure-laden fields.

So what to do? Maybe we should enact an excise tax on all meat products, like a”sin” tax for sodas and sweets and cigarettes. Comments, anyone?

PS Arthur C. Clarke has a great sci fi short story, taking place some time in the future, when a more advanced civilization than ours is aghast at the purported discovery that their ancestors used to–cover the young ones’ ears–eat dead corpses of animals…..Clarke’s ideas were way ahead of his time in lots of ways.

Home Buyer Tax Credit Extension

by Linda Beale

Part of the reason for our ongoing Great Recession is that we have had so many measures in the tax code to favor home ownership that (i) banks started to think of mortgage securitization business as money growing on trees and (ii) homeowners started to think of their homes as money-growing trees. The bubble burst when the whole house of cards almost came tumbling down–it was revealed that banks had lent money through sub-prime mortgages to people who couldn’t afford to make the payments, that people were hoodwinked into getting subprime mortgages (at higher costs) that could have afforded a regular mortgage, that house prices could not just keeping climbing.

Nobody liked the way the “market correction” worked–foreclosures, evictions, job losses and home losses heaped on top of each other. Made especially bad when banks foreclosed on individuals for falling short on payments, refused to accept “short sales”, and then ended up letting the houses deteriorate and selling them for much less in foreclosure sales. Made worse when we watched the bailout drama unfold, with investment banks and companies like AIG (investment banks’ friendly insurer and credit default contract counterparty) saved with trillions of dollars of federal tax money on the line, while home foreclosures for ordinary people continued.

Congress couldn’t get the will to pass a bill to permit modification of home loans in bankruptcy–the one bill that would have done the most to save current homeowners from losing their homes and the social/economic disruption such a loss causes.

But somehow it managed, as part of the economic stimulus bill, to pass a tax cuts to encourage people to buy homes who hadn’t owned one before. I thought that bill was problematic from the beginning. First, it was not an ineffective stimulus, in that it was not as effective as, and much more costly than, permitting mortgage loans to be modified (i.e., principal to be reduced) in bankruptcy. Second, it was not fair–those who’d bought homes earlier and were now struggling with underwater mortgages got no help, but someone who managed to put together a deal made possible by the many foreclosed properties would also get a boost from tax funding.

At least, I thought, it’s temporary–so we won’t be saddled with another one of those monster tax expenditures that gets built into the Code and pricing expectations and is well nigh impossible to repeal, like the home mortgage interest deduction and the home gain exclusion provisions that permanently distort investment decisions in favor of housing over many other valuable capital expenditures–such as college and post-graduate education.

Well, it looks like that was wrong. Congress is close to enacting an extension and expansion, trying to save the crisis caused in part by the housing bubble by creating incentives to invest in more housing. Today (Nov. 2), the Senate voted 85-2 to invoke cloture on H.R. 3548, the Worker, Homeownership, and Business Act. It will extend the deadline for the $8000 credit through the end of April 2010. But it will also provide a new credit to existing homeowners to help them buy a different house. See BNA Daily Tax RealTime (nov. 2, 2009 at 7:20pm). Presumably that’s aimed at those who’ve relocated and have to sell and maybe have rented for a few years but are still unable to sell for full price. See this blog for more info, which also notes that the expansion will also raise income limits to $225,000 for married couples.

Egads! I can see why real estate professionals and people who will get the windfall would support this. But it is hard to believe that it makes sense to provide more tax breaks for housing, especially when it is only to a select group that just happens to be in a position to purchase this year, who are already likely to get pretty darned good deals anyway, and especially if it includes well-off couples who make almost a quarter million annually (the current credit phases out starting at $150,000 for couples)? Especially when this extension alone will cost us another $17 billion or so.

They’re also extending and expanding the provision allowing carrybacks of business losses. Before, it was just open to small businesses. Now, there will be an NOL carryback for five years for all businesses, so long as they had losses in either 2008 or 2009.

The only good thing in this bill, as far as I can see, is the provision for extension of unemployment benefits.

The New Black Gold–will tax boondoggles never cease?

The tax code seems to foster one boondoggle after another. The ones getting my attention this week are the alternative fuel tax credits enacted in the 2005 highway bill. This was intended as a credit to encourage the development of alternative fuels for vehicles to cut our reliance on global warming-causing fossil fuels. See Natural Gas Vehicles for America, “Regulatory Summary: Alternative Fuel Credit-IRS Notice 2006-92″ (Sept. 30, 2006) (discussing the alternative fuel credit of 50 cents a gallon under section 11113 of the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users). But it was modified in 2007 , and as a result the paper mills discovered a credit for a process the industry had been using since the 1930s –it just had to add (in some cases) enough diesel fuel to qualify.

The paper industry essentially cooks wood pulp to turn it into paper, and a byproduct of that process is a dark sludge called “black liquor”. The companies use the black liquor as a fuel to generate steam for electricity. And by adding just a small amount of real diesel fuel to the mix, they qualify for the alternative fuel mixture tax credit. And, not surprisingly, they love the “extra cash flow and income.” See Sharon, Paper Industry: Don’t Kill Fuel Credit, NPR (June 6, 2009) (reporting a $10 million savings from the credit in the past year for one company).

Sen. Bingaman suggested that the paper industries discovery of this black gold hasn’t got much to do with the development of alternative fuels.

The alternative fuel mixture credit was originally intended to encourage
the development and use of alternative fuels as a way to decrease global warming
pollution. But by adding fossil fuel to their black liquor mix, Bingaman
says, paper companies are rewarded 50 cents a gallon for doing the
opposite. Id.

Bingaman wasn’t the only critic. Canada joined with other countries to demand that the US end the paper industry subsidy, threatening a trade action because of the way the credit had distorted global pulp markets. Schott’s Vocab: Black Liquor, NY Times, June 11, 2009.

Some companies had in fact used diesel all along in their effort to burn their own byproduct to produce energy, while others had changed the fuel blend to benefit from the tax credit. Companies claimed that they are doing exactly what the law intended. The Natural Resources Defense Council disagreed, calling it a “travesty” because it has meant reduced reliance on biomass fuels and increased consumption of fossil fuels “in order to rip off the American taxpayer.” Lawmakers May Limt Paper Mills’ Windfall, NY Times (Apr. 17, 2009).

This particular credit is supposed to sunset at the end of 2009, but companies wanted it continued. Let’s face it, few corporations that have found a piece of corporate welfare in the Code are interested at all in seeing that “entitlement” turned off. The amounts are significant–for International Paper, $71.6 million for just one month from mid-November to mid-December last year. See Papermakers Dig Deep in Highway Bill to Hit Gold, Washington Post, Mar. 28, 2009. Not surprisingly, representatives of pulp mill states seem to think the credit is great–Republican Olympia Snowe called it a “critical lifeline to thousands of paper mills”. Snowe, What the Black Liquor Tax Credit Means for Maine, Apr. 25, 2009.

The Obama administration wanted to stop the billions flowing under this provision to the paper industry, we were told in May. See Obama Seeks to Halt Alternative Fuel Tax Credit for Paper Industry, Washington Post, May 9, 2006. At $6 billion a year, eliminating the credit–even retroactively for 2009 (it expires in December, unless extended)– for the paper industry could generate some revenue and at least some in Congress were considering just that. See Black Liquor Tax Credits: A Closing Loophole for the Pulp & Paper Industries, Accuval, Sept. 2009. Of course, the companies lobbied for maintaining it through 2009 and in fact for extending it for at least three years. See Appleton Papers et al, Comments to the Senate Finance Committee on the Alternative Fuel Mixture Tax Credit (July 9, 2009).

Now, it turns out that there is another biofuel tax credit that already extends through 2013, passed as part of the 2008 Farm Bill. See Voegele, IRS: Cellulosic biofuels are eligible for tax credit, BioMass Magazine (Dec. 29, 2008) (describing Notice 2008-110, which describes the tax credits under sections 40A, 6426, and 6427(e) for biodiesel and cellulosic biofuels, enacted in the 2008 Farm Bill for the years 2010-2013). See Committee on Finance, Finance Committee Leaders Detail Elements of Farm Bill Tax Package, page 3, Apr. 14, 2008.

Black Liquor is certainly cellulosic, so the mills may have something even better to replace the expiring black liquor alternative fuels tax credit–instead of 50 cents a gallon, they may qualify for the cellulosic biofuel credit amounting to $1.01 a gallon! Let’s see. That’d apparently mean a subsidy double the current one invested in “incentivizing” paper mills into doing what they’ve already been doing since 1930–converting wood waste into a source of energy to power the mills. See Donville, U.S. Paper Makers’ Black-Liquor Tax Break May Reach $25 Billion, (Oct. 15, 2009) (quoting Mark Connelly that we should “Think of this as a potential black-liquor II” and Marty Sullivan as forecasting “$25 billion in tax reductions for pulp producers claiming the cellulosic biofuel tax credit over the next three years”).

This credit for the paper industry is of slightly smaller magnitude than the bailout we gave the auto industry. In both cases, the argument is that these industries employ many who would otherwise lose their jobs, and who but the government will be willing to help them through these extraordinarily tough times. Yet both industries produce a product that we ought to learn to do without–the gas guzzlers that Detroit was producing pollute the air, require the destruction of vast land for roads, and use enormous amounts of energy in the process, while pulp mills chew up world forests at a frightening rate producing tons of waste that must be absorbed.

I wish it were as easy to get Congress to increase the taxes owed by the superrich as it is to get them to add boondoggles for one industry or another in the form of a tax break in the tax code. I want to see alternative energy succeed, but I’m not sure these tax credits are targeted sufficiently at the new technologies that we should be encouraging.

Wyden’s Proposal for taxing oil and gas speculators

Ron Wyden, Democratic Senator from Oregon who serves on the Senate Finance Committee and the Energy Committee, is generally considered a liberal, though with a mixed bag of positions that hardly qualify on all grounds. He is against the estate tax and favors lowering rates of capital gains taxes, neither of which makes sense, from my perspective, in an economy already tilted to favor capital (and hence those in the upper distributions) and in need of revenue. His positions on the environment have been fairly consistently progressive. Back in 2004, for example, he worked on legislation to “get tougher” on responses to oil spills and get kinder in expediting loans to people impacted by those spills. See this press release. He has supported the US addressing CO2 emissions even if the big economies of China and India don’t (S. Con. Res. 70, May 15, 2008).

So what happens when you put tax policy (where I’m not terribly impressed with many of his positions) together with environmental policy (where he seems to have a fairly decent record)?

Today, Wyden introduced a bill (S. 1588) that deals with both of these issues. It would end a tax break currently enjoyed by speculators who trade in oil and gas. They’d have to pay tax at the ordinary income rates, rather than getting the preferential capital gains rates (o% for the first two income brackets, then 15%). This would be achieved by treating the gains as short-term capital gains (or losses) even if they would be treated as long-term under other provisions. Gains in trading by tax-exempt investors–e.g., Harvard’s endowment and similar funds– would be taxed as unrelated business income.

What’s the rationale? “To amend the Internal Revenue Code of 1986 to provide the same tax treatment for both commercial and non-commercial investors in oil and natural gas and related commodities, and for other purposes.” The first section has a short title that perhaps reveals more–it is the “Stop Tax-breaks for Oil Profiteering Act” (STOP Act). The bill also calls for a study of commodities exchanges and the effect of tax policy on the demand and price of commodities, and particularly of oil and gas.

I’m no expert in this area, but this sounds at first impression like a good idea. Wyden’s point is that those who use such fuels in their businesses have to purchase those commodities and treat any profits on related trading as ordinary. But speculators pay lower capital gains rates on trading profits, which may well mean that their trading distorts the market and raises prices.

Of course, I’ve long argued for eliminating the capital gains preference altogether, either through repeal of the provision in the regular tax or adding it as an adjustment in the alternative minimum tax. While I’d rather there be a wholesale change–to remove all the characterization games that taxpayers play and to help move the tax system towards a fairer one that does not give such inordinate preference to owners of capital over workers, these commodities trades may be an appropriate target, especially given their likely impact on pricing in an era when we can expect increasing oil and gas scarcity.

Any thoughts?

Kornhauser’s Tax Literacy Project–about time

edited 072909 to correct link for giving online, by Linda Beale

One of my big gripes (in case you haven’t noticed) is the ease with which ordinary Americans can be fooled about tax issues by organizations, often ones with greedy purposes of furthering their own interests in lower taxes for themselves, that publish misleading or downright untruthful information and just keep repeating it. This has been a special problem with estate taxes, which hit only the very wealthiest amongst us and for a relatively small amount even for the large estates. It is also true of income taxes in general, the way flat taxes would work, the rationales for the corporate tax and many other key tax policies. Lobbyists frame the issues with inflammatory language, and most are too unknowing about the way tax really works to recognize the ruse for what it is.

Here are two of my pet peeves. (Many tax practitioners–and lots of tax academics–disagree with me on these.) Some of the worst phrases that have furthered the cause of cutting taxes for the wealthy so that the majority of Americans can either pay higher taxes themselves or do without the kinds of things that governments, not private enterprises, do best are “death taxes” and “double taxation” .

Much of the estate that is taxed when a decendent passes it along to his heirs as an unearned windfall has never been taxed at all during the decedent’s lifetime, in the case of wealthy people with mostly financial assets. If there is not a good-sized bite out of the estate upon the transfer to beneficiaries, there’ll be very little contribution to taxes from an agglomeration of wealth that has benefited enormously from the US legal system. And the heirs won’t have any taxes to pay either–they’ll just keep holding or will have a stepped up basis when they sell. All that is is a system for perpetuating or creating oligarchy–letting the wealthy become a ruling class with all the money and all the power without contributing anything much to help pay for the system that made all the wealth possible in the first place.

Similarly, the phrase “double taxation” is used to make people think that taxing corporations is unfair. But the decision about whether we tax entities or not is a reasonable one for societies to make. We made it a long time ago–deciding that we should treat corporations as taxpayers and thst we should tax capitalist owners of corporations on the income they are paid out of their corporate ownership as well. It is one of the most progressive parts of the federal income tax when it works, and it makes a lot of sense from a democratic egalitarianism perspective. Corporations can horde money and have enormous power because of their ability to lobby for their own benefit. Look at the way Big Pharm and Big Insurance has gotten Max Baucus in their pocket–putting money in his, and getting out of that a watered down health bill that doesn’t do half of what we should be doing to move towards a single payer, single provider system like the most advanced countries already have. The presupposition behind the term “double tax” is that you are overtaxing and that you are taxing somebody that shouldn’t be taxed. Yet corporations get to deduct salaries and purchases paid for with their own stock, which doesn’t cost them a thing to issue. Corporations get basis in property transferred to them by shareholders in exchange for issues of corporate stock, even though that stock does not represent an after-tax investment by the corporation. So the taxable income of a typical corporation is generally much less than the corporation’s actual economic income, and in addition to these provisions that are basic to the way the corporate tax is set up there are lots of provisions for reducing corporate tax–too fast depreciation, deferral of income through matching rules coming from court opinions where judges have been unduly influenced by financial accounting (the seventh circuit, in particular), depletion allowances and myriad other tax expenditure items favoring corporations, etc. Since Reagan, there has been a huge push by the same economic thinkers that brought us our current Great Recession to undo the US classical corporate tax system. It’s really a push for giving more money back to the wealthy and cutting the size of government. (Of course, the push for lower corporate taxes, more uneconomic credits like the R&D credit, etc., and the push for zero taxation of corporate dividends have been coordinated and have the same effect of huge reductions in taxes on the wealthy.) But it’s all argued in the name of economic efficiency–a theory without basis in reality that is probably more to blame for the greed that dominates today’s society and the consolidation of huge megafirms–Big Pharm, Big Oil, Big Banks, Big multinationals in general–than anything else. And strangely, no one makes the same “horrid double tax” arguments about the maid being taxed on her salary paid out of already-taxed compensation income of her lawyer-employer…

Of course, even for those who don’t pay much attention to the various organizations that are peddling particular views of tax issues and haven’t been particularly swayed by the push for repeal of the”death tax” or repeal of “double taxation”, there is a huge gap in information that isn’t filled in by the media. Most schools, for example, don’t teach much of anything about the tax system in the basic civics course. Most students don’t take a finance course in college, much less a course that teaches the basics of tax law. In fact, most law schools don’t even require that their graduates have a basic course in federal income tax law before graduating. (That is a major problem, I think, since almost every legal issue has tax consequences, one way or another, that a competent attorney should be aware of.) As a result, we are frighteningly ignorant, as a society, about how tax works, why it works that way, and what other possibilities there are. And as a consequence of that ignorance, it is all too easy for citizens to be in the dark about the consequences of tax legislation under discussions, for lobbyists to influence members of Congress to vote in their favor on bills (the public won’t know the difference), and for members of Congress to fail to fully inform their constituents about the tax issues they are voting on (or even, in far too many cases, for the members of Congress to understand, as when a certain person from Colorado supported windfalls in the agricultural bill based on his apparent failure to understand the difference between gross income (revenues without business or other deductions) and adjusted gross income (revenues with business deductions taken into account)).

So I’m glad to see Marjorie Kornhauser’s project take off. Maybe others won’t agree with me on these pet peeves, but if we have better educated citizens who have more basic knowledge about taxes and how they work, it won’t be so easy to bamboozle them into voting against their interest to support tax cuts for the wealthy and service cuts for everybody else while the boondoggles for the big corporations just keep pouring out (like an agreement that the government can’t use its bargaining power to get cheaper drugs, or that Big Pharm can prevent generics being sold for 12 years and other crap that is getting put into the “health reform” bill that is becoming, like so much else these days, a corporate giveaway).

What’s her project? It’s called The Tax Literacy Project–“a non-partisan effort to informally educate the public about taxes through popular methods such as web-based games and other internet activities.

Want to help? Donations are being accepted. What follows is the appeal, direct from Kornhauser and the ASU Foundation.

Money from Taxes Helps Every Person Every Day!

But polls show most of us do not understand anything about our taxes.

Why should we bother learning about taxes? Because:

Tax ignorance costs each of us money. Many of us pay more tax than we actually owe.

Because tax ignorance makes it hard to discuss and enact sound tax policies, we are not able to raise money in the fairest and most efficient manner possible.

Why do we need taxes?

Taxes support democracy. They fund government services and goods such as court systems and national defense that protect your life, your property, and your constitutional rights.

Taxes support economic growth. Governments use taxes to encourage economic growth in numerous ways such as maintaining a stable currency, enacting and enforcing laws that protect both workers and employers (their lives and proeprty), and helping to build and maintain large and dependable energy, transportation and communication systems.

Taxes support your daily quality of life. They help you and your family buy a house, breathe clean air, have safe food and drugs, travel safely and efficiently on highways, trains and planes. Taxes help pay for your health care (in the form of tax benefits or direct care) and they pay to educate you and your family. Taxes help you at work (e.g., enforce contracts, provide a safe workplace) and help you at play (e.g., national parks).

Become a part of a solution to the problem of tax ignorance by contributing to the Tax Literacy Project.

What is the Tax Literacy Project?

It is a non-partisan effort to informally educate the public about taxes through popular methods such as web-based games and other internet activities.

Can you support the Tax Literacy Project regardless of your political outlook?

Yes, the Project’s only pupose is to help provide information about tax, not to support any particular type or amount of taxes. No matter what kind of government people want, that government will cost money. Americans must understand how that money can be fairly and efficiently raised.

How can you make a charitable contribution?

Make your donation payable to the Tax Literacy Fund at (no appeal code necessary) or Make your check payable to the ASU Foundation and mail to the Sandra Day O’Connor College of Law, Arizona State University, PO Box 877906, Tempe, AZ 85287-7906. Please write Tax Literacy Fund (3000 4788) in the memo line of your check. Thank you in advance for your support.

For more information or to become involved–

Please contact the project director: Marjorie E. Kornhauser, Professor of Law, Sandra Day O’Connor College of Law, Arizona State University,, 480.965.0396.

All funds will be deposited with the ASU Foundation, a separate non-profit organization that exists to support ASU. YOur payment may be considered a charitable contribution. Please consult your tax advisor regarding the deductibility of charitable contributions.

by Linda Beale

This is one of those weeks when almost everything has a tax angle. Let’s survey.

Michael Jackson’s funeral

Should taxpayers have to foot the bill for the extra security surrounding celebrity memorial services? Does an estate get to deduct the costs of gala receptions connected with a memorial as part of the funeral?

International relations and UBS

The Swiss have announced that they may seize the 52,000 account records that UBS holds in Switzerland for what are likely many American tax cheats if the federal court in Florida orders the bank to turn them over in response to the government summons. I’ve already written about that on A Taxing Matter, here. This is a game of chicken, where either the US or UBS/Swizterland will blink. UBS has substantial assets in this country in connection with its banking license here. The US has jurisdiction over UBS for various reasons and UBS has already admitted to criminal violations and given up about 250 names. Looks like UBS clearly violated its qualified intermediary agreement with the US. If I were betting, I’d bet that the Swiss will be the ones to blink, if the US only has the backbone to stand firm.

Health Care Reform

Democrats are wrangling over how to pay for much needed health care reform. On the Senate side, they are apparently taking very seriously the proposal by Citizens for Tax Justice that the Medicare tax be extended to all types of unearned income, not just compensation. (This proposal, of course, has been around, and I’ve made it quite often myself. CTJ has a specific version, and provides state-by-state figures on what it would mean.) Obviously, since the top quintiles own most of the capital assets, this would be primarily a tax increase on them (resulting in a slight increase to the capital gains rate from 15% max for most types of gains to 16.45%).

Defense of Marriage Act

Back in the 1990s, Congress caved to the “values” lobby (i.e., the group that wants to impose its “values” on all the rest of us, and whines about having others’ values imposed on it if it thinks anybody wants to do anything differently from the way it thinks they ought to want to do it) and passed the so-called “defense of marriage act” (DOMA). DOMA says the terms “spouse” and “married” in federal law can only refer to legal ties between a man and a woman –i.e., “traditional” marriage. Of course, there are lots of references to spouses and marriage in the Internal Revenue Code–spouses can transfer property to one another without tax. Spouses can receive alimony when they divorce. Spouses can file joint returns. Spouses can exclude medical benefits from their spouse’s medical insurance. And etc. When DOMA was passed, no state permitted gay marriage. Now, several states do. And finally, one of them is challenging the law as unconstitutional (which, you won’t be surprised, in my view it clearly is) because it “interferes with the Commonwealth’s sovereign authority to define and regulate marriage” and “constitutes an overreaching and discriminatory federal law.” See complaint; AG files first suit challenging DOMA, Mass. Lawyers Weekly, July 13, 2009. Good for Massachusetts.

Developers and tax-exempt bonds

A retirement community in Central Florida may owe millions in back taxes. The Villages is made up of “community development districts” that have been used to pay for roads, sewers and water lines that are essential to the developers’ being able to sell their developments. The IRS examiner has concluded that $64 million of bonds issued in 2003 shouldn’t have been entitled to tax exemption because the board members were all affiliated in one way or another with the developer, and the developer (an ardent Republican, natch) had gotten about $60 million from the district for golf courses and small parks that cost the developer less than $8 million to build. A pretty solid return, in a period of not so solid returns for people conducting their business without the aid of the US government. Other bonds are also being investigated. See Fineout, Florida Communities Pay Attention to a Tax Case, NY Times, July 10, 2009.

Banks, TARP purchases of toxic waste, derivatives regulation (or not)?

Obviously, the entire economy is impacted by the credit crunch and the huge amounts of money the federal government has put on the line for banks, including its plans for “partnerships” with private equity to buy up toxic waste, with the government standing to get a pittance of the up side (if there is any) but to lose most of the downside (which there will likely be a good deal of). Meanwhile, proposals for regulation of derivatives are tepid at best. “Standard” derivatives would be sort of regulated, but “exotic” ones (the ones, by the way, that have been customized to use in tax shelter deals, or to fool accounting regulators) won’t be. You can create a customized derivative to do anything the standard one would do, so who would do a standard derivative if both options exist? (nobody) And why do banks need to be doing exotic derivatives in the first place? (they don’t). Derivatives have been just one other way to manipulate tax burdens and get the right bundle of features at the right point to claim the right application of a particular part of the Code. Swap away the taxes. But here we are, letting banks continue without restructuring, aiding them with more US dollars on the line, and doing it in a way that allows big aid recipients in the bailout (like GE) to get bigger on more bailout-related dollars from the government, while continuing to engage in the same behavior as before. What part of this makes sense?

More tax shelter enablers biting the dust

This week, another of the BDO Seidman “tax solutions group” (that ended up being a euphemism for tax fraud promotional group) pled guilty to various charges in connection with the son of boss type deals done with defunct law firm Jenkins & Gilchrist. You can read all about that on A Taxing Matter here and more about the shelters and other cases, here and here. Will these guilty pleas help put a stop to the overzealous “tax minimization” norm. For a little while, I suspect. And then the race will be off again in a new cycle of tax shelters.

And being in Michigan, I can’t leave out Ave Maria (hat tip to Paul Caron at Tax Prof)

Ave Maria Law School, a Catholic school founded and funded by Tom Monaghan (of Domino’s Pizza wealth), is being moved lock, stock, barrel and faculty to a new city and campus in Florida. A number of tenured faculty objected to the apparent high-handed way in which Mr. Monaghan was able to control the school’s decision making on the matter. They are no longer at the school and are contesting their termination. Monaghan claims that they are Catholic ministers and therefore the school is exempt from suit in civil court under the First Amendment religious protections. See Baldas, Ave Maria claims ‘ecclesiastical abstention’ over termination of three law professors, National Law Journal, July 9, 2009. As one commenter on the Tax Prof posting on this noted–so do the faculty take the ministerial housing allowance exclusion?

Enjoy, and have a great weekend…..

SILOs –more action needed?

Tax advantaged “sale-leasebacks” with strapped-for-cash municipalities (SILOs, in the ever-present tax acronym set) came back to light when the Washington Metro train crashed a week ago. The cars were ones that were involved in the metro authority’s SILO deals with various banks, and the authority didn’t have any spare cash left to fund replacements. See this A Taxing Matter posting on the Metro SILOs, Jun 25, 2009.

I won’t rehash the entire discussion of SILOs covered there. Just note that the transit SILO deals were contrived to permit banks to “buy” the federal income tax depreciation deductions on municipal equipment. The municipalites couldn’t use the deductions, since municipalities are tax-exempt entities. The buying corporations were subject to US tax (usually, a bank) and they were looking for every way possible to avoid paying tax–they would essentially pay a fee to the municipalities, sharing part of their tax savings, for serving as an accommodation party in these deals. They “purchased” the municipalities’ property with nonrecourse debt, and then had “lease income” that was offset by both interest deductions and depreciation deductions, generating artificial losses from the accelerated depreciation. Most of the purchase price was set aside to defease the seller’s obligation under the lease, with the excess the fee for accommodating the tax shelter.

Jim Lehrer covered transit agency SILOs in the March NewsHour, depicting many of the transit agencies as motivated by their desperate need for capital–and encouraged by the federal Dept. of Transportation to use these means to get some. So there is a vicious double circle of irony here, that as states and localities cut taxes during the GOP years, under the flawed assumption that lower taxes means higher revenues, the states and municipalities also cut back on the funding needed by these important public service agencies, and an arm of the federal government encouraged these transit agencies to enter these deals, and at least 30 of them did, serving as accommodation parties in tax shelter deals with banks, so that banks would pay even less taxes than they already did.

Future SILOs were generally undone by new section 470, one of the few revenue raising provisions in the 2004 tax act. (The 2004 Act otherwise amounted to a pile of tax breaks for US corporations, such as the rate cut on repatriating offshore profits. It was misleadingly labeled the “American Jobs Creation Act” to signal the purported justification for all the corporate tax breaks. It didn’t lead to the creation of many jobs.) The new section disallowed to U.S. taxpayers a “tax-exempt loss”, defined as the excess of deductions other than interest and interest deductions allocable to tax exempt use property over the aggregate income from the property. Exceptions allowed certain “true” leases–essentially, ones in which the obligation of the seller-renter had not been defeased by the payment from the buyer and where the buyer had actually put some equity into the deal (the provision requires only 20% of genuine, at-risk equity). There are fewer tax benefits to true leases, so even with the exception, the provision deters leasing deals.

One hitch–the act only applied prospectively, and the transit deals (just one of the varieties of SILOs that were being done at the time of the 2004 change) got special treatment, in that any deals in the pipeline were allowed to be grandfathered in as long as they were done by 2006!

The IRS pursued the old deals with pre-2004 Act tools and won SILO (and LILO–the earlier “lease in, lease out” deals) cases against Fifth Third Bank, BB&T, PNC and other banks. See, e.g., IRS Wins AWG SILO Tax Shelter Case, TaxProf Blog (May 28, 2008) (dealing with the Ohio court’s decision in 2008-1 USTC 50,370, in favor of the IRS in a SILO case involving two US national banks’ “purchase”, with nonrecourse loans from German banks whose proceeds were used by the “seller” to defease the lease obligation, of a German waste facility used to acquire beneficial tax deductions); Ohio Judge Rejects Tax Claims on $423 Million Alleged Purchase of German Facility Made by Cleveland & Pittsburgh-Based Banks, DOJ (May 30, 2008); DOJ, Ohio Jury Finds Cincinnati-based Bank not Entitled to $5.6 Million Tax Refund (LILO transctions); BB&T Corp, 2008-1 USTC 50,306 (4th Cir.) (striking down tax treatment of financial service company’s lease of Swedish wood-pulp manufacturing equipment as a LILO shelter); DOJ, Statement of Assistant Attorney General Nathan J. Hochman on Today’s Decision in BB&T Corporation v. United States (Apr. 29, 2008).

After the court victories, the IRS offered a SILO settlement for these deals that permitted them to keep 20% of their claimed tax losses and waived the penalties, if they terminated the transactions. IRS Commissioner’s Remarks Regarding LILO/SILO Settlement Initiative (Aug. 6, 2008); Donmoyer, IRS Offers to Settle 45 leasing Tax-Shelter Disputes, (Aug. 6, 2008); Service Launces LILO, SILO Settlement Initiative, J. Acct. (Oct. 13, 2008). It later announced that “hundreds of taxpayers settled similar cases involving tens of billions of dollars.” DOJ, Justice Department Highlights FY 2008 Tax Enforcement Results (Apr. 13, 2009). On leaving office, Korb statedthat “taxpayers representing over 80 percent of the dollars involved have elected to take advantage of the settlement initiative.” See Korb Interview. (Dec. 19, 2008).

The settlement offer required taxpayers to terminate the transactions by Dec. 31, 2008, else they would be deemed terminated by that date, with taxpayers still able to claim the partial loss benefit through the actual termination date if they terminated the transaction by Dec. 31, 2010. That’s a fairly strong incentive for termination, but the municipalities may be on the hook for hefty termination payments under their contracts. Even worse, the AIG situation provided a perfect trigger for causing a technical default to apply. AIG guaranteed these deals, so when its credit rating went down, the transit agencies are in technical default and liable for hefty penalty payments. (see NewsHour video, above).

There are real problems here, including the idea of one agency of the government supporting its “clients” (transit agents of municipalities) entering into deals like this that result in corporate tax cheats robbing the government of important revenues. Another problem is the idea of the banks that were instrumental in causing the fiscal crisis–by risky, speculative behavior that disregarded the systemic risks–using AIG’s collapse because of that fiscal mess as an excuse to get municipalities that are especially cash-strapped because of the fiscal crisis (and finding their ability to borrow or get tax revenues severely restricted) to pay over large penalty amounts under their shelter contracts. It seems like an unfair windfall for tax cheating Big Banks at the cost of the people.

And of course, just extending the 2004 provision to make grandfathered SILO/LILO transactions illegitimate and their tax deductions disallowed doesn’t solve this problem, since these are windfalls that the tax cheaters would get under their “lease” contracts.

Rep. Menendez of NJ has proposed a potential solution–the “Close the SILO/LILO Loophole Act” S. 1341, introduced in late June. His bill, he says, would “help protect WMATA and other transit agencies who are being threatened by banks seeking to gain a windfall from the current economic climate while potentially putting transit agencies at risk.” See press release, As Lease-Back Deals Are Raaised as an Issue in Metro Crash, Menendez Says legislation Can help Unwind Deals, (Jun 26, 2009); Davis, Bill Would Tax Banks that Sue Agencies , Star Ledger (Jun 24, 2009); Letter from Menendez to Hoyer (Jun 26, 2009) (noting a need to “protect transit agencies from banks who are seeking to exploit a technicality that would result in agencies having to pay banks millions of dollars that could otherwise be used to shore up equipment and ensure safe operations, even though they have not missed a single payment to the bank”). The bill imposes an excise tax equal to 100% of any “ineligible amount” collected by “any person other than a SILO/LILO lessee” as a party to a SILO/LILO transaction. Ineligible amounts are proceeds from terminations, rescissions, or remedial actions in excess of those under defeasance arrangements. The bill also would deny deductions for attorney fees and other costs attributable to seeking to recover ineligible amounts.

It’s messy, but it does end up with the right results, it seems. I note, though, that there are no additional co-sponsors at this time. Doesn’t look like Congress is hopping on the bandwagon.