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Offshored Assets still in IRS cross-hairs but new disclosure program available

by Linda Beale

Offshored Assets still in IRS cross-hairs but new disclosure program available

As most who follow the issues are aware, the IRS has been focusing for some time on the foreign bank accounts of US taxpayers.  The big break came when the IRS was able to get some data from UBS, including information about particular bankers and mechanisms that US taxpayers were using to sequester significant amounts abroad to avoid paying US taxes on the income.   This has allowed the IRS to pursue leads and draw connections from bankers to accounts to taxpayers, and to pursue criminal prosecutions for international tax evasion in some cases.

There have been two “voluntary programs” for declaring offshore accounts and avoiding potential criminal prosecution with the payment of a set penalty–the first in 2009 and the second in 2011.  The penalty in the second program was stiffer than the penalty in the first program, so that those who delayed had to pony up more to get clear.   The programs have been enormously successful, bringing in more than $4.4 billion dollars, according to an IRS release announcing a reopening of the offshore voluntary disclosure program.  See IR-2012-5.

Under the new program, some taxpayers may be eligible for the 5 or 12.5% penalties but the stiffest penalty will be higher than under earlier versions: 27.5% of the highest aggregate balance in foreign bank accounts during the 8 years prior to disclosure, up from 25% in  the 2011 program.  In addition, of course, participants have to file returns and pay back taxes and interest for the preceding 8 years, and pay any accuracy-related penalties due.

originally published at ataxingmatter

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Romney’s Tax Plan Helps the 1%, Hurts the Bottom 40%

by Linda Beale

Romney’s Tax Plan Helps the 1%, Hurts the Bottom 40%

In spite of having to suffer some closer view of his Bain Capital time–during which the self-proclaimed “job creator” businessman did a lot of job cutting and destruction of going concerns so that his investors could make more money, Romney continues on his well-financed cruise to the GOP nomination.

It’s perhaps an appropriate time to bring out the Urban Institute/Tax Policy Center’s analysis of the Romney 59-point tax plan. They have produced a table (T12-0004) showing “Mitt Romney’s Tax Plan Baseline: Current Policy Distribution of Federal Tax Change by Cash Income Percentile, 2015.” The table looks at individual and corporate income, payroll (Medicare and Social Security) and estate taxes to determine the change in the total federal taxes for the various quintiles under Romney.

Who would have federal tax increases under Romney? Not the rich who have captured more and more of the income over the last decades. Treating corporate shareholders as the payers of the corporate income tax, the table shows that the top one percent would get an average federal tax cut of $86,535 under Romney’s plan, while the top one-tenth of one percent would get an average tax cut of $432,940.

But guess what, the bottom two quintiles–made up of the poorest Americans who are struggling to make ends meet and who can be pushed off kilter by a single illness or other unexpected expenditure–will be the ONLY ones in the distribution who will pay more federal taxes under Romney’s plan than under the current policy baseline. About 18% in that lowest quintile will pay almost a thousand more in taxes. About 13% in the lowest quintile will pay about $125 less in taxes. Similarly, in the second lowest quintile, about 18% will pay almost a thousand more; however, at least for this quintile about a third will pay almost $500 less, so that the overall increase averaged across these groups is less.

This is an unacceptable result. The New York Times recently reported on various studies on inequality and a survey that shows that more and more people, across the spectrum of ideologies, ages, gender and other lines, now consider the conflict between rich and non-rich as important. Survey Finds Rising Perception of Class Tension, New York Times, Jan. 11, 2012.

The demographics were surprising, experts said. While blacks were still more likely than whites to see serious conflicts between rich and poor, the share of whites who held that view increased by 22 percentage points, more than triple the increase among blacks. The share of blacks and Hispanics who held the view grew by single digits.

What is more, people at the upper middle of the income ladder were most likely to see conflict. Seventy-one percent of those who earned from $40,000 to $75,000 said there were strong conflicts between rich and poor, up from 47 percent in 2009. The lowest income bracket, less than $20,000, changed the least.

The reason the rich are getting richer is because the country has followed policies, essentially since Reagan, that favor the rich–from deregulation to relaxation of anti-trust to reduction in tax burdens to privatization to deunionization. To add further rich-friendly policies to our tax code at this point should not be countenanced.

originally published at ataxingmattera>

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Italy now backs a financial transactions tax

by Linda Beale

Italy now backs a financial transactions tax

Germany and France are already on board in support of a financial transactions tax, and one outcome of the meeting of Italy’s new leadership with Chancelor Merkel is that Italy is on board. See AP, Italy Backs Financial Transactions Tax, New York Times, Jan 11, 2012.

A financial transaction tax has several advantages especially relevant in this post-financial crisis period. It raises additional revenues in very small increments on financial trades. That is not likely to have a negative impact on trades, but is likely to raise much needed revenues for starving educational systems, transportation systems and other important government programs.

Further, to the extent it does act as a disincentive to financial transactions, that, too, accomplishes a public good. The financial transaction tax is really a variety of the so-called ‘sin taxes’ that provide revenue when the purchase behavior continues and a social benefit when it ceases. Finance has become too large a part of the economy, and much of what passes as financial activity, as we saw in the 2007-08 financial crisis, was really ‘phantom’ activity–trading at several times removed from the productive economy that gives people (other than bankers).

It remains to be seen whether the US can pull its dysfunctional government together enough to make reasonable decisions about such options as a financial transactions tax. First, we have far too many far too well paid and far too well connected lobbyists roaming the halls of Congress and influencing votes in favor of the big financial institutions’ perspectives. Second, the far right’s emphasis on a version of “free markets” that fails to understand nuances of externalities, biases and framing issues leaves no room for recognition of the many negative aspects of unregulated marketplaces. Third, the Republican party members in Congress have been engaged in obstructionist behavior that leaves little room for any reasonable compromises or even consideration of the justness of a position–they are engaged in election gamesmanship with Supreme Court and other federal court judge nominations at stake, along with an objective of taking broad-stroked deregulatory action across federal agencies, from the EPA to Energy to Education to the IRS. All of these trends bode ill for the US to get its act together and set in place provisions that will further rein in the finance excesses.

But if Italy can make progress in this regard, surely we can…..

originally published at ataxingmatter

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IRS proposes new innocent spouse procedures

by Linda Beale

IRS proposes new innocent spouse procedures

In a press release IR 2012-3 (Jan. 5, 2012), the IRS has issued Notice 2012-8 announcing a new revenue procedure updating Rev. Proc. 2003-61. The IRS describes the effect of the procedure as follows.

This proposed update to Rev. Proc. 2003-61 addresses the criteria used in making innocent spouse relief determinations for section 6015(f) equitable relief cases and revises the factors for granting equitable relief. The factors have been revised to ensure that requests for innocent spouse relief are granted under section 6015(f) when the facts and circumstances warrant and that, when appropriate, requests are granted in the initial stage of the administrative process.

The IRS indicates that it will now take into account the other spouse’s abuse and financial control in making determinations for innocent spouse relief.

Review of the innocent spouse program demonstrated that when a requesting spouse has been abused by the nonrequesting spouse, the requesting spouse may not have been able to challenge the treatment of any items on the joint return, question the payment of the taxes reported as due on the joint return, or challenge the nonrequesting spouse’s assurance regarding the payment of the taxes. Review of the program also highlighted that lack of financial control may have a similar impact on the requesting spouse’s ability to satisfy joint tax liabilities.

For example, the proposed Rev. Proc. indicates that a nonrequesting spouse’s abuse of the requesting spouse may outweigh the fact that the requesting spouse had knowledge of likely noncompliance and that the requesting spouse’s subsequent compliance is a factor that may weigh in favor of relief.

The proposed revenue procedure also provides for certain streamlined case determinations; new guidance on the potential impact of economic hardship; and the weight to be accorded to certain factual circumstances in determining equitable relief.

These appear to be noteworthy and appropriate changes. It is a problem when legal procedures fail to recognize the way that physical and psychological abuse can limit options for individuals. This is particularly true in the case of abused spouses, who may not be allowed to question financial statements or tax returns before being forced to sign them by the abusing spouse.

originally published atataxingmatter

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CRS reports on repatriation tax holiday impact

by Linda Beale

CRS reports on repatriation tax holiday impact

Shortly before the Christmas holiday, CRS released a report by Donald Marples and Jane Gravelle on the possibility of a second repatriation tax holiday for multinational corporations. Download Marples and Gravelle. tax cuts on repatriation earnings as economic stimulus. an economic analysis. 122011.c

The holiday has been pushed by various commentators who support reducing corporate taxation based on the argument that lower tax, and repatriated earnings, will result in greater investment in domestic business expansion and more US jobs.

Our experience with the 2004 repatriation holiday was not impressive. Much of the repatriated funds were diverted to share buybacks and not used to increase investments or increase jobs. IN fact, many companies that repatriated the most money engaged in heavy firings of workers. Hewlett Packard was notable, with large layoffs accompanying significant repatriated cash.

To repeat that experiment at a time when US companies have even more cash socked away in the US and abroad would merely reward those companies that decided to bet on (and lobby heavily for) a second repatriation holiday that would amount to a huge cut in their taxes–like having the best of a territorial tax system at the same time that they get all the benefits (foreign tax credits, active financing exception, etc.) of the current worldwide tax regime.

The CRS report doesn’t suggest that another repatriation holiday would be a sure-fire economic growth engine. In fact, it notes that it can be counterexpansionary if money is used to address cash-flow problems or to pay out to shareholders.

Viewed in the current debate on how to most efficiently stimulate the economy, economic theory suggests that the simulative effect of a temporary tax cut for repatriations may be offset, or more than offset, by exchange rate adjustments that would reduce net exports.

In addition, how businesses use repatriated earnings will impact the stimulative or contractionary effect of a tax cut for repatriations. For example, repatriated earnings will have a larger stimulative effect, or smaller contractionary effect, the greater the degree to which they are used to increase current investment. A smaller stimulative effect or a larger contractionary effect will result, in contrast, if more of the repatriated earnings are used to shore up “cash-flow” issues or pay dividends.

A repatriation tax holiday is not a good idea. it wasn’t a good idea in 2004. It is not a good idea now. There is no reason to give multinational corporations a tax break to bring money back to this country. They’re cash rich as it is and can make investments if they want to.

originally published at ataxingmatter

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Romney’s Tax Plan–good for the wealthy, not so good for everybody else

by Linda Beale

Romney’s Tax Plan–good for the wealthy, not so good for everybody else

The Tax Policy Center has done an analysis of Romney’s plan for US taxation. SeeThe Romney Plan. It doesn’t look bad at all for the wealthy. In adding at least $600 billion to the U.S. deficit by 2015, Romney would

  • reduce the statutory corporate tax rate from 35% to 25% immediately (apparently with no need for offsets). Since most corporations that actually pay any federal corporate income tax–which is very few of them, even when they are quite profitable economically–already pay effective tax rates as low as 0% and typically less than 25%, this can be expected to reduce those payments even more. Lightening the burden on corporations will tend to result in higher payouts to those already overcompensated managers and higher payouts to shareholders, who tend to come from the very top of the income distribution. Net result–more money for the wealthy, less money to finance the U.S. government, and more demands for limitations to the already thin safety net.
  • eliminate the US system of taxation of worldwide income in favor of a “territorial” tax system. this will be especially beneficial for multinational corporations and their owners and managers, and will tend to speed up the offshoring of US manufacturing and service jobs. A boon for the wealthiest, but a real job eliminator for the rest of us.
  • reduce the maximum individual rate from 35% to 25% immediately (apparently with no need for offsets). This will benefit the wealthiest of the wealthy, who already enjoy a very compressed income bracket progression.
  • Eliminate the estate tax. This will benefit the wealthiest of the wealthy, who are the only ones who pay the estate tax now.
  • Retain the 15% rate for capital gains. This will benefit the wealthy, since the top of the income distribution owns most of the financial assets.
  • Eliminate the capital gains tax for those with income of $200,000 or below. This is one item that will benefit a few ordinary Americans, though even here it will provide minimal tax savings for them and more savings for those in the $100-200,000 income range, who are among the most well off, though not the upper-upper crust.

Note there’s only one thing of the major changes in Romney’s list that can be said to be directed at all at the majority of taxpayers in the below $100,000 group (though it also favors those in the 100-200 thousand income). Not surprisingly, Romney’s plan would increase taxes on the poorest among us, those with $20,000 or less in annual income, by 60%.

How can that be justified? Romney says his plan is going to make the world better for inventors, job creators and entrepreneurs.

“My administration will make America the best place in the world for entrepreneurs, inventors and job creators,” Romney said at a campaign event in Davenport, Iowa, on Dec. 27. “I’ll lower and simplify taxes, especially for middle-income Americans.” Bloomberg Newsweek (link below).

Now, the wealthiest taxpayers making $1 million or more will see a 15% cut in taxes paid. That assumes, of course, that those ultra-wealthy who are mostly benefited by his version of tax “reform” fit that bill (inventors, job creators, entrepreneurs). But most of their ownership is not an investment in a company, it is acquired in secondary market trades. And most of them aren’t job creators and entreprenuers, they are just wealthy traders in the secondary market. If we really want to help job creators and entrepreneurs, we’d be funding public education from K-12 through university and we’d be reinforcing and adding to our safety net programs instead of constantly threatening to reduce or eliminate them. See Mike Kimel’s post on Pelzman at Angry Bear…

Steven Sloan, Romney Tax Plan Adds $600 Billion to Deficit, Analysis Says, Bloomberg BusinessWeek (Jan. 5, 2012);

Greg Sargent, Romney Plan Would Cut Taxes on Top 0.1% by Nearly Half a Million Dollars, Wash. Post Blog (Jan. 5, 2012).

Schoenberg, Steve Forbes, Campaigning for Rick Perry, Attacks Romney’s Capital Gains Tax Policy, Boston (Dec. 28, 2011) (opposing the extension of zero tax rates on capital gains only to those with $200,000 or less in income).

originally published at ataxingmatter

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Corporatism and taxes

by Linda Beale

Corporatism and taxes

Corporatism is the term used to describe a economic and governmental approach that favors large entities over people, including adopting rules and regulations to suit the regulated entities, tilting legislation to protect corporate entities that might otherwise be considered to be causing harm to the public good, and allowing access to public fora and public representatives in ways that ensures that corporate voices are heard, whether or not those opposing them are heard.

Corporatism in tax policy has resulted in highly favorable readings of the reorganization provisions–for example, current IRS regulatory approaches proclaim that even losses can be recognized in corporate reorgs, going against well-settled understandings of the operation of the corporate reorganization provisions, and the Code and regulations permit a vastly expanded range of flexible transactions, especially of spins under section 355 and of A reorgs (a mere 40% equity consideration now ‘counts’ as sufficient to provide tax-free reorganization status).

Corporatism has been around in one form or another for a long time, but it was immensely aided by the activism of organizations like the US Chamber of Commerce and the National association of Manufacturers and the ideological ‘think-tanks’ supported by them and by corporate and wealthy backers.

For a revealing slice of the history of corporatism, every reader should be familiar with Lewis Powell’s 1971 memo on the means by which business could take over government. It is given a thorough airing (and there’s a link to the memo itself) by William Black on the blog New Economic Perspectives, My Class Right or Wrong: the Power memorandum’s 40th Anniversary (April 25, 2011).


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The Peltzman Effect: Why Economic Growth Has Slowed in the US Over Time

by Mike Kimel

(Update: Naked Capitalism notes Mike’s post is the top read of the day in ‘links’)

In recent years, there have been a number of studies showing that generational income mobility is particularly low in the US. To quote this 2006 study by Tom Hertz:

By international standards, the United States has an unusually low level of intergenerational mobility: our parents’ income is highly predictive of our incomes as adults. Intergenerational mobility in the United States is lower than in France, Germany, Sweden, Canada, Finland, Norway and Denmark. Among high-income countries for which comparable estimates are available, only the United Kingdom had a lower rate of mobility than the United States.

Hertz provides this handy chart:

Most of the “big government” countries that compare favorably with the US on intergenerational mobility also do pretty well on measures of entrepreneurship. The following snapshot comes from this paper by Acs and Szerb:

(GEDI = Global Entrepreneurship and Development Index)

While studies are, no doubt, imperfect, I’ve seen similar results before and they seem credible to me.

The studies note, essentially, that the US is not, for many, the land of opportunity it is touted to be, and is now being beaten out by countries like Denmark and Canada. Big government countries, countries where Americans seem to believe people aren’t motivated to get off their duff, are actually quite entrepreneurial and offer offer their citizens a lot of opportunity.

Meanwhile, one other thing to note… growth, real economic growth, has been slowing for decades in the US. George W Bush’s term, even prior to the start of the Great Recession, compares unfavorably with the 1970s. The highly touted Reagan years, for instance, saw much slower growth than, say, the big government LBJ administration or the even bigger government New Deal years.

What is going on here? Is it really the catch-up effect, whereby wealthy countries like the US necessarily grow more slowly than other countries? Or is there a Great Stagnation going on? And if so, why?

I think one explanation for this is the Peltzman effect. Sam Peltzman once noted that, in response to some types of regulation, people can have a tendency to change their behavior in ways that counteracts the intended purpose of the regulation. For instance, some bicycle and motorcycle riders will take greater risks when forced to wear helmets, assuming that the helmets make them safer and more impervious to accidents.

Now, economic advance depends on creative destruction, and creative destruction requires people to take risks. Come up with a great idea for a super duper new widget and it has zero effect on anything if you don’t go out and try to market the thing.

But take two people, both of whom independently came up with the same idea for that super duper new widget. One lives in the US, the other in Denmark. Which one gives up his/her job to start a new company? The American or the Dane? My guess is the Dane will, precisely because the Dane, unlike the American, retains a safety net. The Dane doesn’t give up health insurance for herself or her family, and has more social programs she can rely on if the new business fails. My guess is that isn’t just true for Danes and Canadians, but also for people in a whole host of countries with a stronger safety net than the US. If the US still scores higher than on entrepreneurship than these countries, it is for historical reasons. Attitude is part of the ranking, after all, and Horatio Alger stories are still in our DNA.

If my guess is correct, there are things we should expect to see in US data:

  1. The ratio of American companies, particularly successful American companies which required substantial commitments by their founders, that are founded by foreign born people relative to native born people has been growing. (I.e., native born Americans are becoming more risk averse when it comes to starting companies.)
  2. The ratio of American companies, particularly successful American companies which required substantial commitments by their founders, that are founded by native born people who were born wealthy (and thus have their own built in safety net) relative to those founded by native born people who weren’t born wealthy has been growing. (I.e., non-wealthy Americans are becoming more risk-averse when it comes to starting companies.)

Note that I am trying to distinguish between a “business” and a business that requires some substantial commitments by their founders. There is a big difference between someone leaving their existing employer to start a new business based on an idea they have been toying with for a while and someone who was fired six months earlier deciding that they have no choice but to start something, anything, to put food on the table. I don’t have that data, but I would be surprised if it 1 and 2 weren’t borne out. Unfortunately, I think the direction we are taking, politically, is just going to reduce entrepreneurship in this country more and more. There are only so many wealthy people, and only so many foreigners coming to our shores. The land of opportunity, we will find in the long run, is the one with a safety net.


  1. The first paper cited was put out by the Center for American Progress, which leans left. The second paper was commissioned by the Small Business Administration, but its authors are both at George Mason U, which has a definite libertarian bent. –
  2. Consider this a companion piece to Why Don’t Tax Havens Become Economic Powerhouses? and A Simple Explanation for a Strange Paradox.

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Ian Ayres on the Brandeis Tax

by Linda Beale

  Ian Ayres on the Brandeis Tax

I’ve often argued here that vast inequality is harmful to democracy, and that the kind of unequal society that we have today, reflected the Gilded Age of yore, is especially worrisome.  Much of what is happening in this country that threatens freedom and economic suffering for many is related to the vastly unequal incomes and wealth of the top 1% compared to the rest of us.  Oligarchy finds it easy to flourish in such a society, and democracy struggles to keep its head above water.  The corporatist agenda that favors big business (and its owners) facilitates the capture of the state for the benefit of the rich–lobbyists swarm legislators, and campaign funding by corporations floods the airwaves with repetitive (and hence believed even if untrue) messages favoring corporatist allies.

The main defenses that a society has against such developments are twofold:  1) a strong sense of community that incentivizes the uberrich to give a good bit of their wealth away to help the community and 2) a strong tax system–especially estate taxes and other taxes that fall primarily or exclusively on the uberrich as a way of skimming off the excess rents they have acquired because of their status and unrelated to genuine merit or hard work.  {As Elizabeth Warren said, nobody can claim to have earned all they earn without the help of the state, and the wealthy in particular depend on the state to protect their property and even their status.)  Hence I talk here of democratic egalitarianism and my view that equilibrium is not a realistic state so redistribution is always occuring.  Most redistribution will be ‘upwards’ for the benefit of those at the top, unless democratic institutions push for a rebalancing redistribution ‘downwards’ to assist those in the middle and lower income groups.

Ian Ayres has a series of postings on a proposed “Brandeis” tax intended to impose limitations on the inequality gap.   
Don’t tax the rich, tax inequality itself, New York Times, Op-Ed, Dec. 18, 2011.

In 1980, the wealthiest 1 percent of Americans made 9.1 percent of our nation’s pre-tax income; by 2006 that share had risen to 18.8 percent — slightly higher than when Brandeis joined the Supreme Court in 1916.

Congress might have countered this increased concentration but, instead, tax changes have exacerbated the trend: in after-tax dollars, our wealthiest 1 percent over this same period went from receiving 7.7 percent to 16.3 percent of our nation’s income.
What we call the Brandeis Ratio — the ratio of the average income of the nation’s richest 1 percent to the median household income — has skyrocketed since Ronald Reagan took office. In 1980 the average 1-percenter made 12.5 times the median income, but in 2006 (the latest year for which data is available) the average income of our richest 1 percent was a whopping 36 times greater than that of the median household.
Brandeis understood that at some point the concentration of economic power could undermine the democratic requisite of dispersed political power. This concern looms large in today’s America, where billionaires are allowed to spend unlimited amounts of money on their own campaigns or expressly advocating the election of others.

There will be rich always: finding a new way to think about income inequality, Freakonomics, Dec. 20, 2011.

The vast shift in national income toward our richest 1 percent is especially vivid if their income is expressed in terms of the median household income. Indeed, an important goal of our op-ed was to suggest a new unit of measure, “medians” to help us think about what it means to be rich. In 1980, if you earned 3.8 medians, you were in the top 1 percent, but by 2006 even the poorest in the 1 percent club earned 6.9 medians.
What we call the “Brandeis Ratio,” the average income of the richest 1 percent (which includes the billions earned by the lucky few) has grown even more disproportionate. As shown in the chart below, in 1980, one-percenters on average made 12.5 medians, but in 2006 (the latest year in which data is available) the average income of our richest 1 percent was a whopping 36 medians.

An inequality tax trigger: the Brandeis Ratio explained, Freakonomics, Dec. 21, 2011.

A central idea behind our Brandeis tax proposal was to have a tax that is triggered by increases in inequality. Our Brandeis tax does not target excessive income per se; it only caps inequality. Billionaires could double their current income without the tax kicking in — as long as the median income also doubles. The sky is the limit for the rich as long as the “rising tide lifts all boats.” Indeed, the tax gives job creators an extra reason to make sure that corporate wealth does in fact trickle down.
As emphasized by Lawrence Lessig in Republic, Lost (presaged somewhat in Ayres’ book with Bruce Ackerman, Voting With Dollars), the bulk of campaign finance dollars comes disproportionately from not just the 1% club, but the richest one-half of one-percenters.  Focusing on the average income of one-percenters is a good proxy for the rising political power of plutocrats.

Of lags and caps: possible implementations of a Brandeis Tax, Freakonomics, Dec. 26, 2011 (discussing potential ways to deal with bunching of income and the question of work disincentives–see my earlier post on Greg Mankiw).
originally published at

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Romney’s Wall St. J. Interview with Gigot–Protecting the Rich

Romney’s Wall St. J. Interview with Gigot–Protecting the Rich

[edited to rephrase and correct typos 12/26/11 5 pm]
Joseph Rago and Paul Gigot interviewed Mitt Romney on his ‘vision’ for America–“On Taxes, ‘Modeling’, and the Vision Thing”, Wall St. J. Dec. 23-24, 2011, at A13.  In it, Romney reveals the way patrician wealth has affected his values, casting President Obama as a “European social democrat” and suggesting that contrasts with his own belief in a “merit-based opportunity society–where people earn their rewards based upon their education, their work, their willingness to take risks and their dreams.”  
Now everybody likes the idea of people being able to advance based on merit, rather than on crony capitalism, improper influence or whatever.   The problem with suggesting that America is a ‘merit-based opportunity society’ is that it isn’t much of one anymore: America in this second Gilded Age is primarily a wealth-and-status-based opportunity society. 
  • Education:  Even Romney admitted (obviously unintentionally) that wealth makes a real difference, since he noted that rewards depend in part on education.  People with wealth receive the finest educations from pre-K through post-graduate, getting preferences at the best children’s academies in Manhattan and at the highest ranked universities like Harvard and Yale.  People without wealth lose out from the very beginning, with inferior schools that are no longer fully supported by the public, as charter and for-profit schools take over offering inferior educations that no patrician family would ever accept.  The poor and middle class take on enormous loans and work loads to finance even their public university educations, since state support has slipped down to a mere 20-30% of the cost of that education.  That makes study and grades and success much more difficult for them. 
  • Working hard (with Contacts/Influence/lobbyists):  The wealthy are introduced early to the most important people of influence in society, like the Vanderbilts and the Astors of old, the private equity fund managers and the Wall Street bankers that can smooth their way through all the trials and tribulations of their ‘work’ careers–i.e., becoming owners of major league baseball team when you have no relevant experience (George W. Bush, with the aid of his papa and his papa’s influential and rich partners) or setting up a venture capital fund (like Romney’s Bain Capital). These connections ultimately permit the wealthy to mingle in a monied society that offers the right contact for every venture to succeed–including lobbyists to help a wealthy entrepreneur get his business going and ability to ‘invest’ in politicians who are willing to risk alienating the middle class to support preferential taxation of the rich. 
    • By the way, lots of the not-rich work quite hard, often at thankless jobs that provide no cushion to deal with life’s difficult blows or at a job that, at minimum wage, still leaves their family below the poverty line.  Without the contacts and influence that smooth the way of the rich, there chances of moving up are much more limited.  If they persevere, have an entrepreneurial idea, and catch a break, they may be able to move beyond where they are, but they have to do a lot more than just ‘work hard.’  
  • Taking Risks (and Getting Subsidies and Preferential Tax Provisions):  The poor take a risk every time they get up in the morning–will their health hold out so they can keep working? will they be able to make it to their job in that car that needs a new starter? can they manage to arrange for someone to take care of their kids while they work or will they have to be “latch-key kids” yet another day?  But they don’t usually have the kind of capital nest-egg to take a risk with in the way that Romney means it–the excitement of opening a new business demands from the poor and near-poor Herculean efforts to pull together family, friends, and workers to support their business ideas.  Those with money, on the other hand, have a head start on all of this.  Bill Gates’ parents offered him an educated life of relative ease; he could ‘play’ in the garage on that dream of his rather than running heavy machinery or working behind a counter at a McDonalds.  And those with contacts and money are able (and willing) to hire the best lobbyists to ensure that they get all the tax-advantaged benefits and subsidies that they can finnangle (or buy) from local, state and federal legislators for their activities.  That includes favorable tax provisions that allow them to keep a significant percentage of their wealth (and to fight for even more favorable provisions), such as the carried interest provision that gave Romney a preferential rate on almost all of his compensation income, the preferential capital gains rate that gives all the wealthy a low tax rate on their income from trading stocks and bonds with each other, and the various ways that the tax code subsidizes the kinds of personal deductions that provide the most benefit to those with money–from the charitable contribution deduction (including the ability to give away stock and claim a deduction for its value rather than for your actual basis) and the mortgage interest deduction (for interest on home loans up to a million plus $100,000) to all of those provisions that allow the wealthy to retire well–pension plans, exclusion of life insurance benefits, etc.  Then there are the many subsidies they get various governments to provide for their businesses, presumably by using those long-term family/status connections to wine, dine and influence.  They include low-cost loans such as those enjoyed by Romney’s Bain Capital for various businesses that Bain Capital was ‘turning around’.  (Handily, they can make low-taxed profits for themselves even when their turnarounds fail, with all those subsidies, so that the taxpayer sometimes ends up paying  for their losses along with the fired workers.)  See the links provided in the posting yesterday on Romney’s reluctance to release his tax returns, which discuss some of the subsidies and other benefits to Romney’s business. 
That’s not a merit-based opportunity society:  it’s an influence-based society, where the poor and even most of the middle class are working against long odds to make headway. 
And there’s not much evidence that Romney recognizes this fundamental difference in existence of the well-off and the not-so-well-off here in America.  Take the Gigot story’s discussion of tax policy and what kinds of “reforms” Romney supports.  The Journal apparently thinks Romney is too timid on ‘risk-taking’ because he didn’t espouse the kind of tax agenda that the Journal supports–moving to a consumption tax–like the national sales tax– that shifts most of the tax burden to ordinary folks (since they will pay tax on most or all of their  income since they spend most of it on food, shelter, clothing and other necessities) and leaves a zero percent tax rate on the capital gains, dividends, and other income from capital that makes up most of the income of the wealthy and little of the income of everybody else.  Why, the Journal notes, Romney’s plan merely calls for extending the Bush tax cuts, cutting the statutory corporate tax rate from 35% to 25%, and eliminating capital gains and dividends taxes only for those who make $200,000 or less.  Romney won’t even say he supports a consumption tax til he’s studied it more, though he likes the purported “simplicity” of a flat tax.    Romney also says he likes “removing the distortion in our tax code for certain classes of investment”.  This means that Romney does not understand the real economics of the consumption tax and the so-called ‘flat tax’, both of which result in taxation of 100% of the income of the poor and near poor and most of the middle class while leaving the rich with a minimal tax burden.  Any system for alleviating that burden (such as a low-level exemption at the bottom of the income scale) would thrust a truly burdensome recordkeeping requirement on those least able to cope with it.  Especially for versions that merely zero out the tax rate on income from capital, distortions would be magnified: the categorization of income into different types is one of the primary distortions in our system, and any plan to eliminate taxes on one type of income while retaining them on another increases distortions rather than removing them!
What about Romney’s saying he won’t propose cuts in individual tax rates for those making more than $200,000?  The Journal seems to think that is rather cowardly, since such a proposal accepts President Obama’s linedrawing on where rate cuts might be reasonable.  Now, aside from the failure to consider dropping the entire bunch of Bush tax cuts and letting all the rates go back to the level that they were when Bush took office (which might well be the best tax reform the Congress could do at this point), Romney should be commended for at least recognizing that the wealthy have gotten a fistful of tax gifts from the Bush individual tax cuts (and, indirectly, from the various corporate tax provisions that have allowed companies to pay less and less into the federal fisc) and for not wanting to proffer even more. 
But here’s the rub.  Romney doesn’t recognize the damage from the wealthier among us continuing to get even wealthier while the vast majority suffers stagnation and decline:  as the concentration of income increases at the top and inequality becomes the defining characteristic of this society, opportunity for all is threatened as is democracy itself.  Tax policies that could serve as a deterrent to that wealth buildup at the top–e.g., a stiffer, progressive estate tax, a financial transactions tax to discourage trading and capture a tiny amount in connection with those secondary market trades amongst the wealthy, and bracket expansions that would create a more progressive set of tax rates for the highest income that would distinguish between those who have $400,000 a year and those who have $2 million a year–aren’t even on Romney’s radar screen.  He’s content with the current system’s distribution, one that is highly favorable to the wealthy.  As a recent FED Finance and Economics Discussion Series article made clear, inequality has made permanent inroads and tax policies haven’t done much to dampen them.  See Jason DeBacker et al, Rising Inequality, Transitory or Permanent? New Evidence from a U.S. Panel of Household Income 1987-2006.
Romeny’s made it clear that he isn’t about to challenge the status quo of an easy tax life for the wealthy.  Here’s what he said to the Journal on the question of making sure that the wealthy never see any kind of a tax increase.
“My intent is to simplify our tax code and create growth, and so I will also look to see whether the top one-half of 1% or one-thousandth of 1% or top 1% are still paying roughly the same share of the total tax burden that they have today.  I’m not looking to lower the share paid for by the top.”  Wall St. J., Dec. 24-25, 2011, at A13 (quoting Romney).
So after a decade of cutting taxes on the wealthy and passing more and more provisions that benefit the wealthy in particular either directly or indirectly, Romney declares today’s status quo as the perfect state for things to be in–the current low taxes on the wealthy, in perpetuity, are his goal.  And while we may applaud him for not intending to lower taxeds further on the wealthy, it is hard to see how continuing current tax policy towards the wealthy makes sense for the fisc or for democracy.   Carried interest–won’t be taxed under Romney as the ordinary compensation that it is.  Mortgage interest deduction on million-dollar loans–won’t be pulled back to a more reasonable amount such as the interest on a loan that is 80% of the value of the median-priced US home.  Charitable contribution deduction for value rather than basis in stocks contributed–won’t get rid of that one.  Establishment of new brackets to recognize the drastic expansion of incomes at the top so that those with progressively more income are paying progressively more in taxes–won’t happen under Romney.  Why?  Because he is going to make sure that the top 1%, the top 1/2%, the top 1/1000% don’t pay less, but also don’t pay a bit more in taxes than they are paying now, this perfect state where the GOP wants to cut people off Medicaid to save money, turn Medicare into a ‘premium support’ system that will shift more and more of the burden of health care in one’s old age to the vulnerable elderly with a pension they can’t count on and a Social Security system that the GOP is trying to ensure that they can’t count on.
Most tax “simplification” promoted by lobbyists won’t create growth–it is much more likely to result in tax loopholes that the wealthy can drive a truck through.  Refusing ever to increase taxes, even on the ultra-rich who can clearly afford to pay more (without really noticing the difference in spending power) won’t create growth–it most likely will result in a stagnant economy where the burdened middle class gradually falls into the ranks of the New Poor. 

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