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More on Greg Mankiw’s weak arguments for the Bain capital gains preference

by Linda Beale

More on Greg Mankiw’s weak arguments for the Bain capital gains preference

A few days ago, I commented on the weak arguments Greg Mankiw had put forth in his op-ed to support the preferential treatment of compensation for private equity and real estate partnership “profits” partners. He points out the categorization problem–that it is not always easy to be sure what is a “capital gain” and what is “ordinary income”. I concluded along the lines of arguments I have repeatedly made on this blog: the main thing the categorization problem teaches us is that we should eliminate categorization problems that create inevitable inequitable differentiations by eliminating the category difference.

Get rid of the preferential rate for capital gains (and with it the need to distinguish capital gains from ordinary income), and you will in one stroke simplify corporate and partnership and individual taxation tremendously. Much of the Code is invested in trying to prevent smart tax lawyers from using tax alchemy to convert one type of income into another. See, e.g., section 1059 (extraordinary dividends to corporate shareholders), section 304 (sales between affliated corporations treated as redemptions), section 302 (providing tests that, if not satisfied, treat redemptions as dividends if there is e&p), etc.

Uwe Reinhardt makes a similar argument in the Economix blog carried by the New York Times. See Capital Gains vs. Ordinary Income, New York Times Economix Blog (Mar. 16, 2012). Reinhardt uses Mankiw’s own introductory textbook in microeconomics to make the tax equity argument that many have been making about carried interest–it is unfair to tax a money manager at a preferential rate compared to firemen, postal inspectors, college professors, school teachers and neurosurgeons.

In his popular textbook “Principles of Microeconomics,” Professor Mankiw teaches students that “horizontal equity states that taxpayers with similar ability to pay should contribute the same amount.” Well put.

Consider now a person who bought a vacation home for $500,000 and two years later, during one of our recurrent real-estate bubbles, sells it for $1.5 million. That $1 million profit is now taxed at a rate of only 15 percent. If the home had been the principal residence of this person and his or her spouse, half of the $1 million profit would not be taxed at all.

Suppose next that this tax-favored person’s neighbor were a busy neurosurgeon whose many hours of hard, physical and intellectual work earned him or her a net practice income of $1 million during those same two years. That neurosurgeon would pay the ordinary income-tax rate on that income (on average a bit less than 35 percent, because only income over $388,350 a year is taxed at 35 percent).

By what definition of the term would can one call the glaringly differential tax treatment of the real estate investor and of the neurosurgeon horizontally equitable?

Reinhardt goes on to make another of the arguments that I have been pressing for months in this blog–that the assertion that preferential rates are necessary for stock market transactions because they are rewarding investment in the corporations is baloney–most reported gains on securities are from secondary market trades, not from direct investments in corporations.

[T]he proponents of lower capital-gains taxation conjure up an image of, say, Jones purchasing shares of stock directly from the issuing corporation, which then invests the proceeds in new structures and equipment.

More typically, however, sales and purchases of corporate common stock take place among parties quite outside of the issuing corporation. For example, Jones may buy the stock from Chen, who may have reaped a capital gain from once buying and now selling the stock. Chen may have bought the stock from another person not related to the issuing company.

When Jones pays Chen, it is anybody’s guess what Chen does with the money. For all we know, Chen will spend it on a luxury car. Why, then, should any gain Chen enjoys on his or her investment in that stock be granted a tax preference? No new capital formation was supported by this trade in a stock sold by the company years ago.

The ugly truth about the insistence on the capital gains preference is that it rewards people at the top of the income and wealth distribution and serves to maintain the status quo of the allocation of resources. This is what is really meant by “fiscal conservatism” these days–ensuring that resources remain inequitably distributed to the very wealthy who are the “shakers and movers” of society through the influence their money can buy. The right-leaning Supreme Court has made that even more inevitable than it was before, through the Citizens United decision upholding the right of corporations to contribute any amount to influence political campaigns, based on the laughable assertion that such “super-PAC” rights undergird free speech.

crossposted with ataxingmatter

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Graphs Show It Clearly–the richest are much richer and most of us are poorer

by Linda Beale

Graphs Show It Clearly–the richest are much richer and most of us are poorer

David Cay Johnston has employed a couple of key graphic images that tell a significant story about the way that US laws have favored the rich–including tax administrative procedures that have reduced real audits of the rich and tax laws that have cut the top rates significantly and cut the rates on the “favorite” form of income of the rich to extraordinarily low rates.  See David Cay Johnston, The rich get richer, reuters (Mar. 15, 2012) (noting that the figures he uses here, in 2010 dollars, are from an analysis of IRS data by Emmanuel Saez and Thomas Piketty). [hat tip Francine Lipmann and Tax Prof]

The 1934 economic rebound was widely shared, with strong income gains for the vast majority, the bottom 90 percent.
In 2010, we saw the opposite as the vast majority lost ground. National income gained overall in 2010, but all of the gains were among the top 10 percent. Even within those 15.6 million households, the gains were extraordinarily concentrated among the super-rich, the top one percent of the top one percent.

So while the Great Depression acted as a leveler, the cascading impact of tax and other fiscal policies that are extraordinarily favorable to the rich was little influenced by the Great Recession.  Here’re the two telling graphs from the article.

Johnston notes that the story in numbers for adjusted gross income is discouraging:

Saez and Piketty show that the vast majority’s average adjusted gross income, of which wages are just a part, was $29,840 in 2010. That was down $127 from 2009 and down $4,842 from 2000.
Most shocking? The average income of the vast majority of taxpayers in 2010 was just a smidgen more than the $29,448 average way back in 1966.
At the top, the super-rich saw their 2010 average income grow by $4.2 million over 2009 to $23.8 million. Compared to 1966 their income was up on average by $18.7 million per taxpayer.

The graphic illustration shows just how much the inequality we see today is from the richest of the rich getting an indecent proportion of income growth.

Income Growth. top income soared. Johnston 031412.

Is this a problem that needs fixing?  Yes, it clearly is.  We have long recognized the importance of a society where everyone takes part and everyone has at least the minimum essentials for a decent life and a chance for improvement.

A society where a very few “elite” at the top garner all the benefits of the system and more and more of the income for themselves is not a sustainable society–the top becomes predatory, willing to take gains no matter what the cost to everyone else.  It is the kind of attitude that many who are familiar with Wall Street banks have criticized as endemic to Wall Street culture–and one that was revealed even more starkly by the resignation from Goldman of a star banker who publicly criticized the current culture at Goldman that believes in profits for the firm at the sacrifice of the good of the customer.  See Greg Smith, Why I am Leaving Goldman Sachs, New York Times Op-Ed (Mar. 14, 2012).  Shareholders obviously agree with Smith that the “profit for the firm above care of the client” mentality is wrong.  See Christine Harper, Goldman Roiled by OpEd Loses 2.2 Billion for Shareholders, Bloomberg (Mar. 15, 2012).

[Goldman is worried–I got a release from a PR firm suggesting that Goldman’s profit-making is a boon to the economy and gives its clients great trust in the firm.  I read it and thought–hmm, misses the point.  Smith isn’t condemning profit-making per se.  He is condemning profit-making at all costs, and in particular the “greed is good” type of profit-making that creates conflicts of interest with the client that is purportedly being served but would as soon eat a client as eat a steak, if money could be made for the firm (and the trader’s bonus) that way.]

If we want the kind of society that gives everyone a chance to have a decent education, we have to quit running down public schools and diverting public monies to support private religious schools.   Hold schools accountable, but quit the wasteful focus on testing and assessment.  Do a little assessment and a lot more teaching.

If we want a more equal society, then we have to change our tax laws so that they don’t favor the rich over everybody else.  Reduce the interest deduction, so that leveraged buyouts aren’t a way to take a stable working company, make a huge profit by borrowing, and then dump it (either in bankruptcy or out of it, but nonetheless yoked with the debt that got the private equity firm rich).  Get rid of provisions that are primarily beneficial to the wealthy–reinstate a hefty estate tax, eliminate the preferential rate on capital gains, reinstate the phase out of deductions at high income levels, increase the top income tax rate (let the Bush tax cuts lapse in toto or at least for the top earners), phase out the accelerated depreciation schedules, bonus depreciation and expensing provisions, and otherwise return our tax system to a saner progressive model that can support the important basic research at universities and basic public infrastructure development that are the real keys to economic growth.
The right has bamboozled the public with its tiresome but endless class warfare rhetoric pushing corporatist policies that claim that tax cuts for wealthy corporations and wealthy individuals are the way to boost growth and help the majority of Americans have good jobs and decent wages.  It’s a lie.  The way to do that is by moving to a more progressive tax system and providing more government funding for basic research (NIH, NSF, etc.) and for public infrastructure (mass transportation, rails throughout America and its inner cities, urban development).

crossposted with ataxingmatter

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Public Transit Benefit was down, is now up again (in Senate)

by Linda Beale

Public Transit Benefit was down, is now up again (in Senate)

One of the tax provisions that lapsed last year was a very popular tax expenditure supporting public transportation–a tax credit for commuters using mass transit was allowed to lapse back to a $125 monthly benefit from the stimulus level of $230 a month.  Ironically, in a time of clear importance environmentally of cutting back on cars and increasing use of public transit, Congress had given preferential treatment to support for parking (likely supporting most those commuters at the higher end of the income scale who like to drive their BMWs from Connecticut to New York City, or commuters who don’t have decent access to public transit):  the parking subsidy actually increased to $240 a month.

Today, the Senate passed the Surface Transporation Reauthorization Bill (see summary, here; for text and other actions, see S.1813 on Thomas).  The bill as passed included a provision, retroactive to Jan first of this year when credit lapsed to the lower level, that would restore the public transit credit at the same level as the current parking subsidy.  See PR Newswire, Senate Approves Increase to Pre-Tax Benefits for Public Transportation Commuters, Commuter Benefits Work for (Mar. 14, 2012).  The House may delay action on the bill though Boehner has said he would call the Senate version for a vote if the GOP majority doesn’t agree on an alternative.  See Linda Scott,  Senate Passes Transportation Bill, PBS NewsHour (Mar. 14, 2012).

It’s good to see Congress moving to correct this.  As Sen. Lautenberg noted

“Mass transit boosts the economy, reduces dirty auto emissions and takes cars off our congested roads. We fought hard to include this provision in the bill so that transit riders can enjoy the same benefits as drivers. I’m pleased that this bill finally appears poised for Senate passage, and I urge the House to follow suit and approve this bill immediately.” Lautenberg: Increased transit rider tax benefit would help thousands of New Jersey commuters (Mar. 13, 2012). 

Favoring cars over public transit didn’t make sense except as just another example of the way tax expenditures favor high income taxpayers generally–the real face of class warfare in the U.S.A. today. 
(Though of course, it goes to show that it is much easier to get some kind of tax break through Congress these days–in spite of the right’s whining about needing to cut spending–than it is to enact a reasonable program with expenditures specifically targeted at the purpose  intended.  This is why Obama’s corporate tax proposal provides a scattershot corporatist oriented reduction in corproate tax rates for “manufacturers”, instead of doing what we should do, which is leaving the corporate tax statutory rate where it is, and providing an incentive program for corporations that bring significant numbers of new jobs back to the US.)
If you don’t believe my point about class warfare, just look at the way the balance works out between beneficiaries of the various programs that the right likes to refer to as “entitlements” and wants to cut, versus the beneficiaries of numerous tax expenditures in the Code that the right seems endlessly willing to extend, increase, and rationalize.

The result is a general pattern of reallocation of resources in ways that amount toredistribution upwards to those already at the top of the income distribution.  Looks a lot like rewarding rich Congressional cronies while punishing the poor, the elderly and the vulnerable.  See, e.g.,  Eduardo Porter, A Nation With Too Many Tax Breaks, New York Times (Mar. 14, 2012), at B1 (and, off topic but relevant given  Rush Limbaugh’s despicable slurring of the Georgetown student advocating for full coverage of contraception under the Health Care law, notice that Reagan’s signing of the 1986 tax reform act was in the middle of a slew of older white males–not a female in the picture!).  The article compares the distribution of federal benefits (programs like unemployment, Social Security, Medicare, Medicaid, housing assistance, and food stamps, but not Pell grants or Veterans Benefits) to the distribution of tax expenditures (exemptions, deductions and credits like the preferential rate on capital gains, the home mortgage interest deduction, and the deduction for charitable contributions).

The federal benefits are much more evenly distributed, though the primary benefit does go to those in the lowest two quintiles (as intended by the nature of the programs).  The bottom 40% of taxpayer families by income group get about 60% of the program benefits.  But the tax expenditures–all those goodies built into the Code through crony capitalism–go much more disproportionately to those at the very top of the income distribution:  the top 20% get a whopping 67% of the benefit of tax expenditures, with the second highest quintile getting an additional 14%, adding up to 81% of the benefit going to the top 40% of the income distribution (and this spread may undercount, since it compensates for generally larger taxpaying units in the top income layers).  The lowest 40% get only 11% of the tax expenditures.

There is a good graphic for this, that you can access through this link.

crossposted with ataxingmatter

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Illinois’s Tim Johnson (Rep.) Squirms under Norquist No-Tax-Increase Pledge

by Linda Beale

Illinois’s Tim Johnson (Rep.) Squirms under Norquist No-Tax-Increase Pledge

Back in 2002, Tim Johnson represented a safely red district in Illinois and the radical right was pressing on his back with its reaganomics-inspired program to cut-taxes-to-shrink-(nonmilitary)-government-and-eliminate-public-infrastructure-and-social-justice-programs; de-regulate-to-free-up-big-business; privatize-wherever-you-can-especially-schools-bridges-and-other-essential-services.  Not to be outdone, Tim Johnson signed the no-tax-increase pledge on the dotted line, with his right-hand aide as witness.

In spite of the decades of extraordinarily well-funded anti-tax/anti-government propaganda spewed by purported think tanks like the “Americans for Prosperity” arm of the Koch Bros, the anti-estate tax “American Family” coalition arm of the Walton heirs, the Big-Business oriented Chamber of Commerce and Club for Growth and similar groups, the American public seems to be finally beginning to learn to read between the lines and recognize self-serving propaganda for what it is.    Even with all the money being spent to misrepresent and distort the truth about taxes, it is worth noting that Rasmussen polls (run by a leaning-right head) are finding Americans more willing to support tax increases than they were a few years ago.  For example, back in December 2011, despite the anti-tax nonsense of the Tea Party and other radical right-wing groups, only 52% thought tax cuts would help the economy–in the low end of the 51% to 63% range answering that question affirmatively since July 2008.  Similarly, a recent poll showed that 47% favor a candidate who wants to raise taxes on the rich over a candidate who wants no tax increases.  Back in September 50% of Americans favored a mix of spending cuts and tax increases (but 64% weren’t willing themselves to pay higher taxes, a product of the NIMBY syndrome).  And a March poll found a significant decrease in Americans responding who thought that America is an “over-taxed” nation.

[N]ew Rasmussen Reports national telephone survey finds that 56% of Likely U.S. Voters believe America is overtaxed. But that’s down from 66% two years ago and 64% last year. One-out-of-three (33%) now believe the country is not overtaxed, while another 12% are not sure. (To see survey question wording, click here.)

[ASIDE:   The problem with the question about whether Americans are overtaxed–especially in this age of 527 groups spending buckets of money to convince them that they are–is that it depends on who you are asking and what facts they actually know about taxes, the economy, and what the difference is between effective tax rates and statutory rates.  Everybody hears the radical right prattle on about how high our (statutory) tax rates are.  Very few hear much about effective tax rates and fewer still understand the difference.  The wealthy are not over-taxed, though they have spent a good bit of their money to convince typical Americans that they are.  Those who escape federal income taxation because they earn amounts covered by the standard deduction and personal exemptions and earned income tax credits–amounts intended to keep lower income taxpayers from having to pay income tax–nonetheless have to pay signficant state and local property and sales (and often also income) taxes and have to pay significant federal payroll taxes.  Not surprisingly, they may well feel overtaxed when their wages are going down and their tax burden is staying the same and they hear the think tank spew of anti-tax stuff on the airwaves day and night.]

And now Tim Johnson’s district has changed.  He represents a more Democratic electorate, that is less likely to swallow the Tea Party tax aversion hook, line and sinker.  So he is backtracking.  Which is good. It’s a shame he backtracked bit by bit, at first claiming he’d never signed and then suggesting his aide signed for him before he finally admitted he had signed the pledge but just didn’t consider it cast in granite.   See Are you Now and Have You Always Been?, New York Times editorial (March 11, 2012).

But to give him credit, he finally did take a  stand against the idiocy of the tax pledge.   See Pat Garofalo, GOP Rep. Blasts Norquist’s Anti-Tax Pledge as “Disingenuous and Irresponsible”, Think (Mar. 8, 2012).  He ought to do it more straightfowardly–by admitting that it is a mistake to assume that tax cuts are always good or that tax increases are always bad and by acknowledging that there is plenty of room to tax the rich more without harming anybody’s economic recovery.  His statement (quoted on ThinkProgress) weasles by making clear that he is leery of tax increases other than fixing tax loopholes or raising the Social Security tax…..

One hopes that these few quasi- brave Republicans who are beginning to speak out against the idiocy of a “pledge” to cut off a key tax policy tool of democratic institutions for supporting public infrastructure and public needs will cause Norquist’s pledge to go to the same ignominious fate that awaited Joe McCarthy’s anti-liberal binge (under the name of anti-communism) when a lone lawyer questioned his decency.  As a constitutent told GOP representative Rick Berg in a North Dakota town hall meeting (quoted on Think Progress), these guys are supposed to work for their constituents, not for Norquist.

crossposted with ataxingmatter

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Hey, didn’t the GOP say it cared about deficits?

by Linda Beale

 Hey, didn’t the GOP say it cared about deficits?

Just when you think those on the radical right had gone about as far as they could go without recognizing their own zaniness, those in Congress have revived their version of a tax “reform” for businesses.  It was first proposed in 2009–as an alternative to real stimulus spending on infrastructure .  And yes, it is yet another tax cut.  An even zanier one than the rest that they’ve come up with while at the same time whining of deficits and suggesting that longstanding social programs like Social Security and Medicare must be cut back.
Eric Cantor, in a memo last month to fellow Republicans, announced that the House would be putting this proposal forward–let every business with 500 employees or fewer deduct off the top 20% of their income.  And they want to pass this rot by the filing deadline–on the pretense that it will help ordinary folk.
See Richard Rubin, Hedge Fund Tax Break May Come in Republican Small Business Plan, San Francisco Chronicle (Bloomberg News, Mar. 8, 2012).

Now, folks, there are some mighty BIG businesses with fewer than 500 employees.  Like just about every hedge fund and leveraged buyout fund. (The latter, of course, like to call themselves “private equity” these days–let’s people overlook the fact that they have destroyed many a stable, profitable business by loading them up with debt and sucking out all the cash while firing employees or making the business focus on paying back the debt and not on doing business).  Why would the GOP want to reward those funds with even more tax breaks than they already grab for themselves–carried interest, pass-through taxation, and the ability to avoid the payroll taxes since they treat their compensation as though it were an investment gain?  Because that is what they are all about–making sure the richest people in the country get all the breaks.

Then there are sports teams.  Liquor stores.  Golf courses. Gambling dens….. Hotels. Restaurants.  Engineering firms. Accounting firms.  Law firms.  Architectural firms.  Big Business that normally make Big Money.
Just goes to show that the corporatist GOP never saw a tax break for the monied class that it didn’t like.

crossposted with ataxingmatter

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Greg Mankiw attempting to justify carried interest

by Linda Beale

Greg Mankiw attempting to justify carried interest

Greg Mankiw wrote an op-ed in the Sunday Times Money section: Capital Gains, Ordinary Income and Shades of Gray, New York Times (Mar. 4, 2012).

Mankiw notes the historical trend in the US to differentiate between capital gains and ordinary income regarding tax rates (though we have had notable experiements, both in the regular tax and in the AMT, to the contrary). He asserts that there are “good reasons” for the preference for capital gains income–offering only the standard idea of lack of indexation for inflation/deflation as an example.

The purpose of the piece is to justify the carried interest treatment of money managers’ gains from dealing with other people’s money as equivalent to a carpenter who fixes up a dilapidated house and gets capital gains on the sale of the home, though the gains are really paying off the carpenter’s sweat equity. Since the carpenter gets capital gains under our system, he says, why shouldn’t the money manager who does an analogous activity (assuming–which may be a rather big jump– that hedge fund, private equity and other money managers are doing “sweat equity” that adds to the value of the assets under management, and should be viewed analogously to the carpenter).

The problem with making these analogies, especially in the area of capital gains, is that the idea of capital gains is problematic to start with. We’d be much better off with a code that made no such distinction, since there are certainly instances where the distinction is an arbitrary one. Since the line drawing isn’t easy (and it isn’t), then the distinction shouldn’t exist at all in the tax code. That would be the right solution overall.

Nonetheless, the fact that a category is hard to apply generally doesn’t mean that there isn’t a right answer–or at least a better one– in particular circumstances. It is particularly inapt to compare money management with rehabilitation of dilapidated property. Rehabilitation of real property adds “real” value, in that the property is upgraded and will physically last longer than it would have without rehabilitation. Money managers don’t necessarily add any value–they may make money for themselves and others, but there is no real productivity gain in the economy in many (if not most) instances and certainly in any case where the gain is primarily speculative (often the case with hedge funds) or destructive of domestic businesses (often the case with private equity funds).

Private equity fund managers, you will recall, invented the leveraged buyout (or maybe it would be more accurate to say that the idea of the leveraged buyout led to private equity funds). The idea behind leveraged buyouts was to take a stable, money-making company that wasn’t heavily debt-ridden, load it up with debt to cover the acquisition cost of the company, and use the cash flows from the company to pay off the acquisition debt. Private equity funds like Bain Capital could then leverage a minimal investment of their own with the purchased company’s debt to get huge profits, once the debt was paid off with good cash flows (already existing out of the company, with nothing due to the “management” of the money manager). The better the company taken over was, the more its cash flow could be counted on to pay off the debt, the more leverage would be added, the quicker the debt was paid off, and the better the ultimate profit. Sometimes this takeover was relatively harmless for the “good” company, but many times it was harmful–the takeover changes and debt resulted in focus solely on profits and not on long-term investment, and the company’s long-term stability was destroyed. The process was seldom positively beneficial for the company over the long term or for its community (though it may have been for particular shareholders and the managers themselves). The point here, of course, is that the LBO was targeted to (already)”good” companies with low leverage and high cash flow that could easily borrow in the market to cover the cost of the acquisition.

Later, of course, as the age of financial speculation got fully underway, private equity firms started taking over companies that could never expect to pay back the additional debt the LBO loaded them with. The private equity firms made their money in these cases by driving them into bankruptcy and laying off or firing the workers. Equity firms still got their profits out of the deal by selling off the components. But the companies (and especially their workers) were done for–if the companies survived at all, they were just parts of some conglomerate with very different functions.
Making money from managing other people’s money, in other words, is not per se productive for the economy as a whole and is not something we should reward with low taxation that acts as an incentive to the activity. We should recognize the money manager’s take as what it is–compensation for work done–and tax accordingly.

As an aside, I’ll note that it wouldn’t be unreasonable to have a handyman take ordinary income on his share of the profit that serves as reasonable compensation for his labor, but in most cases that’s a difficult facts and circumstances issue for the Service to sort out after the fact. One reason carried interest is such an obvious place to repair the problematic categorization of labor income as preferential capital gains is that there will be a partnership and there will be records of “management fees” and “carried interest allocations”. Given our sophistication about partnership allocations, identifying and classifying the carry as ordinary income is a relatively simple endeavor.

crossposted with ataxingmatter

James Kwak
has a take on it also.

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Defining Rich VI: 1936 tax tables

Today we are continuing to look at the historical tax tables to see how we viewed and possibly defined rich. I introduced this idea with my post: Defining Rich III.
I found a source for all sorts of historical data from the Census Bureau. You can down load it or the better way is to click on the PDF file which brings up the Intro and then click on any of the listings of the table of contents which takes you to that set of PDF data.  For this posting regarding income data I am using this section.
The average weekly income for all manufacturing was $22.82 per week on 39.1 hours work. The highest paid was printing/publishing newspapers/periodicals at $35.15 per week on 37 hours work. The lowest was cotton goods at $13.80 per week on 37.5 hours of work.
In the non-manufacturing sector the I calculated the average weekly income to be $23.76 on 40.28 hours of work. The highest earnings were electric power/lights manufactured gas at $31.70 per week on 40.2 hours work. The lowest was hotels at $13.97 per week on 48.3 hours of work. For the Walmart greeter retail trade-general merchandising it was $17.51 per week on 40.8 hours work.
There were regional differences also. The most glaring is the north/south difference. The hourly wage ranges from 12.5 cents to 19 cents less if you worked in the south. The greatest differences being between the East South Central and the Pacific North.

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It’s Almost April so Tax Tips Are Flowering

by Linda Beale

It’s Almost April so Tax Tips Are Flowering

You can tell when it is getting close to the April filing deadline for individual calendar-year taxpayers. All of the major tax firms release their “handy tax tips” to entice new clients for this tax season.
The American Institute of CPA’s handy tips (released Mar.1, 2012) include some helpful reminders that taxpayers should claim deductions they are entitled too but shouldn’t be piggy and claim deductions–like the home office deduction–that they aren’t entitled to.

  1. Expenses. “Keep a daily diary.”
  2. Deductions. Take advantage of all of the deductions to which you are legally entitled. “The most common deductions for small business owners include entertainment, travel, meals, capital assets, home office and health insurance. Travel miles, meals and entertainment deductions require that you maintain a diary with daily entries that tie into receipts and other records.”
  3. Traps. “[C]laiming deductions that exceed your income for more than one year is a definite red flag. The home office deduction, which is allowable only under specific circumstances, may be another red flag.”
  4. Retirement. “income each tax year to qualify for a tax-deductible retirement plan.”
  5. Equipment. “For tax years beginning in 2011, a small business may deduct up to $500,000 in equipment purchases as long as the business spends $2 million or less for equipment for the year.”
  6. Payroll. “One of the most common and costly tax-related problems for small business owners is that they use the payroll taxes withheld from employees to finance business operations. Not only does the IRS often go after a small business owner’s personal assets to collect the unpaid payroll taxes, but also it may attempt to assess significant penalties.” In other words, those taxes you’ve withheld aren’t your money to spend–you are collecting on behalf of the government and must turn them over.
  7. Insurance. “If you have health insurance coverage for your employees, check to see if you are eligible for the small business health care tax credit. The IRS website has a page describing the credit, eligibility requirements and how to claim it. ”
  8. Veterans. There’s a credit for employers who hire veterans. The IRS website has details.
  9. Contributions. “Be sure to get a valuation for any non-cash items your business donates to charity”
  10. Help. “If you are unsure about anything related to your tax obligations under the law, you should seek professional help “

crossposted with ataxingmatter

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Comparisons of charitable giving among presidential candidates

by Linda Beale

Comparisons of charitable giving among presidential candidates
[Hat Tip to Tax Prof]

Len Burman, now a professor at Syracuse but still affiliated with the Tax Policy Center, wrote a blurb for Forbes on Stingy Rich People, Santorum-Gingrich Edition, Forbes (Feb. 20, 2012), which was a followup to Caron’s comparison of presidential contender giving based on “Romney and Obama vie for title of most charitable; Santorum gave least to charity,” Washington Post (Feb. 16, 2012).

Romney gave about 13.8% of his income to charity in 2010, and Obama gave about 14.2% of his in 2010. The Gingrichs (with about $3.1 million in income) gave only about 2.6% of theirs in 2010 and the Santorums (with about $0.9 million in income), only about 1.8% of theirs in 2010.
Burman professes his surprise at Gingrich and Santorum’s relative stinginess, given their avowed commitment to religion (and their open claim to religious merit) and the Christian doctrine of tithing 10% of one’s income to the church.

But Burman finds that the relative stinginess of the two candidates is about on a par with members of their respective income classes. The group of people making between half a million and a million give an average 2.6% in 2009 and the group making between $2 and $5 million gave about 3.2% on average. Conclusion–Santorum and Gingrich are “in the middle of the pack” in terms of generosity for people of their income level.

Personally, I’ve always thought candidates should keep their religious faith to themselves. I don’t think we have any business at all taking into consideration whether a presidential candidate is a Mormon, a Baptist, a Muslim or an atheist. But if they do make a point of their religious faith and present it as a worthy attribute qualifying them for the presidency, then it is rather revealing when those who openly “brag” about their religiosity don’t comply with the most fundamental concept of sharing and generosity in the bible, the tithing requirement

crossposted with ataxingmatter

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The Supreme Court’s corporate monsters–if money buys them "free speech" rights, can it help them avoid giving others human rights?

by Linda Beale

The Supreme Court’s corporate monsters–if money buys them “free speech” rights, can it help them avoid giving others human rights?

The Supreme Court decided in Citizens United that corporations could intevene to influence elections–giving money and aide to their selected candidates. This was an inordinate broadening of corporate “personhood”, claimed to be necessary under the warped First Amendment precedents of the Supreme Court that count “money” as speech and thus consider that limitations on money spent to influence elections as a limitation on speech.

Yet most economists and tax professors argue against the corporate tax–which has been in place longer than the individual income tax–on the grounds that taxes distort and that the claimed “double taxation” of corporate income distorts the allocation of capital. See, e.g., Tax Foundation, 2004 paper on integrating corporate and personal income taxes; seminal 1985 integration piece from NBER. Much of the argument boils down to an a prior assumption that “only people can pay taxes.”
(Of course, we used to think that only people could engage in campaign speech or bribe politicians for quid pro quo policies or otherwise influence the course of society. We were naive.)

As a result of this “received wisdom” about economics and corporate taxes–mostly based on the mathematically correct but practically challenged Chicago School approach to understanding economic systems (by assuming away most of the real world, including life, death, and everything in between)– corporate lobbyists and their allies in Congress have been pushing for decades to eliminate corporate taxation through integration of the corporate and individual tax schemes or at a minimum to drastically reduce the liability of corporations for federal income taxes.
Every presidential candidate has one scheme or another to reduce corporate taxes, with even Obama falling prey to the continuing influence of the Wall Street facilitators like Timothy Geithner in the Treasury and Larry Summers. See Citizens for Tax Justice, President’s Framework Fails to Raise Revenue (pointing out that there is no reason not to fix the loopholes in corporate tax to help address the deficit without having to lower corporate rates, and noting that although Obama at least called for making his rate reduction framework for so-called corporate tax reform revenue neutral, his plan fails to raise about a trillion dollars to make up for the corporate taxes that it gives up). As CTJ notes, many organizations have called for the opposite–to raise revenues from corporations that have been paying very little in taxes, especially since the 2003 Bush “reforms” that granted most of the items on corporations’ wish list for tax cuts.

Last year, 250 organizations, including organizations from every state in the U.S., joined us in urging Congress to enact a corporate tax reform that raises revenue. These organizations believe that it’s outrageous that Congress is debating cuts in public services like Medicare and Medicaid to address an alleged budget crisis and yet no attempt will be made to raise more revenue from profitable corporations. Id.

Nonetheless, most candidates call for making the corporate income tax territorial and thus making it even more lucrative for US multinationals to move more of their corporate businesses (and jobs) abroad. Most call for reducing the rates on corporations to a historically unprecedentedly low level–making it even more likely that the US trade deficit and corresponding budget deficit will continue to grow, even at a time when these self-nominated fiscal “conservatives” are claiming that the current deficit requires monumental sacrifices from ordinary people in the way of reduced medical care and old age security (the effort to cut back drastically on the benefits payable under Medicare and Social Security).

Most treat the owners of corporate equity as though they were some kind of revered engine of growth, when in fact they are usually merely rich people who are interested in reaping as high a profit as possible from sales of corporate shares but very little interested in entrepreneurship, and as likely to engage in quick trades (the profits of which go into their pockets and not into the working capital of the corproations) as to hold long-term based on analysis of corporate business fundamentals. Most don’t accompany their form of integration with eliminating the category distinction between capital gains and ordinary income.

Most “corporate reform” plans call for continuing most of the absurd provisions that have larded the pockets of corporate management over the last few decades, such as

  • accelerated depreciation and expensing (including all the depletion allowances for the heavily subsidized oil and gas extractive industry, even while it complains about the petty little incentives put in place in recent years for environmentally sound energy generation–accelerated expensing creates “phantom” deductions that reduce taxable income well below economic profits), and
  • the “research & development” credit, which was first enacted as a stimulus that was to be in place for a very short period of time but has been extended in fits–even retroactively for several years–as corporations demand making every single “stimulus” tax break they get permanent.

(As readers of this blog know, I see little merit in the R&D credit. Corporations can already deduct way too much “phantom” expenses–excess interest expense that allows them to operate with too much leverage, facilitating equity firm buyouts by leveraging up the purchased entity to pay off the equity strippers. Further, as with so many of the GOP’s favorite programs of tax subsidies for multinationals and the upper crust, it hasn’t bothered to conduct studies to see if the R&D credit indeed results in more research done in this country. Clearly, a retroactively enacted credit does NOT incentivize research.

Probably the times it’s been enacted without being retroactive haven’t either–it takes extensive labs and equipment to do research, and such labs and equipment have to be purchased far ahead of when they pay off. Most of the R&D that the credit supports is likely to be of the “tweak-a-patent” variety that seeks merely to find a way to extend a monopoly profit from a particular profit–something the patent law should frown upon.)
So the drumbeat for lower corporate taxes–at a time when corporations are paying less as a proportion of GDP than they did in the time of our most sustained economic growth–continues unabated from the right joined by only slightly less enthousiastic accompaniment at the White House and think tanks like the Tax Policy Institute.

Meanwhile, the Supreme Court, having anointed corporations with a kind of personhood that lets them intervene in elections even though they have no vote, has taken for consideration a case that challenges the rights of individuals to hold corporations accountable as people are held accountable for human rights violations. The case is Kiobel v Royal Dutch Petroleum (2d Cir. 2010), in which Nigerian plaintiffs seek to hold Royal Dutch/Shell liable for violating the Alien Tort Statute (“ATS”), 28 U.S.C. § 1350, which upholds international norms of human rights.

The Second Circuit held that US courts cannot entertain such suits, holding that jurisdiction under the Alien Tort Statute against corporations requires an international norm approving sanctioning corporations for torts and that requires more than the mere fact that most countries treat corporations under their domestic law as capable of committing torts. The court in the Second Circuit opinion makes a point much like economists tend to make about taxes–essentially implying that “only people commit heinous acts”.

From the beginning, however, the principle of individual liability for violations of international law has been limited to natural persons—not “juridical” persons such as corporations—because the moral responsibility for a crime so heinous and unbounded as to rise to the level of an “international crime” has rested solely with the individual men and women who have perpetrated it. Second Circuit in Riobel.

While people are the “deciders” of corporate decisions, nonetheless the corporate form permits corporations to engage in conduct that individuals alone cannot engage in–from amassing huge resources to carrying out massive enterprises that pollute and steal human dignity. To ignore that reality of corporate wrongdoing, especially in an age that has anointed corporate personhood with rights that seem furthest from ones that corporate entities should be permitted to enjoy, would be folly.

For further discussion of the implications of the case, see Peter Weiss, Should corporations have more leeway to kill than people do?, New York Times (Feb. 24, 2012).
Suffice it to say that this case raises the specter of full-blown corporatism overtaking the entire U.S. economic and social system. If the Supreme Court accompanies its “personhood for free speech/election intervention rights” with “not people so can’t be touched for human rights violations”, there will be even fewer ways to hold multinationals accountable, and they will forge even stronger relationships with autocratic dictators who treat their citizens like slaves and their environments like garbage pits. Meanwhile corporations will continue to intervene in our elections at will (usually the will of their ultra-wealthy managerial class), using the extraordinary power of the resources at their command.

We will all be the worse for any decision that would allow multinationals to expand their quasi-sovereign rights without saddling them with a strong obligation to comply with international norms respecting human rights. Rights without obligations are invitations to corruption.

crossposted with ataxingmatter

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