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

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

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

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A Random Observation About the 1970s… and the 1980s

by Mike Kimel

A Random Observation About the 1970s… and the 1980s

People often point to the stagnation of the 1970s, and the Reagan administration that followed, as evidence that cutting taxes leads to faster economic growth. But the same folks rarely look at the flip-side of things, and when they do, they don’t reach consistent conclusions. Here’s an example of what I mean. Real GDP grew 14.5% from the first quarter of 2003 to the last quarter of 2007. That is a 20 quarter period. I started with 2003 because that’s the year that tax rates dropped to 35%, and it was also more than a full year after the 2001 recession. I picked the last quarter of 2007 as the end point because the economy peaked in that quarter.

What followed, of course, was the Great Recession. 2003 Q1 to 2007 Q4 were the years of the Greenspan Put, and the real estate bubble. If it isn’t clear, I am cherry-picking, purposely selecting a period that best showcases the the 35% top marginal income tax rate era.
Now, 14.5% growth over 20 quarters lacks context. So here’s context. Take any consecutive 20 quarters beginning no earlier than Q1 of 1970 and ending in Q4 of 1980. There are 25 such periods. Only seven of them, or 28% of those periods, saw real growth rates below 14.5%. 72% of those periods had real GDP growth rates above 14.5%. (It is worth noting that four of those seven periods began in 1970 or Q1 of 1971 and that Carter didn’t take office until Q1 of 1977.)

Now, the 1970s were the decade of the Oil Embargo, the Iranian Revolution, inflation, stagflation, polyester, the Bee Gees and big sideburns. Big sideburns for crying out loud. They were also an era with top marginal tax rates of 70%. And yet, they compare very favorably to the best years we’ve seen since tax rates fell to 35%.

Now… let us discuss a more recent period. Reagan famously cut taxes – top rates were at 70% when he took office, and by 1986 were down to 50%. In 1987 they were cut to 38.5%, and then to 28% in 1988. They rose slightly to 31% in 1991. Finally, under Clinton, in 1993, top marginal tax rates rose to 39.6%. So we’d expect exceptionally rapid growth from 1987, ending around 1993, right? Well, pick any quarter from 1986 Q1 to 1991 Q4 and consider the growth in real GDP over a twenty quarter period. Every single one comes in with growth in real GDP below 14.5%.

That is, every single one under-performs the period that under-performs the 1970s. (I guess we can say those periods were under-performing squared.) The conclusion is clear, but I’m sure it is different to folks on different ends of the political spectrum.

Data here.

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Essential Health Benefits and cost benefit analysis: can we maintain doctors’ incomes and provide decent care for all?

by Linda Beale

Essential Health Benefits and cost benefit analysis: can we maintain doctors’ incomes and provide decent care for all?

 So we thought we had finally created a national system of health insurance that would permit near-universal coverage for essential health benefits to every American.

But the Obama administration says it is not going to write rules regulating exactly what benefits must be covered.  Again bowing his head to the GOP personal responsibility/states’ rights mantras, the president is willing to let states “experiment” like they do with Medicaid.  Question whether this amounts to allowing right-wing states to shift benefits to private profits and away from care for Americans?
This goes back to the recommendation from a panel at The National Academic of Sciences, which said that the federal government should take cost into consideration in deciding what’s essential to be provided by health insurance plans under the reform act and that new benefits should be ‘offset’ by cost cutting elsewhere. Robert Pear, Panel Says U.S. Should Weigh Cost in Deciding ‘Essential Health Benefits'”, New York Times, Oct. 7, 2011, A14.
But a primary problem with cost-benefit analysis as typically understood is that it favors the status quo because any new benefit for which money must be expended will cost compared to the current system, and the benefit is much harder to turn into a quantitative number that will prove that the cost is worth it.  It is very hard to do truly ‘dynamic’ cost-benefit analysis–the assumptions used tend to be a one-size-fits-all and it is hard to calculate the way that the immediate benefit builds even more substantial long-term benefits and then result in much lower costs down the road,

so that current costs that will have substantial long-term benefits that may not add up to significant numbers until years or decades have passed will tend to be viewed as negatives, whereas maintaining a terribly ineffective and unjust status quo will be seen as positive.  Even more killing for any cost-benefit analysis of medical reform where part of the reason for the problem is the exorbitant pricing that creates large profits for doctors and for-profit hospitals is that If ‘costs’ take into account the fact that decent health care modeling should reduce the highest end medical provider incomes (like the excessive profits made by private nursing homes and hospitals and surgeons who do not work on salary, etc.), then of course the cost-benefit analysis will favor the status quo where those that have money get good care and those that don’t die.

One of the ways that the failure to adopt at least a public option or ideally a single (national) payer option for health care reform shows is that the panel suggested that the minimum coverage required should conform to what small employers provide–typically much less generous coverage than that provided by large employers.  As the October New York Times article on this noted, “This reading of the law was unexpected, but the panel said it was justified because small businesses ‘will be among the main customers for policies in the state-based exchanges.'”  Id.  Not surprisingly, the article also concludes that “the recommendation is likely to please employers and insurance companies and could cause concern among some advocates for consumers and patients with particular illnesses who want more expansive benefits.”  Id.  Again–just more evidence that the right option for health reform is an extension of Medicare for all, not this piece-meal attempt to appease health insurers and health providers by attempting to guarantee that they can still reap huge profits out of what should be a universally provided public good.

originally published axingmatter

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Madoff and Mankiw and Inequality–the corporatist ideology at work

by Linda Beale

  Madoff and Mankiw and Inequality–the corporatist ideology at work

There are two letters to the editor in the Times today that are worth noting–as usual, the ‘real’ analysis is hidden in the interior pages, positioned next to a huge ad (for an investment adviser, no less).
Chris Cannon from San Francisco notes that treating Madoff as the iconic symbol of the financial disruption caused by the credit bubble is problematic.

“Everyone agrees that Mr. Madoff broke the rules.  But the damage done by those acting as allowed by our ineffective rules cost the public much more.  ‘Our troubled financial times’ are the product of a bubble economy fueled by cheap money, an abject failure by rating agencies, regulatory agencies that have been hamstrung by regulations written by financial lobbyists, and a laserlike focus by some bank leaders on yearly bonuses.”  Letters, New York Times, Dec. 18, 2011, at BU 7.

Steven Conn, Yellow Springs Ohio, notes that Greg Mankiw (economic adviser to Republicans, and specifically to Mitt Romney) misses the boat on understanding the way that economics is burdened with ideology.

“He seems not to understand that economists aren’t really objective and dispassionate scientists.  Economics is merely a set of tools with which we build the kind of society we want to live in.  Defining what that means is, of course, an ideological proposition, and thus all economic ‘theory’ is freighted with ideological baggage.”  Letters, New York Times, Dec. 18, 2011, at BU 7.

These two ideas are related.

 One of the reasons that someone like Madoff could get away with a long-term, enormous economic scam is that the reigning economic ideology from 1980 to 2010 has been the neoliberal belief in unfettered markets, taking power with ‘reaganomics’ and the acceptance of ‘greed is good’ corporatism that took hold in 1980, in which those that are sleazy, fraudulent or just intent on having things work out a certain way can take enormous means to achieve their petty ends–like hiring just-out-of-Congress people to panhandle for them in the halls of Congress and to hobnob with regulators, drafting the rules that govern the industry.  It is the enormous expansion of this corporatist perspective that permits money to buy the rules that caused the financial crisis and that continues to pervade the policy solutions that can get through a Congress that is behoven to lobbyists and Big Money in various industries.
As long as we leave tax policy fundamentally to the corporatist moneybags and ideological economists, we can expect regulations to fall short of what they ought to do to protect ordinary Americans; corporations to make money out of failing to do what they ought to do to protect their workers, their customers, and their communities; tax laws that fail to exact a reasonable share of the fiscal burden from the very wealthy (such as the current trend towards decimation of the estate tax, often the only way that some extraordinarily wealthy families pay much of anything, because most of their income is in the favored form of capital gains and income on capital); and the passage of stupid laws that take away our most precious Constitutional rights–like the legislation under consideration that will permit the MILITARY TO DETAIN US CITIZENS WITHOUT DUE PROCESS.
And the result of these tax and economic policies will be a continuation of the trend towards a two-class society of the very rich and the rest of us that has been aided and abetted by reaganomics.  See Allegretto, the few, the proud, and the very rich, Berkeley Blog, Dec. 2011.

The share of wealth held by the top fifth is about 87.2 percent while the bottom four-fifths share the remaining 12.8 percent of wealth—so the Occupiers are correct in their assessment. And, the riches of those in the top 1 percent are about 225 times greater than that held by the typical family—it was 125 times in 1962—so, Grandma was correct too.
In 2007 (the most recent SCF) the cumulative wealth of the Forbes 400 was $1.54 trillion or roughly the same amount of wealth held by the entire bottom fifty percent of American families….Upon closer inspection, the Forbes list reveals that six Waltons—all children (one daughter-in-law) of Sam or James “Bud” Walton the founders of Wal-Mart—were on the list. The combined worth of the Walton six was $69.7 billion in 2007—which equated to the total wealth of the entire bottom thirty percent!  Id.

originally published at

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A Modest Forecast: The Average Real Growth in Ireland will Exceed 10% a Year From 2012 to 2014

by Mike Kimel

A Modest Forecast: The Average Real Growth in Ireland will Exceed 10% a Year From 2012 to 2014

 You read the title correctly: the Irish economy will grow by more than 10% next year. Now, hearing that, you might be asking yourself: “Is this guy for real? He must be nuts.”

 Because I’ve looked around and nobody is predicting that sort of growth for Ireland for the next few years. So let me lay out ten facts that should make it obvious to just about everyone:

1. According to the Central Statistics Office of Ireland, real GDP (measured in 2009 Euros) peaked at 45,583 million Euros in the fourth quarter of 2007. It bottomed out in the fourth quarter of 2010 at 39,403 million Euros. That is, real GDP fell by 13.5%. Since then, GDP has barely budged. So its safe to call 2011, four years after the peak, as a year when the bottom out process was ongoing.

2. According to the OECD, Ireland’s all in top marginal tax rates are about 52.1%.

3. According to the BEA, real GDP (measured in 2005 dollars) was 976.1 billion in 1929. It reached a nadir of 715.8 billion in 1933, amounting to a drop of 26.6%. Note that while growth was negative in 1933 (four years after the peak), it was just a small drop. The bulk of the decrease occurred from 1929 to 1932. 

4. According to the IRS, the top Federal marginal tax rate was 63% in 1934, and it rose to 79% in 1936. Note that this wasn’t an “all in” rate.

5. According to the BEA, real economic growth in the US in 1934, 1935 and 1936 was 10.9%, 8.9% and 13.1%. The annualized rate of growth from 1933 to 1938, years which I’m cherry-picking to show some relatively poor growth, was 6.7% a year.
6. FDR instituted a number of large scale programs. For instance, [b]y March, 1936, the WPA rolls had reached a total of more than 3,400,000 persons. For comparison, according to the BEA’s NIPA Table 7.1, the entire population of the US in 1936 was 128.181 million. Thus, 2.7% of the US population was employed in the WPA alone. Throw in the CCC, the Rural Electrification Administration, the TVA, and I think we can all agree that the Federal government was playing a big role in the economy.

7. Many eminent worthies, too many to name, in fact tell us that the rapid growth in the economy from 1933 to 1940 was due to the bounce-back in the economy. They also tell us that the economy would have recovered much more quickly if FDR had not followed socialist policies.

8. Ireland doesn’t have as far to bounce back from as the US did in 1934, implying slower growth in Ireland today than in the US in 1934.

 9. On the other hand, taxes are much lower in Ireland today than in the US in 1934, and nobody is accusing the Irish today of following socialist policies, implying faster economic growth in Ireland today than in the US in 1934.

10. Facts 8 and 9 probably cancel each other out, leaving us to expect, on average, about the same growth rate in Ireland over the next few years as we saw in the US during the New Deal years when FDR ruined the economy.

As the eggheads say, QED. 

What’s nice about this is that we will see rapid growth in other countries too. Taxes are much lower in the US now then they were during the New Deal years, and for all the cries of socialism and whatnot, there is WPA or CCC or Rural Electrification Program. Heck, even the Fed doesn’t seem to want to do anything about jobs and that’s part of its mandate. Back to the eggheads for a moment.

There’s a bunch of them who think the New Deal helped the economy, that lower taxes don’t generate faster economic growth or that its a good idea for the government go out and buy stuff to boost demand at times of economic weakness. Boy are those folks about to be surprised by the magic of the free market and low taxes. — Disclosure:

I profess, in the sincerity of my heart, that I have not the least personal interest in endeavoring to promote this necessary work, having no other motive than the public good of my country, by advancing our trade, providing for infants, relieving the poor, and giving some pleasure to the rich.

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House passes spending bill

by Linda Beale

  House passes spending bill

While the Senate was wrangling over what of the noxious provisions in HR 3630 they would have to keep in order to get expanded unemployment compensation and a payroll tax cut, the House passed a spending bill 296-121 (with 147 Republicans and 149 Democrats in favor) to carry the government through September 2012.  Steinhauer & Pear, Senate Leaders Agree to a Two Month Extension of the Payroll Tax Cut, New York Times (Dec. 16, 2011).

The GOP strategy is to obstruct and demand–one right-wing idea after another is inserted into every bill, just so the Dems will think they have won something when they give the Republicans ten things instead of 100!

As wrangling over the tax has continued, Republican leaders have sought to build support for the measure by adding conservative policy provisions, which have replaced earmarks as the legislative sweetener for Republican lawmakers in a Congress where fundamental differences about the role of government in American life deeply divide the parties.
That conflict, which mirrors the broader political dynamic across the country, is unlikely to ebb in the second session, as Republicans labor to make life more difficult for President Obama and Democrats struggle to hold the White House and the Senate.  Id.

The spending bill isn’t much better.  See Sonmez, Government Funding Bill That Will Avert Shutdown Passed by House, Washington Post Blog, Dec. 16, 2011; Steinhauer & Pear, Senate Leaders Agree to a Two Month Extension of the Payroll Tax Cut, New York Times (Dec. 16, 2011). Defense gets $518 billion and military gets a 1.6% pay raise.  (Remember that this same house in HR 3630, the unemployment extension bill, wanted to freeze all federal workers’ pay for another year, and require greater retirement contributions, among other stingy things for ordinary people.)

In line with the GOP’s anti-regulations ploy, the House bill makes it harder for the government to regulate marketing for food targeted at kids–now there has to be a cost-benefit analysis.  Regretably, cost-benefit analysis is one of those “economics”-based policy ideas that essentially favors the retention of the status quo: any regulation will cost businesses something (restrained marketing to kids costs junk food businesses a whole sector of potential targets, er, customers), and the business world portrays the benefit of healthy food or less exploited kids as miniscule compared to the wonders of their profits and what that can do for society (the wealthy will get wealthier, no doubt).

The House doesn’t care much for ordinary people.  Low-income heating assistance spending will be cut compared to last year and the National Institutes for Health will be barely increased.  The GOP is placing its moral oprobrium of gays in the limelight by prohibiting health money from being used in needle exchange programs, which have been shown to be effective in curbing the spread of AIDS.  Obama’s education initiative is cut 20%–in spite of the fact that education is key to economic growth and the development of human capital.

crossposted with ataxingmatter

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Payroll Tax Cut -Keystone vote up Saturday at 9 in Senate

by Linda Beale 

Payroll Tax Cut -Keystone vote up Saturday at 9 in Senate

Apparently, Senate leaders on Friday ironed out the difficulty between the GOP and the Democratic party.  The GOP got most everything it wanted, and the Dems got just barely more than nothing.  That’s the way “negotiating” seems to go in the Congress these days.  The right demands and demands and demands and gets most of it by obfuscating and obstructing.

This time the Dems were worried about not getting a spending bill.  So while the House passed a spending bill to carry the Federal Government through September 2012, the Senate caved on all the things they’d said they wouldn’t cave on–like the ridiculous provision for expedited approval of the Keystone Pipeline.  All to get just a 2-month extension of the payroll tax cut and expanded unemployment benefits–which the GOP knew it could not afford not to pass, no matter what.  And Obama has already flipped on his earlier looks-like-he’s-finally-figured-out-how-to-stand-tall position that he would veto any bill that carried the expedited Keystone approval provision.  See Steinhaur & Pear, Senate Agrees to a Two-Month Extension of the Tax Cut, New York Times (Dec. 16, 2011).
The GOP continues to call the Keystone pipeline project a “job creator”, even though it will create no more than 50 permanent jobs, at a considerable environmental cost.  Schumer calls the Keystone provision a “Pyrrhic victory” for the GOP, because he says Obama will not approve it if pushed.  That’s not so clear to me.  Schumer also spins the cave-in as a victory for Dems! saying that the GOP won’t have the leverage of the need to pass a spending bill when this issue comes back.  See  Rubin et al, U.S. Senate Leaders Agree on Two-Month Payroll Cut , (Dec. 16, 2011).
Again, past experience suggests this may be too rosy an assessment.  There were commentators who thought that surely the Congress would not pass further tax cuts after the 2001 tax cuts resulted in large deficits but instead we got the 2003 bill and the 2004 tax giveaway for corporations bill and many others, with the deficits mounting with each one.  One would have thought that the sunset of the various Bush tax cuts in 2010 would have been a perfect time for the Dems to develop a spine, but they didn’t.  And the Dems weren’t even able to pass a bill ending the carried interest subsidy for hedge fund managers, in spite of the Great Recession and the need to reign in financial institutions.
The Senate bill will apparently at least not include some of the bad stuff  that was in HR 3630 as passed by the House–it is “scaled back” so it looks like medicare premiums won’t rise for seniors, and  the GOP won’t win its attempt to end medicare’s coverage of outpatient rehabilitative therapy for stroke victims and medicare payments to doctors will not be affected.   Nor will it include the “extensions” of expiring tax provisions like the R&D credit or the active financing exception for the financial  industries’ deferral of its offshoreprofits.  Id.
The Senate bill will apparently be paid for by raising the guarantee fees for Freddie and Fannie, something that was included in HR 3630.  Id.  Vote is to take place at 9 am Saturday.
crossposted at ataxingmatter

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Should reinsurance using foreign affiliates be deductible to US corporations?

by Linda Beale

Should reinsurance using foreign affiliates be deductible to US corporations?

Foreign-owned US insurance companies frequently reinsure through their foreign affiliates and then claim a deduction under section 832(b)(4)(A) for the reinsurance premium paid to the affiliate to reduce the US tax liability of the US company.

Rep. Richard Neal (D-Ma) introduced a bill on October 12 that has been referred to the House Ways & Means Committee, where it now languishes unattended by the Republican chair, David Camp of Michigan.  H.R. 3157 amends the Internal Revenue Code to create a new section 849, which disallows the deduction for certain reinsurance premiums and related amounts paid to non-taxed foreign affiliates, defined as members of a controlled group, with 50% rather than the usual 80% used to define a control relationship.

The President’s FY 2012 Budget included a similar proposal for disallowing some affiliated reinsurance premium amounts.  Earlier iterations of a disallowance bill were introduced in 2000 and 2001.  A bill with somewhat broader disallowance provisions, H.R. 3424, was introduced by Representative Neal in 2010 and did receive a hearing at Ways & Means that year.  The Joint Committee on Taxation issued a report on reinsurance with offshore affiliates prior to the hearings on H.R. 3424 in 2010, titled “Present Law And Analysis Relating To The Tax Treatment Of Reinsurance Transactions Between Affiliated Entities”, JCX-35-10 (including a description of HR 3424 and the President’s FY 2012 proposal, beginning at page 22).  As noted in the JCT report:

When these assets are shifted from a U.S. insurer to an offshore reinsurer with a foreign parent, these earnings may no longer be subject to U.S. income taxation. If the U.S. insurer and the offshore reinsurer are affiliated, the profits attributable to the reinsured risks remain within the affiliated group, although the earnings on the assets may no longer be subject to U.S.income taxation. (footnotes deleted)

If the offshore affiliate is in a low or no-tax jurisdiction, the result may be almost no tax  on the reinsurance premium amounts (other than the applicable excise tax, if not eliminated by treaty).  Not surprisingly, the trend over the last few decades has been towards reinsurance arrangements with affiliates:  between 2001 and 2008, ceding of insurance of offshore affiliates grew by more than 108%, while ceding of insurance to nonaffiliated offshore entities grew by only 16%.  See JCT report at 11, n.21 and accompanying text.  Bermuda, a jurisdiction with no corporate tax and one especially friendly to insurers, is the most frequent jurisdiction for these affiliated reinsurance transactions.  The JCT report notes that the lack of a market price for affiliate transactions provides an incentive to shift income between affiliates at off-market prices.

Also not surprisingly, lobbyists for these foreign-owned insurance companies have fiercely fought the possibility that this handy tax-reduction technique might be legislated away.  The “Coalition for Competitive Insurance Rates” put out a press release on November 29, praising Republican lawmakers from Florida who had joined in a letter, available here, opposing the bill. The claim is that eliminating the tax avoidance technique will be a “punitive tax on reinsurance” that would “lead to higher premium costs” because it would “impose a tariff on international reinsurance firms”  and that this would amount to “punitive and anti-competitive taxes.”

The Florida Republican representatives note that 90% of Florida’s insurance is reinsured offshore.  The fact that such affiliate reinsurance is widespread does not mean that it is a better means of risk management.  The regular amount of US taxes that would be charged on those US affiliates” income is not a “punitive” tax: it is merely the amount of tax that those firms would pay if they do not use affiliates as reinsurers.

Note that moving the insurance to an affiliate doesn’t achieve the risk-shifting that reinsurance is designed to accomplish–it retains the risk within the controlled group.  (The IRS litigated a number of captive insurance cases under the theory that a controlled group constitutes a single economic “family” and hence cannot achieve risk-shift or risk-diversification.  Although courts were hesitant to adopt this theory, it does seem to capture the essence of the affiliate reinsurance problem.  The JCT report noted above also suggests the theory as a means of addressing the tax avoidance technique.)  Although lobbyists claim that reinsurance with affiliates is a valuable “risk-management” tool and that reinsurance with affiliates accomplishes the same risk management as reinsurance with non-affiliated parties, it seems that reinsurance within a controlled group does not provide the same risk protection as nonaffiliated reinsurance.   A catastrophic event covered by the reinsurer could result in liquidation of its assets, including its interest in the US affiliate.

Insurers using offshore affiliate reinsurers claim that there are nonetheless real non-tax advantages: (i) reducing adverse selection/moral hazard from information asymetry between insurer and reinsurer and (ii) “allowing risk and capital to be moved more easily … to respond to changing market conditions.”  See Cragg, Cummins & Zhou, The Impact of a U.S. Tax on Offshore Reinsurance Market, TheBrattle Group , May 1, 2009 (research funded by the Coalition for Competitive Insurance Rates projecting a 2.1 – 2.4% rise in insurance costs upon elimination of the affiliate reinsurance scheme) (also cited in the JCT report for these claims).

These so-called advantages of affiliate reinsurance appear spurious.  First, while the interests of the insurer and its affiliated reinsurer are aligned (so that the insurer will have less incentive to select the worse policies for that affiliated reinsurer or to be lax in its policy making for policies it will reinsure with its affiliate), the absence of real risk-shifting would make that alignment of little real value.  Alternatively, as the JCT report notes, the aligning of interests may mean that the premium paid to affiliated reinsurers should be lower than the third-party premium, meaning that much of the affiliated reinsurance market may result in understatement of the US company’s income. Furthermore, nonaffiliated reinsurers may well undertake more comprehensive due diligence connected with taking on real reinsurance risk, and thus in fact contribute to a better risk-balanced insurance market. 

Second, the claim that reinsuring with offshore affiliates allows for easier movement of capital in response to market conditions is of little real benefit to the U.S. insurance market.  The foreign parent that reinsures the U.S. affiliate has received an advantage from having that reinsurance premium as its capital while at the same time reducing its US affiliate’s tax liability, but that merely substantiates the complaint of domestic companies that the ability to reinsure with a foreign affiliate gives an unjust  competitive advantage–the double whammy of the tax deduction to the US affiliate and the capital infusion to the foreign company.  Further, as we saw in the 2008 financial crisis,  globalization of interactions among financial companies can have deeply negative systemic effects.

On balance, eliminating the deduction for affiliate reinsurance premiums is not the creation of an “anti-competitive tax” whenthe insurer is using the affiliate to shift income offshore and avoid paying U.S. corporate taxes.   In fact, the ability of some insurance companies to offshore preimums is itself anti-competitive, since it puts wholly domestic U.S. insurance companies at a disadvantage.

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GOP’s payroll tax cut bill (with a lot of other stuff)

Dan here…Linda Beale writes on the intent and passage of these bills. Whether the use of the payroll tax has political and budget consequences for people’s perceptions of Social Security and its future remains a question previously discussed at Angry Bear here.

by Linda Beale

(Update from Linda: Payroll Tax Extension Passes)

GOP’s payroll tax cut bill (with a lot of other stuff) up for vote on Tuesday

[edited 2 pm 12/13 to provide additional links to news coverage of some of the changes]

Congress has been playing politics as usual over the few policies that are on the table that have a real chance of assisting, to some degree, the plight of ordinary Americans and perhaps even the slow recovery that is still trying to gain steam–extension of the reduction in payroll taxes (from 6.2% to 4.2%) and extension of unemployment compensation.

The Republicans have refused to pay for these common sense tax reductions for ordinary Americans with a similarly common sense tax increase on the wealthiest Americans who have continued to capture all the productivity gains in the economyt.  Republicans in the House think that these kinds of provisions should be offset by more goodies for the “uberclass”–at least as evidenced by the H.R. 3630, the bill introduced by Dave Camp (R-MI) and to be voted on today at about 4:30 pm.

  • It would restructure unemployment compensation in ways that add hurdles and make it less likely that unemployed Americans will qualify–providing more state flexibility and experimentation (including paying employers to cover part of cost of wages exceeding the recipient’s prior benefit level), permitting demeaning drug testing of all unemployment compensation recipients (section 2127), and requiring a high school diploma or participation in state “reemployment services” for which recipients may be charged up to $5 weekly out of their unemployment compensation.  It would severely curtail the total number of weeks for which federal unemployment assistance is available–moving to a 59-week limit from a 99-week limit.  Methinks I see Scrooge here…..
  • It will interfere with the Environmental Protection Agency’s ability to regulate, letting corporations continue to harm the environment at the expense of ordinary Americans.   See Subtitle B.  Section 1102(b) lists rules that are “stayed” by the legislation and provides that no new rules can have an effective date earlier than 5 years out and requires consideration of various factors in determining that date.  Further, it requires adoption of the laxer 2000 definitions for certain key terms and the imposition of the “least burdensome” among potential regulatory alternatives.  This is a key cave-in to corporate polluters. 
  • It will expedite the KeystoneXL pipeline by requiring a permit to be issued within 60 days unless within that time the President determines that the pipeline will not serve the national interest (in which case within 15 days the President must provide various committees and members of Congress a report justifying that conclusion from various perspectives).  It indicates that the environmental impact statement from August will be treated as satisfactory for environmental and historical preservation purposes and shall not have to be supplemented if there are modifications to the plan  and no further federal environmental review shall be allowed.  This is a clearly ideologically driven provision, failing to give due regard to the potential longterm environmental impact on drinking water aquifers or historical preservation impact. 
  • It would provide yet another tax reduction for US corporations that have paid less and less taxes over the last decade, with a renewal of the ill-advised 100% expensing provision in section 168(k)(5) (along with the alternative of accelerating AMT credits)
  • it makes further changes to medicare such as applying a cap to hospital outpatient therapy services and reversing part of the Health Reform Act passed earlier, by permitting new doctor-owned hospitals and permitting existing ones to expand, even though it has been shown that such hospitals spend more on testing and procedures (and profit more from them).  See, e.g., Pear, G.O.P. Bill Would Benefit Doctor Owned Hospitals, New York Times at A24, Dec. 13, 2011.
  • it would continue funding for the “healthy marriage and responsible fatherhood” initiative, see 42 U.S.C. section 603(a)(2)  (the cynic in me suspects that these funds primarily go to programs supported by religious institutions and that they proselytize more than they teach reasonable relationship skills)
  • it includes an extensive section remaking flood insurance provisions, including, in section 3005, lifting the cap for premium increases for flood insurance from 10% to 20% (an apparent boon to insurers), and another section prohibiting the administration from “disregarding” any levee or floodwall, even if it is not accredited.  The goal, made clear in section 3009, is privatization of the national flood insurance program.
  • It includes extensive broadband spectrum auction provisions in Title IV, Subtitle A, reallocating spectrum from federal to nonfederal use.  These provisions, among many detailed ones, e.g., permit private administrators of state public safety networks to use the public spectrum for private purposes as well as the public safety  purposeand prevent states from denying requests for modifications of existing wireless towers that do not substantially change the physical dimensions thereof.
  • It increases the guarantee fees charged by Fannie Mae and Freddie Mac.
  • It requires a social security number for the refundable child credit
  • It provides in section 5895 a 100% tax on “excess unemployment benefits” that go to millionaires (unemployment compensation is reduced proportionately as the adjusted gross income increases from $750,000 to $1 million)–The Times today has an article on the bill and notes that the number of millionaires receiving unemployment compensation is very small, but that their participation is predicated on the fact that the unemployment compensation program is a type of insurance into which payments are made to cover payouts.  Means testing such insurance programs is in sync with the right-wing goal of means-testing as a prelude to privatizing and/or eliminating all federally administered social welfare insurance programs, such as medicare and Social Security (and, see above, national flood insurance).
  • It increases pension contributions from longterm federal workers by .5% a year for 2012-2014 and for those “secure annuity employees” with less than five years of service, by more than 10% a year and using 5 year average pay rather than 3 year average pay, sets annuity amounts, and ends the annuity supplement for post-2012 retirees.
  • it extends the general freeze on federal pay for another year
  • It increases the premiums for Medicare Part B and Part D for those making $80,000 or more (for those making $200,000 or more, the applicable percentage is 90%)–this again appears to move these national social welfare insurance programs towards more means-testing that will facilitate privatization or eventual elimination. 
  • It sets up a number of procedural hurdles in the Senate, which is already hogtied by the ease with which a minority of its members can filibuster and thus stop legislation that is supported by a solid majority of its members.  For examples,
    • it requires a 2/3 vote in the Senate to amend the dates for section 601(c) of the 2010 Tax Relief Act–that’s the temporary employee payroll tax cut;
    • it provides that a point of order by any Senator against an emergency designation in a bill eliminates that designation and makes it impossible to bring the designation through a floor amendment unless there is a supermajority 3/5 vote in favor of doing so (limiting debate to 1 hour)–thus one right-wing Senator intent on obstructionism can make it very unlikely that an important provision can pass by preventing even reasonable debate about the importance of the provision!

The GOP, of course, touts its bill as creating jobs.   While the Keystone pipeline may create some short-term jobs (the New YorkTimes reports estimates from Transcanada itself  and the State Department of only about 6500 temporary construction jobs  and maybe 50 permanent new jobs–see Keystone Claptrap, Editorial, New York Times at A34, Dec. 13, 2011), the potential negative impact on aquifers could be life-threatening.  Most of the other provisions are Scrooge-like additions of hurdles and caps on social welfare provisions or attempts to roll back the social welfare insurance provisions into means-tested ones that will be even more susceptible to the derogatory and inflamatory class-action warfare that the right has increasingly unleashed on anything that doesn’t give a break to the wealthy and corporate clients of the all-powerful Washington lobbies.

On lobbies, just read the New York Times article about the wealth that online educators are getting from state and federal taxpayer dollars for delivering no or sub-standard education, and the amount of taxpayer money being spent on lobbying to ensure the continuous flow of that wealth.  See Saul, Profits and Problems at Online Charter Schools, New York Times, Dec. 12, 2011.  It’s obvious that the corporatist agenda sees no problem with siphoning off taxpayer dollars for private benefit with little public good created, but complains mightily about any siphoning off of exorbitant corporate profits–that tend to go to wasteful excess managerial compensation or portfolio enhancement–for taxes intended for public benefit.

The inclusion of the Keystone and other right-wing-rhetoric-driven items in a bill to provide the payroll tax cut and a limited unemployment extension (with hurdles) demonstrates the absurd level of ideological partisanship engaged in by the House Republicans.  Senate Majority Leader Reid characterized the bill as loaded with “ideological candy” that the Senate would reject.  Sloan & Rubin, House to Vote on Payroll Bill as senate Eyes Tax Sweeteners, (Dec. 13, 2011).    Of course, most of the sweeteners that Reid proposes adding are components of the right-wing corporate-friendly agenda–like the R&D credit that rewards what companies do anyway; the active financing exception for big banks, insurers and other financial institutions that lets them defer taxation on their financing income earned overseas; and accelerated depreciation for restaurants and motorsports tracks that provide special tax subsidies to particular industries!

Also read more:

Environment and Taxes, Insurance, Job creation, Payroll Taxes, Regulation, Tax in the News, Tax Legislation

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American v. Brazilian Healthcare, a Continuing Series

by Mike Kimel

American v. Brazilian Healthcare, a Continuing Series

I spoke to my sister on Skype last night. She’s been in Natal, in Northeastern Brazil, for the past few months. Last week, she noticed a couple small warts growing on her leg. So she wandered down to a government run hospital and and had them removed. The hospital was low on supplies, and the doctor asked her to contribute a box of Q-tips (since Q-tips would be needed in the procedure). The total cost of the whole thing: 12 reais, or about $6.60 American, plus a box of Q-tips.

This isn’t the first time I’ve had a post that dealt with my sister and the Brazilian health care system. A few years ago I wrote about the time she had emergency open heart surgery in Brazil, and how it compared very favorably with her experience with (planned) open heart surgery in the US.

Now, on the subject of the US, my wife also has an interesting healthcare story to relate. She got a letter from Aetna, her insurance provider, indicating they didn’t know why they were being asked to pay for services when she doesn’t have health insurance through them. Interestingly enough, money is withdrawn from our bank account each month to pay for her health insurance, and a call to Aetna indicated that she did, in fact, have health insurance. A number of phone calls back and forth between my wife, Aetna, and her doctor resolved the issue (I think) – the doctor is being paid, etc. But it isn’t the first time this has happened, and it serves to follow up our family’s earlier experience with health insurance. All told, I would estimate my wife and I have spent about 40 hours – that would be a workweek – dealing with health insurance since July.

Brazil is a poor country, and I don’t think anyone has ever suggested that the Brazilian health system is the best in the world. On the other hand, we often hear precisely that about the American system from certain circles, despite the astounding cost (which doesn’t seem to include the waste of time dealing with the paperwork or fighting with health insurance companies) and ho-hum outcomes. I’m starting to think a lot of Americans are absolutely insane. Lord knows it would explain a lot.

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