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

## Presidents, Congress, and Economic Growth – The Return of Presimetrics

by Mike Kimel

Presidents, Congress, and Economic Growth – The Return of Presimetrics

If you’re a regular reader, you may know that a couple of years ago, Michael Kanell of the Atlanta Journal-Constitution and I had a book published called Presimetrics. Nobody much read the book, but we had a lot of fun writing it. In it we looked at how Presidents performed on a wide variety of issues – everything from curbing abortions to the murder rate to the national debt. We tried to be as objective as possible, always using data from whichever source collected it, and treating each variable the same way.

Thus, for instance, when looking at the murder rate – we collected data from the FBI. Then we measured the change in the murder rate from right before a President took office to right before a President left office. We found that on a number of issues, particularly economic ones, Presidents who did well followed similar policies to other Presidents who did well. Conversely, Presidents who did poorly on a given issue tended to either show it not much attention or follow the same approach to the issue as other Presidents who did poorly. That is to say, policies matter.

In this post I want to focus on economic growth, but I want to do something a bit different than what we did in the book, and a smidge more complicated than the graphical approach in Presimetrics.

In the book, we looked at the annualized change in real GDP per capita from before a President took office to right before he left office. This time, I want to look at the following variable: Annualized Growth rate over the next four years less Annualized Growth rate for the previous four years.

Thus, for, say, 1981, Reagan’s first year in office, that variable would have this formula:

annualized growth rate from 1981 to 1985 less annualized growth rate from 1977 to 1981

Thus, it would show the difference in the growth rates between Reagan’s first four year term, and the four year term of his predecessor, Jimmy Carter.

I went with four year periods because just about every President in the sample served at least one four year term (or most of at least one four year term), and four years is enough time to see if policies are working or not, on average.

The BEA’s data on real GDP goes back to 1929, so the variable could be created for the years from 1933 to 2007.

I ran a regression attempting to explain this change in the growth rate using the following dummy variables:

1. A Republican becomes President. This variable took values of 1 in 1953 (the year Ike took office), 1969 (the year Nixon took office), 1975 (Ford actually took office in August of 1974, but I rounded up for Presidents who took over in the second half of the year), 1981 (Reagan), 1989 (Bush 1) and 2001 (Bush 2). The variable took values of zero all other years.

2. A Democrat becomes President. This variable took values of 1 in 1933 (FDR’s first year), 1945 (Truman took office in April 1945), 1961 (JFK), 1964 (LBJ took office in November of 1963), 1977 (Carter) and 1993 (Clinton).

3. A Republican President begins his second term. This variable took values of 1 in 1957 (Ike), 1973 (Nixon), 1985 (Reagan), and 2005 (Bush 2).

4. A Democrat begins his second (or plus) term. This variable took values of 1 in 1937 (FDR), 1941 (FDR), 1949 (Truman), 1965 (LBJ), and 1997 (Clinton).

5. A sitting Republican Veep ascends to the Presidency. This one takes values of 1 in 1975 and 1989.

6. A sitting Democrat Veep ascends to the Presidency, which occurred in 1945 and 1964.

7. Republicans take over both houses of Congress from Democrats. That happened in 1947, 1953, and 1995.

8. Democrats take over both houses of Congress from Republicans, which we saw in 1933, 1949, 1955 and 2007.

Note that variables 7 and 8 only count instances where one party took control of both houses of congress from the other party and not from a mixed Congress. Some instances of mixed Congresses looked a bit like one party control so I decided to simply those out.

Obviously, the fit of this simple model won’t be that great as all the variables are dummy variables, and that’s the sort of thing that really doesn’t help your cause when it comes to patterns in the residuals, but hey, the goal here is not to explain the change in growth rates (I’ve done that before, and perhaps will follow up this post) but to look at which of these variables.

If, for example, a given party’s Presidents tend to enact policies that produce growth, we would expect to see the coefficient associated with that party’s presidents be positive and statistically significant.

Results of the regression are shown below.

Figure 1

I could comment, but from past experience, I know that if I do, I’ll be excoriated by people insisting I’m a partisan. So I highlighted the significant and almost significant variables, and I’m calling it a day. Please leave your thoughts about what this means and why in the comments section.

Well, I guess there is one comment I do have to make as I wipe a touch of egg off my face… the coefficient (and quasi-significance) of the Democrat Veep ascendance variable kinda throws into question at least part of what I wrote here.

And now, my usual closing statement: if anyone wants my spreadsheet, just drop me a line. I’m at: my first name (mike), my last name (kimel – one m only) at gmail.

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## Summers says taxes must increase

by Linda Beale

Summers says taxes must increase

For once, I find myself agreeing with Larry Summers. At a conference in Washington sponsored by the Brookings Institute, he emphasized that tax cuts and spending cuts cannot appropriately resolve the US budgetary issues.

“It is a near certainty that we are going to need a significant increase in revenues, and it seems to me that any discussion of tax policy needs to start there,” Summers Says U.S. Tax Overhaul Should Raise More Money, Bloomberg.com (May 3, 2012).

Without additional taxes, “close to inconceivable” cuts to earned benefits programs like Medicare and Social Security would be required, he noted. Id.

It’s important that people start talking some sense about taxes since they are the lifeblood of a democracy and the primary way that a government can act to limit the concentration of wealth in the hands of the few that diminishes democracy by promoting oligarchy.

I suspect most of the insiders in the Republican Party know this and know that if common sense reigns, taxes will be raised on the upper crust and raised somewhat on most of the middle class, in order to ensure that the US can deal with its crumbling infrastructure, support its citizens, not just the wealthy ones, in developing their human capital, and provide a decent and sustainable standard of living for most of our people. That is why the Republican Party is engaged these days in brinksmanship legislative (and judicial) action. As the extreme right has gained representation through strong turnout of the more ideological base,

Republican congressmen and women have played a one-note tune, using the filibuster in the Senate to stymie majority rule and repeatedly relying on counterfactual assumptions about the economy and meaningless soundbite promotions–such as the idea that tax cuts result in greater revenues (not so) or the notion that Social Security is bankrupt (not so) or the idea that lower income Americans should pay more in taxes rather than increasing the taxes paid by the extraordinarily wealthy upper-crust that has seen its taxes lowered during the three-plus decades of reaganomics–to convince Americans that a return to the laissez-faire, corporate titan economy that reigned at the turn of the nineteenth century would lead to prosperity.

One of the major problems facing this country today, and its economy, is the huge gap between the income of a few ultra rich and the rest of us, and the near-poverty level of income for many Americans. Countries with such inequalities generally have poor quality of life indicators on a lot of fronts, and the US is no exception. Teenage birth rates, illiteracy, health care, low-birth weight babies, unemployment–a litany of societal ills accompanies high inequality within a society, and the US suffers from almost all of them.

Why then is it that our policymakers do not recognize the central role of the tax system in either fostering inequality–as it has been for thirty years under reaganomics, as we reduced the role of the estate tax, provided an extraordinarily preferential rate for capital gains (the type of income mostly enjoyed by the very wealthy), and otherwise provided deductions and preferences that had the effect of redistributing upwards from the vast middle to the few at the top. Yet right wing economists like Martin Feldstein refuse to recognize the devastating impact of huge inequality on the economy.

“Our problem in the income distribution area is poverty, and you should be concerned about combating poverty, not inequality.” Id (quoting Martin Feldstein).

Perhaps Feldstein has bought the Kool-Aid of the American myth, that we are a society with great mobility, no class structure, where everyone can “rise by his own bootstraps” and become a millionaire. That mobile and classless society may have almost existed in the golden years after World War II, when veterans came back, went to college on the GI Bill, and raised families in small towns across the US that were dominated by locally owned stores and regional food supplies. But the US society has lost a considerable amount of that mobility. Yes, there are some at the bottom who win the lottery (literally or figuratively) and move up, and there are some at the top who don’t stay at the top. But generally in this country, the father’s wealth determines the wealth of the son, who inherits it at no tax cost and generally increases it because that wealth is mostly represented by capital assets whose income is preferentially taxed at very low rates.

Ultimately, this nation would be best served by merely allowing the ill-considered Bush tax cuts to expire as they are slated to do under current law. Then hopefully a more reflective group of legislators can get together and discuss how best to modify our tax system to deal with the issues that face us in this century–global companies that move their intellectual property offshore in order to avoid taxes and who no longer have any sense of loyalty to country; too big to fail institutions in banking, insurance, and global multinational corporations; and excessive subsidies for companies that are making billions in profits and paying almost no taxes, such as the oil and gas industry, the agribusiness industry, and multinationals like GE.

I think a big part of the answer requires rethinking in a direction quite different from the one that the right is pushing: to considerably narrow the tax-free provisions for mergers, acquisitions and spin-offs; to modify the transfer pricing formula to reject treatment of intellectual property developed in this country as “sold” to a controlled subsidiary; to recognize the need to protect domestic industry from globalization that leaves us too dependent on imports; and to re-invigorate anti-trust and consumer protection laws so that industries can no longer sell products and leave customers without recourse to information or repair because of unintelligible call services in the Philippines and “company policies” that refuse to reimburse a customer for damage done to a printer by a cartridge sold by the printer manufacturer.

http://ataxingmatter.blogs.com/tax/2012/05/summers-says-taxes-must-increase.html

## Tax Foundation–up to its usual nonsense

by Linda Beale

Tax Foundation–up to its usual nonsense

The Tax Foundation claims to be a nonpartisan institute interested merely in researching and informing people about taxes. That’s far from the truth, however. Its work is aimed at one purpose–convincing Americans that they pay too much in taxes and that government is too big.
One of its most useful distortions is its self-proclaimed “tax freedom day.” It adds up all the state and local and federal income, excise, social security, property, and other taxes on individuals and businesses,including corporations, and then considers how many days of work, at a consistent amount per day, are required to raise that amount of taxes. See Tax Freedom Day 2012, Tax Foundation.

But of course the entire enterprise of tax freedom day is baloney. Nothing in that formula actually relates to what an individual earns or what an individual pays in taxes. But because the date is announced as the day that Americans quit working to pay government and start working for themselves, many media outlets and readers interpret the “tax freedom day” as meaning that they themselves must work that long to pay off their share of taxes. There is no such thing as an average American, and it isn’t clear at all that many of the excise, corporate and other businesses taxes are borne by ordinary Americans. Moreover, thinking about this on an individual level means averaging in the super-rich like Warren Buffet with ordinary Joes like “Joe the Plumber” and poor folk like those barely scraping by on teacher or janitor salaries results in sheer nonsense. There is no such thing as an “average” amount of taxes paid or a day in the year when each and every American can say–this is the last day I have to work to pay taxes.

The Tax Foundation often goes through some rigmarole to insist that it doesn’t ever imply that the “tax freedom day” is anything other than a cute figure of speech that captures a meaningless statistic. But look at what it says in its announcement of the 2012 date:

Tax Freedom Day® 2012 arrives on April 17 this year, four days later than last year, due to higher federal income and corporate tax collections. That means Americans will work 107 days into the year, from January 1 to April 17, to earn enough money to pay this year’s combined 29.2% federal, state, and local tax bill.

Now, a typical person reading those two sentences would conclude that this is a straightforward statement that that particular American will work 107 days to pay off his own personal taxes. Nothing could be further from the truth. Some would have to work only a few days to pay off their share of taxes, while others don’t work at all–those living on capital gains from inherited wealth–and still others may work considerably longer. The statistic is meaningless and by confusing ordinary Americans into thinking that it can be applied to their own particular situation it becomes detrimental to understanding of the US tax system or government costs.
Further down, the Tax Foundation makes this statement.

Tax Freedom Day is a vivid, calendar-based illustration of the cost of government, giving Americans an easy way to gauge the overall tax take.

And there one sees the anti-government bias of the Tax Foundation. By using a formula that pretends to show Americans how hard they must each work to fund government, and providing no counterbalance (such as showing how many people are benefitted by various government programs, or how much harder each American would have to work without the various subsidies for home ownership, financial institution soundness, health research, and old age health care and retirement benefits), the Tax Foundation succeeds in convincing many Americans that government is indeed a wasteful exercise that demands too much of their own sweat.

Just about as bad is the more recent Fiscal Fact: Americans paying more in taxes than for food, clothing and shelter, Tax Foundation (May 3, 2012). This look at government tax collections (using the same data used for the tax freedom day calculation, so including all taxes paid by individuals or businesses, whether income, property, excise or other and whether paid to local, state or federal government) and compares that to government figures for expenditures on essentials.

This is again misleading, as the Tax Foundation itself acknowledges, since it counts taxes that are used for social programs that pay for those same essentials. Redistribution programs that use the collective wealth to support those who cannot support themselves (vulnerable elderly and children, unemployed, mentally incapacitated, prisoners) serve a vital government function. Similarly, it again deals with national statistics that ordinary people are likely to interpret as applying to their own situations, even though the statistics cannot be applied in that way. Consider the wealthy billionaire with a private island and seven multimillion dollar homes in the US–taxes collected on those properties will be much more than what ordinary folk pay on their single residence. Likewise, taxes collected from billionaire CEOs will be much more than those collected from ordinary workers, even though the CEOs may also have considerable investment income that is taxed at ridiculously low preferential rates. So no conclusions can be drawn from aggregate numbers of housing, food and clothing expenditures to individual taxpayers, just as no meaningful analysis can be drawn from aggregate federal, state, and local expenditures to benefits received (or costs borne) by individual taxpayers.

So why does the Tax Foundation produce such deceptively simple statistical studies that are cast in terms that are bound to mislead ordinary Americans about the role of taxes and government and even the amount of taxes they pay? It seems likely that the primary purpose is to mislead ordinary Americans about the role of taxes and the amount of taxes they pay. The Tax Foundation gets my maximum “boo” for its shameless exploitation of statistics to mislead Americans about both their own tax burdens and the role of government in our lives.

crossposted with ataxingmatter

## Leonard says GOP Is intent on sabotage

by Linda Beale

Leonard says GOP Is intent on sabotage

Andrew Leonard of Salon writes often about tax and economic issues. In Friday’s column, he addressed the increasingly obstructionist tactics employed by far-right representative Paul Ryan and a coterie of other GOP representatives who are willing to sacrifice core systems in order to keep the military machine humming (and putting money into pockets of GOP arms merchant constituents) while ensuring that anything that provides aide to the less well off is labeled as a disrespected “entitlement” that can be chopped and destroyed at will. See Andrew Leonard, Sabotage: the new GOP plan, Salon.com (May 4, 2012).

Ryan introduced a bill on Wednesday that would achieve the Holy Grail of GOP political goals–continuing the ridiculous Reaganomics militarization by ending the sequester that would cut \$600 billion from the military entitlement budget, and at the same time cutting drastically almost every single program that protects ordinary Americans. See Ryan offers bill to end sequester in bid to eliminate defense cuts, The Hill (May 4, 2012).

As a commenter on the Hill piece noted, the US military budget is overblown and needs to be cut.
The U.S. Spends More On Defense than Next Top 14 Countries Combined Wiki List of countries by military expenditures SIPRI Yearbook 2011 – world’s top military spenders in 2010 (in billions).

1. United States…..698.0
2. China…………… .119.0
3. United Kingdom….59.6
4. France………….. ..59.3
5. Russia………….. ..58.7
6. Japan…………… ..54.5
7. Saudi Arabia……..45.2
8. Germany………… 45.2
9. India ………………41.3
10. Italy…………. ….37.0
11. Brazil…………….33.5
12. South Korea…….27.6
13. Australia………….24.0
15. Turkey………….. .17.5

Unbelievably, one of the things that Ryan would prefer to cut, rather than see some of the military’s perks diminish, is Title II of the Dodd Frank Act. I guess the radical right in the GOP has a short-term memory: it thinks there is no need for the government to have liquidation authority over the too-big-to-fail banks. Instead, it apparently would prefer more outright bailouts of the well-to-do bankers who speculate with our economy for their own private gains. Oh, and the GOP-led House financial services committee wants to defund the Consumer Financial Protection Bureau–to again allow the banks and insurance companies to undertake the rapacious exploitation of ordinary Americans through exorbitant and unconscionable fees. Other GOP “reforms” include medical liability, with the GOP protecting medical establishments from facing the piper when they make mistakes that they could have avoided through appropriate care.

Pretty clear just how much the Supreme Court’s terrible decision in Citizens United with its warped view of free speech in relation to elections is distorting our government’s ability to function for the good of ordinary citizens.

crossposted with ataxingmatter

## Corporate Profits and Corporate Taxes

by Mike Kimel

Corporate Profits and Corporate Taxes

Based on a comment by reader Troy, the following graph from FRED, posted without comment:

Figure 1

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## Taxes and Economic Growth: Real World & Simulations

by Mike Kimel

Taxes and Economic Growth: Real World & Simulations

Over the past few years, I’ve posted many times on an unpleasant reality: despite the fact that so many people believe otherwise, in general, lower taxes do not result in faster economic growth. It is really too bad, because we could all be better off if only lower tax rates led to faster economic growth. However, the association between slower econoimc growth and lower tax rates is something we can see in data from the US, whether we use national level data, state and local data, or anything in between.

Here’s a post I wrote not that long ago noting that when top marginal tax rates are below about 65% or so, cutting taxes is associated with slower economic growth and raising taxes is associated with faster economic growth. Here’s something a bit more academic showing the same thing.

As I’ve noted before, there’s a logical reason why lowering top marginal rates slows economic growth (except when top marginal rates are very high), and it should be obvious to anyone who has ever run a business: the easiest way to avoid, or at least postpone paying taxes for is not to show taxable income. If your business looks like it will show a profit, reinvest the revenues, pushing up costs and voila, you don’t have any profits for the IRS to tax. But, by doing so, you are also strengthening the company, which means setting the stage for faster growth in later years. And you’re more likely to follow this strategy, rather than consume your profits, the higher the tax rate.
Notice that this little story depends entirely on the self-interest of people in the economy. Money collected in taxes could be put in a big hole and burned, and the story would still work. (Of course, the story works better if whatever is collected in taxes is actually used productively, but that isn’t a requirement.)

The response I’ve gotten via e-mail and commentary comes overwhelmingly in two flavors: a. You lie about the data and you don’t understand how people react to changes in tax rates. b. That may be what the data shows, but it can’t possibly work in theory so it must be wrong.

I can’t help the group folks in group a – I’ve offered up my spreadsheets, and frankly, anyone should be able to replicate it – this stuff ain’t rocket science. But this post is for the folks in the second group.

For grins and giggles, yesterday I made a simple little simulation tool in Excel which is intended to look at the behavior of a very wealthy person reacting to changes in tax rates. In any given period, the person consumes some percentage of the wealth they happen to have. The remainder, the savings, are allowed to grow. Individuals get a benefit from both consumption and holding wealth.

Their goal is, given the tax rate, to maximize the discounted weighted consumption & wealth over all the periods of their working life. I set tax rates at 0%, 10%, 20%, … 90%, and used Excel’s solver tool to determine the percentage of wealth they will select under each tax rate.

Results are as follows:

Figure 1

Given the parameters selected, here’s what we find: the higher the tax rates, the lower the less of their wealth people consume in any given period and overall. However, the greater the wealth they accumulate… which is essentially the story I’ve been telling to explain the data. As noted previously, in general, higher taxes lead to faster economic growth.

a. The simulation is simplistic, and it does not show the quadratic relationship between taxation and growth we see in the real world data. I believe that this can be resolved simply by taking into account satiation resulting from consumption.
b. The simulation indicates that increasing tax rates makes people worse off (the discounted sum of the weighted wealth and consumption tends to be lower for higher tax rates).
b. i. However, they leave behind more wealth. Put another way – individuals in any given period are made worse off, but their descendants are made better off.
b. ii. A more realistic scenario probably shows increased returns as wealth increases. (Mr. Romney, to use one example, has investment options available to him that you and I do not, and Mr. Buffett has options available to him that Mr. Romney does not.) Higher taxes might very well make a person worse off today but better off in the long run. Its great to live during the Gilded Age, a period during which tax rates fell from 75% to 24%… provided you die before the effect of the Gilded Age spits out the Great Depression.
c. Because of the way taxes are defined in this model, they play a similar role to compulsory savings. Put another way: this model can also explain countries with relatively low taxes but compulsory savings, such as Singapore.
d. The model also explains Tyler Cowen’s Great Stagnation.
e. Government spending does produce a benefit, though that is ignored by this model.

I haven’t decided whether I want to spend time improving the simulation tool, but, as usual, if anyone wants my spreadsheet, drop me a line. I’m at my first name (mike), my last name (kime), at gmail.

## Reform that "high" statutory corporate tax rate? Not necessary

by Linda Beale

Reform that “high” statutory corporate tax rate? Not necessary

I got an interesting item pushed to me from an online-MBA website blog where today’s item was on “10 Big Businesses That Barely Pay Taxes“. It looks at companies like GE, duPont, Verizon, ExxonMobil, FedEx, Boeing, Google and others that aggressively maximize the offshoring of profits and the onshoring of deductions (like the “domestic manufacturing” reduction in the tax rate, the research deduction, etc.) in order to tap out on taxes at zero or awfully close thereto.

The companies tend to dislike such coverage of their very low tax rates of only slightly more than 0% when they are quite loudly (and hypocritically) protesting how uncompetitive the 35% statutory rate makes them. The site notes that most of the companies have claimed that they pay a higher rate than the one noted here–usually by counting their financial statement deferred taxes as though they were already paid. Deferred taxes, however, are just an accounting way of noting the possibility of future taxes–they may never be paid (for example, if offshore profits are not repatriated, or if corporations are successful in lobbying for another very-low-tax repatriation holiday), and years of deferral can convert what appear to be substantial taxes into de minimis amounts, since that money is meanwhile invested and earning more money.

Here are some excerpts (not in the same order as in the blogpost itself):

1.Boeing may own and operate factories and research facilities all over the U.S., but the mega-corporation isn’t paying much back to the government for the privilege of doing business in this country. In fact, the company hasn’t paid anything at all for three years running. Over those three years, Boeing made \$9 billion in profits but didn’t pay anything in federal income taxes, actually getting back more than \$178 million in tax benefits. …
2. … A study found that in 2008 FedEx paid no federal taxes, which the company claims is an anomaly caused by depreciation deductions. …
3. … Verizon hasn’t paid a cent in taxes for the past three years. …[i]t actually makes money from the government in the form of tax subsidies and is the third largest collector of these benefits in the U.S., … . Like GE, Verizon has denied these tax evasion allegations, stating that they pay billions in taxes every year, but like GE, Verizon is counting deferred taxes in these calculations. …
4.GE has raked in more than \$81 billion during the past decade, but little of that profit has been returned to the government in the form of taxes. While the corporate tax rate has held steady at 35%, GE has paid an average of just 2.3% of its income in taxes since 2002. And that’s just an average, some years the company didn’t pay taxes at all, getting off scot-free in 2002, 2008, 2009, and 2010 …

crossposted with ataxingmatter

## Common Cause Claims ALEC Violated Tax Exempt Lobbying Restrictions

by Linda Beale

Common Cause Claims ALEC Violated Tax Exempt Lobbying Restrictions

The Common Cause organization filed a complaint with the IRS under 26 USC 7623, the tax whistleblower act,  alleging that the American Legislative Exchange Council violated the lobbying restrictions applicable to tax exempt organizations through underreporting and operating in furtherance of private corporate interests.   The complaint argues that “ALEC’s primary purpose is to provide a vehicle for its corporate members to lobby state legislators and to deduct the costs of such efforts as charitable contributions. ALEC drafts “model” legislation provided by its corporate and legislative members, and lobbies for the adoption of that legislation. These goals are fundamentally inconsistent with ALEC’s claimed tax-exempt status as a charitable organization.”

The following paragraphs are from the introduction to the complaint.

This matter concerns the massive underreporting of lobbying by the American Legislative Exchange Council (“ALEC”). While ostensibly a nonprofit organization under Section 501(c)(3) of the Internal Revenue Code, ALEC’s primary purpose is to provide a vehicle for its corporate members to lobby state legislators and to deduct the costs of such efforts as charitable contributions. ALEC drafts “model” legislation provided by its corporate and legislative members, and lobbies for the adoption of that legislation. These goals are fundamentally inconsistent with ALEC’s claimed tax-exempt status as a charitable organization under 26 U.S.C. §501(c)(3), because (i) “no substantial part” of a charity’s activity can be “attempting to influence legislation,” and (ii) ALEC’s activities do not qualify under any of the enumerated purposes of Section 501(c)(3).

This scheme causes harm to taxpayers in two distinct ways. First, ALEC’s activities constitute an abuse of its 501(c)(3) tax exemption, which is reserved for organizations “operated exclusively ” for a limited number of purposes, such as “religious, charitable, scientific … or educational purposes ….” 26 U.S.C. §501(c)(3). Second, ALEC’s corporate members improperly deduct from their taxable income the dues and other contributions made to ALEC; such expenditures are non-deductible lobbying expenses under Section 162(e). In fact, because ALEC solicits very few contributions from individuals, its false claims of tax-exempt status appear driven by the desire of ALEC corporate members to deduct lobbying expenses as charitable contributions.
ALEC’s primary, if not sole objective is to “influence legislation.” Its bylaws state that its purpose is to “formulate legislative action programs,” “disseminate model legislation and promote the introduction of companion bills in Congress and state legislatures,” and “[e]establish a clearinghouse for bills at the state level, and provide for a bill exchange program.” 1 As recently as April 11, 2012, ALEC boasted that “for years, ALEC has partnered with legislators to research and develop better, more effective … legislation. 2Notwithstanding these claims, however, ALEC has reported ”for years“ to the IRS that it has not spent a single penny on lobbying or attempting to influence legislation. These tax returns are patently false.  (Complaint available here, on BNA’s tax service)

The complaint goes on to specify how ALEC develops legislation and works to get that model language enacted.  The following is an excerpt from this portion.

ALEC boasts about how frequently its bills are introduced in state legislatures to show its influence over the legislative process, publishing “scorecards” to demonstrate the high numbers of ALEC bills enacted. [Exhibit 9] In its 1995 scorecard, then-ALEC Executive Director Samuel A. Brunelli explicitly stated that corporations join ALEC to drive a legislative agenda in a cost effective way: “’This was a landmark legislative year in ALEC’s history,’ said ALEC Executive Director Samuel A. Brunelli. ’With our success rate at more than 20 percent, I would say that ALEC is a good investment. Nowhere else can you get a return that high.’” [Exhibit 11] Similarly, in a brochure that ALEC distributed to recruit more corporations for its private sector membership, it claimed that “during each legislative cycle, ALEC legislators introduce more than 1,000 pieces of legislation based on these models, approximately 17 percent of which are enacted. ” [Exhibit 12] It is telling that ALEC expresses its success in corporate terms, as a good “return” on a corporation’s “investment” in tax-exempt lobbying.
Beyond quantifying its influence by measuring how often its lobbying efforts succeed, ALEC trumpets how its Task Forces and other programs provide corporations with direct access to state legislators. In a near textbook definition of lobbying, the recruitment brochure states “ALEC provides the private sector with an unparalleled opportunity to have its voice heard, and its perspective appreciated, by the legislative members.” !d. The brochure further explains that “[t]his partnership identifies issues and then responds with common-sense, result- oriented policies. The two groups work in unison to solve the challenges facing the nation, with results that will define the American political landscape in the 21st century.” Jd. In other words, ALEC provides a network to influence the legislative process and deliver “results” to its private 13 corporate membership – namely, legislation favorable to corporate members’ interests. These statements by ALEC belie any claim that it is engaged in “education” rather than lobbying . The ALEC Task Forces provide a venue for corporations to lobby legislators while deducting the expenses as charitable donations.

The complaint goes on to outline the way ALEC presses for legislation, including issue alerts and one-on-one contacts with key legislators, bill tracking documents, model press releases and talking points to assist legislators in getting its model legislation passed,  hearing testimony by staffers in support of the ALEC legislation, and even  luxury conferences three times annually to which legislators are encouraged to bring families for subsidized work/vacations.

Legislator members on ALEC Task Forces are also eligible for “ALEC scholarships,” which reimburse a legislator’s accommodation, transportation and other expenses to attend the ALEC national conferences. Scholarships are also available for legislators to attend other events, including “ALEC Academies,” which are described as a “two-day intensive program on a specific issue;’ attended by invited members of both the public and private sector. Contributions to the ALEC scholarship fund are made by corporations who are solicited directly by legislators at the individual state level. See Exhibit 18 (a breakdown of payments to the ALEC in Ohio scholarship fund). According to the tax filings of PhRMA, the pharmaceutical lobbying group and ALEC private sector member, it provided \$356,075 to the ALEC scholarship fund in 2010. 13Many of these expenses are likely deducted from corporate taxable income. The ALEC conferences are nothing more than a forum for tax-subsidized lobbying. ALEC provides logistical support in the form of travel, accommodations, entertainment, and family services, in order to facilitate lobbying by ALEC’s corporate members targeting ALEC’s legislative members.

The complaint considers whether ALEC even qualifies as a 501(c)(3) organization.  Suggesting that the only possible qualifying purpose that might be claimed is educational, the complaint concludes that ALEC clearly fails to satisfy any concept of an educational non-profit.

[E]ven if a tortured interpretation of the regulations led to the conclusion that ALEC is not engaged in lobbying, ALEC would fail to satisfy the most basic requirement for 501(c)(3) status – operations that are exclusively for charitable purposes . ALEC’s operations are neither charitable nor educational, much less exclusively so. They are pecuniary and political, and devoted to fostering the enactment of bills that will financially benefit and further the ideological goals of ALEC’s corporate membership.

crossposted with ataxingmatter

## Tax cuts for jobs. NOT! Another tax cut that is not paying out

First a qualification. I am basing the following on info I found on the net. If the info is wrong, then I stand corrected as to who is or is not paying but not as to what happens when a large entity does not pay. The specific city and company are used purely for example purpose because of familiarity. What follows could be any municipality with a similar size company calling it home.

Lately in the city of my flower shop the big talk is a \$10 million deficit in the school department. It’s a funny story. See, the department hired a couple people and these people, along with the help of the city council and the school committee the budget numbers became not real. They budgeted \$59 million but have spent \$66.6 million. The total \$10 million is a 2 year deficit. The funny part…we had a surplus. Though, where the surplus went to no one knows. The school committee insists there was no funny business and even voted down an investigation. So, if there was no funny business, then who gained and what did they gain by covering up a deficit? What benefit is there about lying about a deficit?

Of course, this is also a state funding issue. You see, the city has the typical city size problems that the surrounding town do not have. This article notes:

“The committee chair pointed out that Lincoln has a budget of \$48 million to educate half the students Woonsocket teaches with a mere \$59 million.

“And they don’t have the special needs we have. They don’t even have a quarter of the IEPs we deal with,” she said.”

On top of this, we’re one of those states that has been passing ALEX type legislation. In particular we passed the one that thinks it is smart of a state to set a cap on how much a municipality can raise taxes in any given year. The city notes that default is an option, but is currently begging the state legislature to allow a supplemental tax bill.

## Buffett Rule rejected by Senate

by Linda Beale

Buffett Rule rejected by Senate

The Senate rejected the effort to make tax policy commensurate with the slogans about American values that we parrot freely–opportunity, paying fair shares, etc. Given the now rigid “phantom” filibuster rule requiring a supermajority to pass anything in the Senate, the Republicans –especially if joined by a few of the right-leaning Democrats–can defeat just about any attempt at reasonable taxation.

So Senate 2230 got only a majority of the SEnate (51 votes) in support of the effort to move the Buffett Rule–calling for a phased in increase to 30% minimum tax on taxpayers with income in excess of a million a year.

Minority Whip Jon Kyl (radical rightist Republican from Arizona) said Congress should instead be focussing on the economy. BNA Daily Tax RealTime (Apr. 16, 2012 at 7:35pm). Shows how completely out of tune with reality the Republican right is. Focusing on the divide between rich and poor is the best way to focus on the economy these days. We are so busy redistributing upwards through tax and fiscal policies that we are rapidly driving the middle class into extinction and depriving those who are disadvantaged by income and other demographics (like location in inner cities) of a fair opportunity to live a decent life. Watch Angela Grovers Blackwell on Bill Moyers PBS program (4/15/12) for more on what equity really means and how our policies are ignoring the real equity issues surrounding us.

crossposted with ataxingmatter