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The relation between high college tuition and low state funding of higher ed: the right’s austerity agenda

by Linda Beale

The relation between high college tuition and low state funding of higher ed: the right’s austerity agenda
 
As certainly everyone should be aware by now (after almost 20 Republican candidate debates and months of negative campaign ads), the GOP candidates all think that we need to prescribe an austerity budget for state and federal governments. “Too much spending” they yell. “Too high taxes”, they scream. “It makes our big corporations uncompetitive”, they whine. “We need to break the backs of unions so public workers are as poor as workers in private industry, but still give tax cuts to the wealthy”, they assert, “so jobs can trickle down to the poor”. See, e.g., Arthur B. Laffer (yes, he of the laughingstock napkin-drawn Laffer “curve” projecting his view that cutting revenues from taxes increases revenues), “The States are leading a pro-growth rebellion,” Wall St. Journal, Feb. 11-12, 2012, at A11 (lauding the move to free-rider states, where stingy workers can get the benefits from the results of collective bargaining agreements without paying for the costs of supporting the union that got those benefits from them, thus starving and “busting” the union; gloating over the fact that California didn’t adequately fund its state workers’ retirement plans and that the anti-tax movement will keep it from doing so now).
That’s a prescription for disaster.

What our representatives in Congress need to do is look around them–preferably after driving at least 100 miles outside of the insulated Beltway and seeing some of the real country and its people.


We need federal programs that ensure a minimum standard of living for our people. We need a universal, “single payer” system of health care that kicks the insurers out of the profit-from-my-life-threatening-condition rentier existence and resigns them to offering supplemental insurance for those that want cushier than the universal coverage. We need federal enforcement of anti-trust, so that multinationals lose their aura of quasi sovereign status and can’t get “too big to fail”. (if anything is a short catchy phrase for what anti-trust should aid at, too big to fail seems to capture it.) We need to reinvigorate unions, so that ordinary Americans have a chance to grab a slice of the American pie.
Instead, states are putting on the austerity brakes. By keeping state taxes too low–cutting business taxes, cutting taxes on investment income and otherwise generally failing to adopt a steeply progressive tax system that could ensure they have adequate funding for important programs, states are sacrificing their futures. For example, states are forcing students to pay way too much for state universities (while they coddle private universities that should be making it on their own). Tuition has gone up by about the same amount that state support has gone down. States are firing state workers, or making them absorb a pay cut of 10-20% (in the name of making them pay more into their retirement plans while the states pay less, or making them pick up all of the incremental costs of health care coverage). The trickle down effect of those cuts is a slashing of small business in localities throughout the states. States are taking away public bargaining rights–moving us back to a neofeudalism where workers like peasants have to take whatever scraps the big boss throws their way, from cutting wages in half to tossing out the pension plan that the boss never fulfilled his promises towards. They are using a divide and conquer strategy–tell private workers [whose unions were long ago weakened by Taft-Hartley’s provisions and by concerted employer action to impede union formation and lobby for provisions that make it harder to unionize (such as the fight against the ‘card check’ rule)] that it isn’t fair for public workers to still be able to have unions and have good wages and benefits. Bring ’em all down to the dog eat dog world where the 1% will lord it over and the 99% can grovel.
There’s a good letter to the editor in the New York Times Friday 2/10/12, at A22, on the Cost of Public Colleges: easing the burden, by Mark Steinberg, history professor at the University of ILlinois in Champaign-Urbana (my stomping ground before my move to Detroit). He hits it right on.

“Punishing” schools that have partly filled the gap [left by the erosion of state support] with higher tuition may make education cheaper but will surely damage that education. College teachers across the country have seen many of these ‘more cost-effective ways to deliver education’: bigger classes taught by overworked and lower-paid adjuncts, more online courses, freezing the pay of faculty and staff, and other measures that control costs at the expense of quality and access.

Steinberg proposes two solutions to ensure that more money is spend on the “primary mission–serving the public good with new knowledge and educating citizens regardless of income”. The solution is to help states restore higher education funding, and to end the “jack and the beanstalk” growth of administrative positions.
Hear, Hear. Michigan, for one, needs to move to a progressive income tax and use the increased revenues to re-fund its state universities, which have moved from about 60% state funding to about 30% state funding in the last few decades.
If we don’t, we will see the proliferation of preferential treatment of the elite 1%, and the mashing down of most of the ordinary folk to low services. See Peter Funt, How Government Coddles the 1%, Wall St. Journal, Feb. 11-12, 2012, at A22 (noting that purchased privileges like California’s creation of “high roller lanes” for the wealthy who pay a fee and speedy airport screening for the rich are “dangerous precedents” for a country that has long considered the community of sharers of the public good to be undifferentiated by class. What’s next, he asks–public libraries where goold card holders get first crack at new titles; public parks, where the elite get the cleanest, greenest spaces; public beaches, where premium members get the best spots; public memorials, where the elite get the red carpet? As we move in that direction, we not only define an upper class but we place everyone else in a lower caste.
http://ataxingmatter.blogs.com/tax/2012/02/the-relation-between-high-college-tuition-low-state-funding-of-higher-ed-and-the-gop-agenda.html

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Santorum’s Tax Returns Out

by Linda Beale
Santorum’s Tax Returns Out

News Sources report Santorum has released tax returns. I’m on my way to San Diego for the ABA Tax Section meeting, so haven’t had a chance to peruse. But a tax rate of around 25-27% for 2007-2010 on income ranging from $659,000 in 2007 to more than a million in 2009 shows Santorum paid a considerably higher share of his income in taxes than did Romney (at not quite 14%).

See Exclusive: Santorum Releases 4 Years of Returns, Politico (Feb. 16, 2012) (the returns are accessible at links on the Politico website).

crossposted with ataxingmatter

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Misleading Tax Rhetoric Abounds

by Linda Beale

Misleading Tax Rhetoric Abounds

I got the same piece of mail that my colleague and fellow blogger Jim Maule got–a disturbingly misleading rant trying to make a case for zero taxation of unearned income. I started to write a post about it, since this is the kind of material that gets my ire up. It is written with what appears to be an intent to confuse or mislead. It applies vague language when that suits the writer, and fails to explain even the simplest transactions acceptably.

Maule beat me to it. He has an excellent post on Issue 9.04 of Tax Bytes, put out by the Institute for Policy Innovation (a think tank on the right): When Double Taxation Doesn’t Exist, Mauled Again (Feb. 8, 2012).

The problem with the IPI starts with the title of the piece–“when investment earns you additional–not lower–taxes”. Right there they are conflating two things–the original amount earned that was put into the investment, creating a “tax basis” that will not be subject to tax on any disposition of the investment; and the return on the investment when it is sold (or when dividends are paid on it), creating additional “gross income” that will be subject to tax, though at the preferentially low, low rate currently applicable for capital gains.


As Maule points out, the piece seems to be written to try to make the unknowing reader think that all the proceeds of a disposition of an investment will be taxable, not just the NEW income represented by the gain –the increase in value of the investment over the original basis.

The fact that a think tank could publish this kind of tax rhetoric, with so many misleading or erroneous statements, is just one more reason that I have urged my colleagues here at Wayne Law to require all our students to take at least the basic federal income tax course. No student will come out of that course making the mistakes the IPI made in its piece on the taxation of gains from investments. And every lawyer ought to have that foundation, so that they don’t make such foolish statements as those in the IPI piece.

crossposted with ataxingmatter

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U.S. Chamber and corporations fighting for low preferential capital gains rates

by Linda Beale

U.S. Chamber and corporations fighting for low preferential capital gains rates

A coalition of the U.S. Chamber of Commerce and large multinational corporations such as Altria Group Inc. and Excel Energy Inc. is trying to pressure Congress to retain the extraordinarily low current tax rates on unearned income that will expire at the end of 2012 without action.

The alliance sponsored a report by Robert Carroll and Gerald Prante of Ernst & Young that develops the idea of an “integrated tax rate on dividends” that includes the taxes paid by the dividend-paying corporation, the federal income taxes paid by the recipient, and the state taxes paid by the recipient. See Carroll & Prante, Corporate Dividend and Capital Gains Taxation: A Comparison of the United States to other developed nations (Feb. 9, 2012), Higher Capital Gains and Dividend Taxes Would Put U.S. Further Behind International Competitors, Alliance press release (Feb. 9, 2012); Richard Rubin, Corporate Coalition Says Obama investment taxes Near World High, Bloomberg.com (Feb. 9, 2012)(republished on the Alliance website). The report claims that the U.S. has an “integrated” rate of 50.8%. The report claims that such a rate “discourages capital investment, particularly in the corporate sector, reducing capital formation and, ultimately, living standards.” Richard Rubin, Corporate Coalition Says Obama Investment Taxes Near World High, Bloomberg.com (Feb. 9, 2012).


Robert Carroll is a former Bush administration official who regularly presents on behalf of corporatism’s Holy Grail of lower corporate taxes, lower dividend rates, and/or change to a territorial tax system for U.S. corporations. See, e.g., Charting a Course for Tax Reform–Moving the U.S. Towards a Territorial Tax System (Jan. 2012); Considerations for a Value-Added Tax (July 26, 2011) (arguing that a VAT-type consumption tax could permit lowering corporate tax rates). Carroll’s VAT article makes the same argument as here–that taxes hurt investment and therefore jobs.

Greater reliance on value-added taxes, or other consumption-type taxes, to fund government can help improve economic performance because consumption taxes do not tax the return to saving and investment. By not taxing the return to saving and investment, these taxes reduce the cost of capital and lead to greater investment. Greater investment means more capital formation, and, ultimately, higher labor productivity and living standards than otherwise. Id.

But these arguments ignore the distributional impact of shifting taxes from corporations and wealthy stock traders to everyday Americans who make 30,000 or 50,000 or 75,000. The drive by the GOP and big corporations to save the wealthy from paying much in taxes shows no concern at all for the fact that the tax burden would be shifted to low-income Americans.
Not surprisingly, the tax rate analysis in this “for hire” E&Y report is highly misleading. Let’s note the reasons, yet again.

  • The report assumes that shareholders bear the full brunt of the corporate income tax. Yet there is no conclusive evidence about the incidence of corporate tax. Many shareholders such as pension funds are tax exempt and pay no tax on the corporate dividends.
  • The report assumes that corporate income is taxed at the federal statutory rate of 35%, whereas in reality the vast majority of corporations pay zero federal income tax and those that pay tax pay an average around 24% effective tax rate (with many lower). Aggressive tax planning, cross-border tax credits, and various deductions (including greatly accelerated depreciation and expensing compared to actual economic wear and tear) allow corporations to reduce their tax liabilities much below the nominal statutory rate. While a chart on page 4 (showing a $100 income amount suffering the 35% corporate rate, an average state corporate rate, a 15% shareholder federal tax and a 4% assumed average shareholder state tax) indicates this is the “top” rate, most of the report discusses this “integrated” rate as though it were the actual rate paid.
  • The report disregards the fact that capital gains are also earned outside of corporations (as Dan Shaviro noted in the Bloomberg piece). It suggests that the corporate level tax will impact “each worker”:

With less capital available for each worker to work with, labor productivity is lowered, which reduces the wages of workers, and ultimately, Americans’ standard of living. Report at 5.
Yet much of the work done in this country is not done for major corporations. There are partnerships and S corporations and sole proprietorships all operating businesses and providing capital gains in appropriate contexts. (And of course most of the capital gains that are being taxed aren’t earned from money that was invested in corporations but rather from corporate stock bought in the secondary market. All this talk about capital for workers is irrelevant to those secondary market trades. See this point below.)

  • The conclusions disregard the fact that investors can defer taxation of capital gains indefinitely by choosing when to sell, and that many gains are never taxed at all over multiple generations, since heirs receive corporate stock (and other assets) with a step-up in basis. (Text accompanying footnote 5 merely mentions that the effective rate “might” be lowered by this fact; the footnote notes that “common practice” for determining the impact would give an integrated tax rate of 43.1%.)
  • Chuck Marr, at the Center on Budget and Policy Priorities, also indicated that “the report also ignores the total tax burden around the world. In 2009, U.S. tax revenue of 24.1 percent of gross domestic product was 9.7 percentage points below the unweighted average of countries in the Organization for Economic Cooperation and Development.” As a result, “the United States is actually a very low-tax country compared to all these other countries.” Richard Rubin, Corporate Coalition Says Obama Investment Taxes Near World High, Bloomberg.com (Feb. 9, 2012).
  • The report purportedly compares top integrated tax rates among the developed countries. But does it really include all the relevant taxes for other countries? It is not clear that the VAT, for example, has been included in countries where a VAT is a significant addition to regular income taxes: the report mentions only corporate income tax rates and dividend tax rates in discussing other countries’ “integrated” rates.
  • The report ignores the fact that there is at best a very slim correlation between the transfer of funds to a business entity for use in running the business and capital gains taxation. Most corporate stock is purchased in the secondary markets, not at IPOs. Most of the gains that are taxed are therefore just accretions in value as corporate stock changes hands from one investor to another. There is no benefit of capital formation for the corporation from the trade–the money goes into the pockets of the one who sells, possibly to be reinvested offshore in an emerging market economy or to purchase the stock of another U.S. MNE.
  • The report assumes that half of any increase in dividend taxes is absorbed into share value but the other half “influences investment decisions”. n.12. This is one of those “anything goes” assumptions that is so annoying about supposedly empirical work that tries to “predict” how behavior will be affected by taxes.
  • The report discusses a “marginal effective tax rate” and suggests that corporate capital will be reduced by that rate, resulting in less expansion and less job creation. But that rate as shown here includes the statutory tax rate on the corporation’s profits and the shareholders’ tax rate on its unearned income from holding corporate stock. Even if one thought that using the statutory rate to discuss corporate tax burdens was reasonable (which I do not), this mingled rate is not the relevant rate that the corporation would consider in determining whether it was profitable and could expand and add on workers or jobs. The corporation may retain its profits and use them to expand or provide working capital, and not pay dividends to shareholders. Many corporations have in fact foregone dividends and instead invested in share buybacks, which give a perceived benefit from reducing the total number of outstanding shares. Interestingly, while the report uses this mingled rate to argue that taxes are bad because it will keep corporations from investing and hiring (pp5-6), it also argues that taxes on unearned income of shareholders from corporations will mean corporations will retain those earnings and “overinvest” in the corporation (p7). Talk about trying to have your pie and eat it too.
  • The argument that fungible investor capital will necessarily flee the country if capital gains rates are allowed to go back to at least the level they were under Clinton, as GOP representative Peter Roskam from Illinois suggests, id., simply misundersands what drives investment decisions and the way our tax system works.
    • Many other factors drive investors to purchase stock, whether in IPOs or in the secondary market, including the stability of a country’s markets, the vigorousness of economic growth, the price-earnings ratios of corporate stocks, the economic outlook for particular industrial sectors, etc.
    • Americans are taxed on their worldwide income, so they don’t avoid the US tax on capital gains unless they expatriate.
  • Taxes are just one factor, and in fact corporate stocks traded quite well when capital gains taxes and dividends taxes were much higher than they are now. Many experts think that removing the preferential rate for capital gains would be the most reasonable way to level the playing field for workers and managers/owners, while raising billions to offset the federal deficit.
  • The distributional effects of very low capital gains tax rates are detrimental. Most of those who benefit from the preferential capital gains are the wealthy who own most of the financial assets, with about 2/3 of the benefit going to millionaires, according to the Tax Policy Center. Id.

Taxes on earned income–salary and wages–are graduated, rising to a maximum of 35% for top income earners. Taxes on unearned income, such as dividends from qualifying corporations or gains from sales of corporate shares, are only 15%. This significant disparity in rates (35% compared to 15%) means that the wealthy who own most of the financial assets and have most of the capital gain income enjoy an extraordinarily preferential tax rate. The result is that wealthy individuals like Mitt Romney can end up paying a significantly lower tax rate than construction workers, firefighters and schoolteachers. That’s unreasonable: the nation would be better served by eliminating the capital gains preference and using those funds to rebuild public infrastructure.

Additional information:
Alliance Statement on Capital Gains and Dividends Tax Provision in the Republican Jobs Committee Proposal (Nov. 2, 2011) (same assertions as in the E&Y report that lowering taxes on unearned income will have wonderful trickle-down effects on the economy)

originally published at ataxingmatter

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The 1% are the only beneficiaries of Greek austerity, not ordinary Greeks

by Linda Beale

The 1% are the only beneficiaries of Greek austerity, not ordinary Greeks

An interesting post over on Naked Capitalism on the Greek austerity measures being demanded by the EU leaders (Germany, mostly) and the IMF: Marshal Auerback: Greece and the Rape by the Rentiers (Feb. 10, 2012).

The austerity demands, in order for a sovereign nation to pay back its debt to mostly big banks that lent money recklessly in the leadup to the financial crisis, make no sense at all. If you impose austerity, you clamp down on the economy. If you clamp down on the economy, the poor and near-poor who are already struggling will struggle even more. Unemployment will increase. Desperation will set in and crime or revolution will follow. The 1% at the top do okay at least for a while–after all, they’ve been hogging all the good stuff for a decade at least, and many of them (if the scofflaw wealthy in this country are any guide) will have sequestered funds away in hidden offshore bank accounts to bide them through the rough times or even support them if they expatriate to avoid the mayhem. When austerity measures include privatization of public assets, that same top 1% is able to acquire very valuable assets for a song and then charge “rentier” rewards for the public to use their own assets.


That’s the story that Auerbach tells for Greece, as he wonders why they don’t just get the hell out of the Euro zone and go back to their own currency. They probably will default anyway. But they will have paid a high price for trying to avoid default–the huge cut in wages, increase in unemployment and suffering going on now, and the privatization of even more of their public goods. Greece plans to sell six national companies–energy companies and refineries are included. The banks must be shitting in their pants in excitement.

originally published at ataxingmatter

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Finance moves transportation bill–revenue sources at issue

by Linda Beale

Finance moves transportation bill–revenue sources at issue

Senate Finance committee approved on a 17-6 vote the transportation financing proposal (13 Dems and 5 GOP voting yes; the GOP were Snowe, Crapo, Roberts and Thune).
The GOP –Jon Kyl a favorite spokesperson–claimed that the Committee’s rush had “lost the opportunity to have a truly bipartisan deal.” See BNA Daily Tax RealTime 020712. What that means is that the GOP doesn’t like the revenue provisions in the bill (surprise). In particular, they don’t like the “black liquor” provisions (see my earlier post about that) and the pension provision.

What’s the pension provision? It is expected to raise about $4.648 billion over ten years. It provides that inherited IRAs and 401(k)s must pay out (and therefore be taxed) over a 5 year period instead of over the expected life of the beneficiary, unless the beneficiary is the account holder’s age, a child with special needs, or past 70 years old.

Those Congressmen interested in protecting fat cat privileges can be expected to boo-hoo over the poor beneficiary who inherits a windfall of cash and, gee, has to pay tax as it gets paid to him over 5 years instead of getting to defer most of it by taking it into acccount over his lifetime. But taxing that to the beneficiary up front is clearly the right answer. The beneficiary did nothing to earn it. It is funds that have been accumulating over time in the IRa without tax. If beneficiaries are allowed to keep it in the IRA and continue the tax-free growth over most of their productive lives as well, they really receive a windfall–millions of tax free accumulation. See Richard Rubin, Senate Baucus Eyes Inherited IRAs for $4.6 Billion, Bloomberg.com (Feb. 7, 2012).

As the Bloomberg story notes, the intended purpose of IRAs is as a retirement planning tool, not a way for wealthy estate holders to pass even more of the estate to beneficiaries essentially tax free. Ending that tax bonus makes sense. Not unexpectedly, estate planners don’t like the idea: one estate planner objected that this deal would be a “non-starter” because “there’s too much invested in the whole stretch IRA concept.” In other words, wealthy people like their perks, so the Congress won’t have the guts to eliminate a provision that made no sense as a policy provision from the outset!

originally published at ataxingmatter

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Why we don’t need corporate tax "overhaul":

by Linda Beale

Why we don’t need corporate tax “overhaul”

GOP poormouthing on behalf of rich corporate allies(Part I in a series) These days, one hears a great deal from politicians on the right about how a corporate tax “overhaul” is needed because our taxes are “too complex” and/or “too anti-competitive” or because our tax rates are “too high”. The same GOP politicians who whine and whimper about how huge the deficit is, and accuse President Obama of driving our country to ruin with the deficit are willing to lower the tax burden paid by highly profitable corporations considerably (thus increasing the deficit and adding to regressivity of the tax system)–so long as they are appeasing their multinational constituency, the huge corporations who are the new providers of campaign funds and the new decisionmakers in elections–even though the corporate entities have no vote. Claims of revenue neutrality are generally little more than PR cover for corporate giveaways.

Just a couple of examples from a recent Bloomberg piece:

  • Republican Senator Robert Portman says he will unveil a new proposal soon that will cut taxes for multinational companies’ repatriated offshore profits–i.e., a permanent tax holiday for multinationalsm as a first step towards a very MNE favorable move to a territorial tax system–that will remedy “an inefficient and complex maze of tax preferences”. See, e.g., Kathleen Hunter, Portman Corporate Tax Plan to Include Low Repatriation Rate, Bloomberg.com (Feb. 1, 2012). Portman claims this huge tax cut for the high and mighty MNEs (and their managers/owners) is needed because they “pay[] a very steep tax bill if and when they choose to bring their money home.” Ludicrous. There is a very generous foreign tax credit provision that allows many MNEs to reduce their taxes to near zero anyway. Further, the deferral they are allowed on active business income gives them the time value of money benefit. Most of what foreign corporations want to do is allow their taxes on non-US income to reduce their taxes on US income–which is a kind of subsidy for offshoring that costs US jobs. And of course, as I’ve noted in earlier posts on tax holidays and proposals for a territorial system to replace a worldwide system, corporations hold more money overseas when they think there is a good chance that their buddies (or “bought pols”?) will give them the tax break they have been lobbying for–so these proposals encourage corporations to engage in the activity that these proposals say they are addressing, thus giving them more ammunition to get the change they want. Portman, of course, says he wants to “streamline” the corporate tax and lower the rate to 25%. We have a statutory rate of 35% now and most corporations that pay taxes (which are not by any means all of the corporations that make significant profits) pay less than 25%. If we lower the statutory rate to 25%, it is quite likely that most corporations that actually end up paying taxes will be a smaller number than with the 35% rate and at a much lower rate–probably around 10-15% instead of 20-25%. Of course, what the result will be–as it was in the 1986 tax reform that lowered rates for ordinary income and ended a number of problematic tax preferences such as the capital gains preferential rate–is that the lower rates will stay, and all of the loopy tax preferences (and more) will be reenacted within a couple of years under heavy lobbying for the same by the corporations that benefit from this round.
  • Dave Camp, Michigan Republicans and Chair of the House Ways and Means Committee, wants to exempt 95% of overseas profits.

Is there merit in this drumbeat of (lobbyist-induced) calls for “corporate tax overhaul legislation”? The simple answer is no.

On Complexity:

Most complexity in the code is there for one of two reasons.

The most likely reason for complexity is the creation of tax preferences heavily lobbied for by corporate lobbyists. One example is the so-called “domestic production activity deduction” that lowers the tax rate by 9% for most industries (even ones that don’t really produce anything) and 6% for natural resource extractive industries. There are tax breaks on top of tax breaks for the resource industries, of course, that get numerous special benefits throughout the Code, while joining in various coalitions that lobby AGAINST even extraordinarily modest support for green industries (such as reasonably low cost loans for solar power).

The second main source of complexity is the clear need for specific anti-abuse provisions to undo the harm done when corporations use what can most charitably be called aggressive and inventive interpretations of Code provisions–often ones that are hyper-literal in nature (the kind of analysis that allowed the Bush Treasury to redefine what “exchange” means in the reorganization provisions in order to allow taxpayers to manipulate the allocation of consideration to create a hitherto unrecognizable tax loss in the reorg transaction) or turn the Code’s clear textual provision on its head (look at the briefs for the defendant–or for that matter the lousy statutory interpretation in the district court opinions– in the Black & Decker contingent liability shelter case, where Black & Decker argued for application of a provision in section 357(c) (which says explicitly that it applies only where paragraph one of that provision applies) in a context where paragraph one did not apply).

As a result of the contingent liability shelters, Congress added various Code provisions, including section 358(h) (having to do with the basis for corporate assets in transactions with significant liabilities) and section 357(d) (having to do with calculating the amount of liability assumed).
Complexity, in other words, is not an evil in itself. Sophisticated taxpayers aren’t harmed by complexity, and in fact complexity is needed to provide sufficient detail to prevent sophisticated taxpayers (with the help of their tax advisers) from cheating. There is generally less complexity in provisions that are relevant for unsophisticated taxpayers, though it is more clearly an obstacle to good tax compliance behavior there.

On Competitiveness:

Competitiveness is used so frequently that it seems doubtful that anybody really knows what they mean by it. If one company destroys a union and is able to pay their workers lower wages as a result, then a company that produces a similar product will claim that “competitiveness” requires that they be allowed to do the same. Of course, another approach would be for the company that retains an active union, and continues to provide pension and health care benefits could lobby Congress to enact stronger laws protecting worker rights to pension and health care benefits. In other words, competitiveness is consistently used as an argunent, when it comes to corporations, for taking away benefits to workers, communities, states and the nation for the benefit of the corporations.

Competitiveness could just as easily be used to argue for maintaining programs, procedures and benefits for workers, communities, states and the nation by considering what would be necessary to buttress the system that supports those benefit levels. And in fact that view of competition–that we are competing globally to create both profitable companies AND a secure and well-paid workforce that can support a healthy economy that can in turn support a quality of life in all dimensions–would lead to different decisions not only about taxation but also about anti-trust, excise taxes, trade treaties, environmental protection, and many regulatory projects.

Furthermore, competitiveness is often used as an argument in the abstract when the main competitors are both US based companies. There, the argument for reducing taxes to enhance competitiveness is at its weakest, but few competitiveness arguments reveal just how the competititon is playing out even on a globalized playing field.

On Rate Structures:

The 1986 tax reform act is a frequent reference these days when people talk about amending the Code generally and specifically about amending the corporate tax provisions. But the context for that act’s passage was quite different. Individuals were taxed at rates that were reasonably progressive–with a top rate at 70% (though the brackets could probably have been better defined to differentiate among top income recipients). Further, the 1954 Code had built up a plethora of tax preferences (especially useful to the rich) and the Congress had realized that the preferential capital gains rate was wreaking havoc on sensible provisions because of the arbitrage opportunities it created. Thus, there was room for “base broadening” (removing ill-advised preferences spread throughout the 1954 Code) as a means of paying for “rate lowering” (lowering the fairly high rates about half, without costing the fisc because of the higher amount of income on which those rates would be charged).

We are not in the same situation today. We have very high deficits because of an economic crisis caused by two interwoven problems–(i) the lax regulatory oversight of 40 years of Reaganism, which permitted the financialization of the economy and led to excessive incomes for people at the top (managers and owners, hedge fund and equity fund managers, and speculators generally) and excessive debt for banks and especially people not at the top (because of their stagnant or reduced incomes in the face of growing costs, caused in part by the relaxation of regulations and anti-trust activity coupled with the anti-union attitudees and activity); and (ii) the success of a radical right-wing fringe in characterizing government and business as having adverse interests and progressive programs supporting social well being (from Social Security to Medicare to Medicaid to (modest) heatlh care reforms intended to reign in the cost of medical care to unemployment benefits to efforts to reign in contracts of adhesion in the consumer credit markets) as “unmerited” “entitlements or costly and anti-competitive regulation of businesses that counters the “free market” that will ensure “growth and jobs”.

The result of the rhetoric is a citizenry that is ignorant of the actual income distribution, tax burdens, and impact of government spending on jobs and the health of the economy. The result of the 40-year “reaganomics” effort from the right to cut regulations, cut taxes, privatize and militarize is that this is no context for rate reduction but in fact a context in which those who can afford to do so–for sure those individuals and households in the top two quintiles of the income distribution that comprise the upper middle class and the upper class and all profit-making corporations–should be paying taxes at HIGHER rates, not lower rates.

It should be noted that President Obama–who is at best a middle of the roader on tax issues–also is said to plan to propose an “overhaul of the U.S. corporate tax system” in connection with his budget plan for FY 2013 that involves lowering rates and base broadening. See Steven Sloan, Obama said to propose corporate tax overhaul next month, Businessweek.com (Feb. 2, 2012). Again–lowering the rate is a bad idea. Lowering the rate without base broadening is a stupid idea. But the kind of base broadening that is included, if such a proposal eventually passes, matters an awful lot. The problem is that if Obama proposes such a reform, the GOP won’t support it unless the “base broadening” is essentially inconsequential and can be undone easily later or affects only little guys and not the big-monied lobbyists. Thus this looks like another of those initiatives from the White House that play into the right’s agenda and do little to advance any progressive idea.

originally published at ataxingmatter

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Obama’s State of the Union vs Romney’s Tax Returns

by Linda Beale

Obama’s State of the Union vs Romney’s Tax Returns

Obama took the high ground in his state of the union address, where he pointedly noted the importance of applying fair tax rules to ensure that millionaires pay taxes at rates more similar to those paid by secretaries and firefighters. He wants a 30% rate on those with incomes of a million or more.

We can either settle for a country where a shrinking number of people do really well, while a growing number of Americans barely get by,” Obama said in his address to a joint session of Congress. “Or we can restore an economy where everyone gets a fair shot, everyone does their fair share and everyone plays by the same set of rules.” STeven Sloan, Obama Says High-Earners Should Pay at least 30% of Income as Tax, Bloomberg.com, Jan 24, 2011.

That would mean that Romney wouldn’t enjoy the exceptionally low rate of tax he had in 2010 after Congress enacted Obama’s suggested reforms. Romney released his tax returns on Tuesday. See this handy link on the New York Times at which the 2010 and 2011 returns and accompanying documents are available, including links showing where Romney earned his $528,871 in speaking fees, etc.. Romney paid only 13.9% on $21.6 million of income, benefitting enormously from the low preferential capital gains rate of 15% that he paid on his returns from his investment of capital. Romney benefitted, too, from investments in the Cayman Islands, a well-known tax haven. And he is still earning “carried interest” from Bain Capital to the tune of multiple millions a year–that’s a share of the profits of a partnership he managed, treated as though it were a return on an investment of capital though it is paid for services. Romney is most definitely one of the 1%–actually in an even more rarefied class cluster of the top 0.006% of multimillionaires with lots of very low taxed income. See Kevin McCoy, Romney tax returns show he’s no average multipmillionaire, USA Today (Jan. 24, 2011) (noting that only 8274 returns out of 140 million filed had income of $10 million or more in 2009); Lori Montgomery et al, Mitt Romney’s Tax Returns shed some light on his investment wealth, Washington Post (Jan. 24, 2012); Nicholas Confessore, Romney’s Tax Returns Show $21.6 Million Income in ’10, New York Times (Jan. 24, 2012).

As the Times story puts it:

What Mr. Romney’s returns illustrated, instead, was the array of perfectly ordinary ways in which the United States tax code confers advantages on the rich, allowing Mr. Romney to amass wealth under rules very different from those faced by most Americans who take home a paycheck.

Obama’s proposals sound reasonable. But I’d extend the basic concepts to the corporate tax. Every corporation that is making book profits of more than some amount ($5 million? $10 million) ought to be held to a similar minimum tax rate on those book profits.

Funny, that is what the original Alternative Minimum Tax (for individuals, and one for corporations) was supposed to achieve–to ensure that everybody paid at least a reasonable rate on their income, even if they could cumulate lots of preferences like mortgage interest deductions, state income taxes, property taxes, and similar deductions. Over time, the AMT has eroded–too many exceptions made, too many taxpayer friendly amendments, and then the Bush tax cut bills that lowered rates so that the AMT rates aren’t really working well as a “broader base but lower rate” tax that ensures that even high-flying income recipients pay a more reasonable tax rate on their income.
http://ataxingmatter.blogs.com/tax/2012/01/obamas-state-of-the-union-vs-romneys-tax-returns.htm

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Gingrich’s 2010 Tax Return: what it does (and doesn’t) tell us

by Linda Beale

Gingrich’s 2010 Tax Return: what it does (and doesn’t) tell us

In last Thursday’s debate, Newt Gingrich released his 2010 Gingrich Foundation tax return and the Gingrich Joint Tax return. See Kim Dixon & Marcus Stern, Gingrich tax return out, but much remains unseen, Reuters (Jan. 20, 2012); Paul West, Gingrich tax return details sources of income, alimony payment, L.A. Times (Jan. 19, 2012); Jon Ward, Newt Gingrich Releases His Tax Returns, Huffington Post (Jan. 19, 2012; updated Jan. 20, 2012) (the Gingrich press release, with links to both returns, is also accessible from a link at bottom of this brief article).

The private foundation’s return lists Callista Gingrich (presumably in her role as President) as having custody of the books at the Foundation’s address in Washington. It lists Newt Gingrich as the only manager who contributed more than 2% of the contributions received during the year, and another form (Schedule B) lists Gingrich Holdings as the contributor of $152,609. Callista Gingrich is listed as the president (with zero compensation) and Newt Gingrich as a board member (with no compensation). A treasurer is listed with $1800 of compensation, a secretary with no compensation, and two other uncompensated board memberes.


 The Foundation supported the following organizations with a total of $120,000: Mount Vernon Association, Basilica of the National Shrine, Shiloh Point Elementary in Cumming GA, Amerivan Museum of Natural History in New York, The Washington Opera, The Atlanta Ballet, A Learning Foundation inAtlanta, the Arthritis Foundation, Mount Paran Christian School in Kennesaw GA, the Walker School in Marietta GA, Luther College in Decorah IA, Susan Chambers Dance in Sugar Hill GA, Breast Cancer Research in New York, and Alzheimer’s Association in Washington.
The joint tax return shows income in 2010 of more than $3 million, with about $450,000 in compensation income and about $2.5 million of Schedule E income through his S corporations Gingrich Holdings inc and Lubbers Agency Inc. and partnerships Draper Fisher Jurvetson Fund VIII and FLC XXXII Partnership LP. (He apparently restructured these businesses before entering into the Republican nomination contest, perhaps foreseeing better than Mitt Romney did that voters might react to the very idea of a giant holding company through which one receives one wealth.) The Salaries and Wages report shows that $450,000 in compensation income arising as follows: 252,500 in wages to Newt from Gingrich Holdings, Inc., and to Callista 5918 from National Shrine and 191,827 from Gingrich Productions, Inc. According to the Reuters story, Gingrich’s earlier disclosure said the Gingrich Holding income was mostly a distributive share (the tax term for a pass-through payment from an entity taxed as a partnership) from Gingrich Productions. His Schedule SE shows only 847 of self-employment taxes in connection with the various schedule C, K-1 etc. income, while Callista’s shows 268.

Also revealed on the tax return are the following: $41,625 in speaking and board of director fees (showed as business income on line 12), $6,853 in rental income, $26,655 in taxable interest, $11,892 in ordinary dividends (not eligible for the 15% net capital gain rate), $5,990 in qualified dividends (eligible for the 15% net capital gain rate), $4,184 in net short-term capital gains and $32,133 net long term capital losses and $33,124 of taxable refunds, credits or offsets for state and local income taxes The couple claimed a total itemized deduction of $215,095. They made $81,133 in contributions to various charities and paid $122,844 in state and local income taxes, $11,656 in real property taxes, and $2,422 in personal property taxes, as well as 8505 in tax preparation fees. They also enjoyed $10,754 of tax-exempt interest (not part of their taxable income). The Gingrich couple paid almost a million in taxes, giving them an effective tax rate on the 3.1 million of income of around 31%.

  • Re those net short term capital gains: Gingrich bought and sold shares in Campbell Soup in 2010 (losing 74), bought shares in Celgene Corp in 2009 and sold them in 2010 (making 2591), sold in 2010 shares in American Funds Capital bought at various times, for a 346 gain, and similarly sold shares in Nuveen High Yield fo a 1225 gain.
  • Re those net long term capital losses: Gingrich sold shares bought at various times of Martek Bioscience, American Funds capital, Ishares Trust s&P smallcap 600 and Ishares Trust Russell 1000 Value, which combined with the long-term totals from Schedule D-1 of 1.023 million (from sales of various funds and closing out of $600,000 worth of CDs) yielded an aggregate of 1.257 million with a claimed loss of $35,636. Using his capital gain distribution from Schedule D-1 of 1018, that left a net LTCL of 32,541.

There are several things worth noting about Gingrich’s release of the couple’s tax information.
1) this is only a single year’s return–2010. George Romney, Mitt’s father, famously began the more transparent information sharing about presidential candidates by releasing 12 years’ of his own tax returns. Gingrich should follow that example, even if Mitt isn’t sure he will. Multi-year returns are necessary for tax experts to even begin to pierce the veil of tax secrecy by seeing trends and patterns in types of income. One year of returns tells you very little. Gingrich should release returns back to his volatile period in Congress and his scuffle with the ethics inquiry, and should release returns relating to the period when he earned what he calls “consulting” fees based on his being a “historian” for Freddie Mac (see item 3).

2) we don’t have tax returns for Gingrich Holdings or Gingrich Productions, or even the informative financial statements that publicly traded companies are required to provide. Those privately held corporations are therefore able to function as “blockers” to maintain a good deal of secrecy about Gingrich’s own income even with the release of his return. Back before Nixon, corporate tax returns were public information and were not kept secret by the Service. We should go back to that, because corporations, whether publicly traded or held privately, are benefitting from the public trust and the state’s willingness to allow them to form. There seems to be little justification for maintaining any business entity returns as confidential documents, with some redaction allowed to maintain trade secrets. But until we do, we won’t know anything more than what Gingrich tells us (or reporters can get “deep throat” sources to divulge).

3) Gingrich’s return labels him a “consultant” but we know very little about his client list or his activities for his clients. We know he worked for Freddie Mac: he claims he wasn’t a lobbyist but that is a hard one to swallow whole. It is difficult to imagine Freddie Mac paying the consummate politician as though he were a mere historian doing historical research but it is very easy to imagine Freddie Mac paying a well-connected lobbyist, shoes that Gingrich’s role as House Speaker ensures that he would have fit into easily. We know that he worked as a “consultant” during the passage of the Medicare Part D prescription drug provision. Again, that sounds more like lobbying than “consulting”. The problem is that Washington has written weasel rules for lawmakers who “consult” so that they can claim they are not “technically” a lobbyist, as Gingrich is doing. But voters should want to see what kinds of reports he provided on the Medicare and Freddie Mac issues, as Romney is insisting. Otherwise, he is just hiding behind the very thin curtain of the fuzzy line between obvious lobbying and “not required to register-wink/wink lobbying”.

4) Congressmen pay themselves nice little pensions even while the GOP is making an ideology out of its desire to cut private pension benefits for unionized workers (in the name of ‘saving’ business but really in the name of passing along even higher profits to managers and owners) and its intention of “reforming” Social Security (meaning leaving beneficiaries who depend on this system that they’ve paid into all their lives with less money than they should be able to have). Gingrich’s return reports more than $76,000 in 2010 from his Congressional pension.

originally published at ataxingmatter

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Romney to release tax returns Tuesday (finally)

by Linda Beale

Romney to release tax returns Tuesday (finally)

Romney’s bitter loss to Newt Gingrich in the Republican primary in South Carolina demonstrated that playing the patrician elite above the fray has its limits as a campaign strategy. Romney’s strategists had apparently thought that they could get away with not releasing tax returns–at least not any except his 2011 ones (maybe) when filed–but they hadn’t counted on vicious attacks from the GOP right that questions his vulture capital millions and his top1% effective tax rate.

That’s what happens when there is a campaigner who thinks that earning $370,000 from speeches given to meaningless conventions of some trade or another is “just a little money”, while admitting that the money he still earns from the vulture fund where he oversaw takeovers of companies (and layoffs of employees and offshoring of work) manages to be taxed at a preferential rate of merely 15%.


So after the loss to Gingrich (an odd man to try to claim a populist mantle when he had a $500,000 line of credit at Tiffany’s and disposes of old wives the way most people dispose of old socks), Romney has now announced that he will release returns plus an estimate of his 2011 taxes due. See Michael Shear, Romney to Release Tax Returns on Tuesday, The Caucus, New York Times (Jan. 22, 2012).

One does wonder why it will be Tuesday when they are released. Why not today? or six months ago? Will they be redacted? Will the accompanying schedules that show his income coming through tax haven “companies” located in the law offices that house 18,000 others in the Caymans be there? Questions that we will have fun examining on Tuesday, anyway.

Oh, and Mitch Daniels, current governor of Indiana and Bush assistant who helped preside over the real growth of the federal deficit as Bush pushed through huge tax cuts while increasing federal spending (especially on preemptive wars), will give the GOP response to the State of the Union message. The Tea Party has picked Herman CAin–the author of the infamous 9-9-9 plan who wanted to shift the tax burden brutally onto the backs of the working poor. The GOP seems to have tax cuts for the rich accompanied by increasing burdens for the poor in its blood, doesn’t it
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originally published at ataxingmatter

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