- 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.
by Linda Beale
The right’s nutty claims about job creation–Gingrich and the estate tax
The right is busy selling its program for enriching the rich to the working class. As usual, the sales pitches are full of false and nutty claims pitched to fool hard workers who are uninformed about the facts.
Newt Gingrich, for example, pitched the claim that eliminating the estate tax that applies only to the biggest multimillion dollar estates–a large tax cut applicable only to the uberrich silver-spoon kids who do nothing to earn the largesse–will cause all kinds of wondrous economic changes. See “To create Jobs, abolish the death tax now” (The Newt Gingrich Letter).
These claims are based on a so-called “study” by the American Family Business Foundation (put in quotes, since this is a paid “study” by a propaganda tank that asks family businesses of the kind that might have to pay the tax whether they would create more jobs if they didn’t have to pay the tax, and gets the not at all unsurprising self-serving answer that “oh yes, we’d have more jobs with fewer taxes”.) So the study and Gingrich make pie-in-the-sky claims that
- the US government would actually take in more tax revenues by getting rid of the millionaires & billionaires’ estate tax–even claiming a specific number of $362 billion more in taxes. (It helps if the persons answering the self-serving survey give numbers that can be used to make these specific type of claims.)
- Gross Domestic Product would increase by 2.26% just by eliminating the tax
- New revenues from the “economic activity that would result from the elimination of the [estate] tax” would be twice as much as the revenue gained from the current estate tax;
- the economic growth from eliminating the estate tax would “create thousands of new jobs as families kept more small businesses running through mutliple generations and shifted their efforts from avoiding estate taxes to investing in America”
Eliminating the estate tax won’t create new economic growth, new investment in jobs, save family businesses or divert monies now spent on tax evasion to worthwhile domestic investments. Most of the claims in articles like Gingrich’s or in “studies” like the self-serving American Family Business Foundation are unfounded, based on absurd assumptions or simply made up.
- Estate tax reduction or repeal doesn’t lead to growth. We have cut taxes on estates enormously in the last decade and growth has stagnated, with none of the benefits going to the vast middle and lower classes. There’s no empirical evidence supporting the self-serving claims that such a tax cut helps growth. In fact, evidence on inequality in societies supports exactly the opposite conclusion–the more we allow spendthrift heirs to take over family fortunes tax free and accumulate even more wealth, the worse it is for economic growth and societal wellbeing.
- Estate tax reduction or repeal doesn’t create jobs. Money saved from taxes doesn’t automatically get plowed back into businesses in a way that creates jobs. It’s more likely to get plowed into private equity funds (that strip companies of their employees and load them up with debt in order to resell them at great gain for the equity investors and great loss of jobs) or invested in emerging market economies to diversify portfolios. Most use of excess funds by the wealthy, that is, benefits the wealthy at little or no good to society and in fact often with considerable harm to society in terms of job loss
- Estate tax repeal doesn’t “save” family businesses, because they aren’t at risk from the estate tax in the first place. Very Very few (if any) family businesses are lost to the estate tax. There is a provision in the Code allowing installment payments over 14 years to ensure that family farms can stay in business by paying the estate tax out of annual incomes. The argument about loss of family businesses is invented to appeal to those who do not understand the very limited number of estates subject to the tax in the first place (fewer than 2%).
- Estate tax repeal doesn’t prevent sales of family businesses upon death of the founder–and those sales are often a good thing! Many times, family businesses are sold upon the death of the founder because nobody in the family wants to run it anymore–they want to take their cash and go live their own lives. That’s probably not a bad result for the economy–new management will tend to see opportunities that the old business had ignored. All repeal of the estate tax would do would be to put more money in the hands of heirs who do nothing to deserve it.
- Estate tax repeal isn’t needed to avoid “double taxation.” Gingrich tries to make the case, quoting Petter Ferrara as follows:
“The [estate] tax taxes yet again a lifetime of savings and investment that has already been taxed multiple times. It is double taxation on top of double taxation, which often forces loved ones left behind to sell the family farm, ranch or business to pay the taxes just when they are suffering from their loss the most.”
Not so. Many estates have as their primary assets investment securities that represent considerable appreciation that has NEVER been taxed. Elimination of the estate tax means that even this “last chance” for getting a single tax bite would be eliminated. Many of the biggest estates represent passage of stock from one generation to another with almost no taxation along the way. Whereas workers pay tax on every single dollar earned and have little ability to use their salaries as collateral for big investment plays, wealthy heirs of financial assets can use their assets as collateral for loans to “monetize” their wealth without taxation. Most substantial family farms and ranches are now incorporated, with use of various schemes to zero out corporate income and pay no taxes (especially, e.g., depreciation of equipment and “salaries” for family members and corporate ownership of personal residences resulting in widespread ability to deduct personal expenses not possible to ordinary wage workers). Double taxation is a fabricated myth for most of these estates. As Leona Helmsley famously stated–only little people pay taxes.
And of course, as already noted, the sales are usually because they WANT to sell, since family farms have 14 years in which to use the income from the business to pay off any (usually small) estate tax due. Remember that the effective estate tax rate is usually very very low, given the very large current exemption amount. Only the estate above the multi-million dollar exemption amount is subject to tax, and the rate right now is inordinately low and there are numerous accepted and simple mechanisms, such as family limited partnerships and other devices, which result in much lower evaluations than fair market value under current warped rules.
Meanwhile, it is important to note the many beneficial effects of the estate tax:
- the estate tax provides revenues to help combat significant budget deficits. Those deficits have been substantially created by two problems–wars being fought without the normal tax increases to fund them, and tax cuts even when those cuts created hundreds of billions of dollars in annual deficits.
- the estate tax is a slightly redistributive mechanism to counter the upwards redistribution that is the norm in our current economic system. CEOs get golden parachutes for ruining companies, and bankers and managers take all the benefits of worker productivity gains. Ordinary employees are denied the right to form a union by every employer trick imaginable and by the right’s unwillingness to let card check become law. Workers therefore end up scraping by on a combination of devalued wages and debt.
Keeping the estate tax, and making it more progressive so that the estates of the uberrich are appropriately taxed under “ability to pay” concepts regarding the marginal utility of the dollar, is the fair thing to do. And it would have a stimulative effect on the economy by providing revenues for governmental infrastructure and other projects. Counter to Gingrich’s claim, repealing the estate tax would be a further step backward to the robber barons’ gilded age. Let’s not take that step.
by Linda Beale
Well, not exactly an animation, but Estate tax attorney Douglas A. Cook has a chart on the Federal Estate Tax 2001-2011 (linked from the Wills, Trusts & Estates Prof Blog) and also as an animation (see below). Certainly a picture worth a thousand words in terms of showing that ordinary Americans are essentially not taxable under any version of the estate tax. So what the Obama -GOP deal amounts to is a giveway to those few millionaires who had enough assets in the wrong category that they would actually have to pay some amount of tax–only about 5,500 estates under the 2009 version of the bill, about 145,000 in 2011 if the current laws (enacted under GW Bush) remain without any action by today’s Congress to change them, but even fewer than 5500 under the Obama deal for a $5 million exemption and a mere 35% top rate.
by Bruce Webb
The Ryan Budget Roadmap was introduced in January, and then sank like a stone. But with Ryan’s appointment to the Catfood Commission it and its author have drawn some new attention which borders on fawning. Or at least part of the plan has drawn attention, that part which would privatize Social Security and voucherize Medicare. What is getting less attention is his radical tax plan which if fully implemented would mean inheritors of great wealth would never pay federal taxes. EVER.
To set the background we have this article from the WaPo Monday Rep. Ryan pushes budget reform, and his party winces And it turn frames it as follows:
Instead, Ryan is running a campaign of a different sort, one his party has so far refused to adopt: He is determined to persuade colleagues to get serious about eliminating the national debt, even if it means openly broaching overhauls of Medicare and Social Security.
He speaks in apocalyptic terms, saying the debt is “completely unsustainable” and warning that “it will crash our economy.” He urges fellow politicians, and voters, to stop pretending that this problem will go away on its own.
He administers his sermons with evangelical zeal. He will go anywhere and talk to anyone who will listen. When he is not writing op-eds and appearing on television, he can often be found speaking to liberal and conservative audiences alike about his “Roadmap for America’s Future,” a plan he says would fix the problem.
So what is step one and two in cutting “completely unsustainable” debt? Well slashing Social Security and Medicare. And step three? ELIMINATE ALL TAXATION FOR BILLIONAIRES AND THEIR HEIRS. Details directly from Ryan’s website under the fold.
The main page for the Roadmap is here: http://www.roadmap.republicans.budget.house.gov/ If we go to the tax reform page we get the following (bolding mine):
This plan discards a needlessly complex and manipulative tax code, replacing it with a simplified mechanism that promotes work, saving, and investment.
Provides individual income tax payers a choice of how to pay their taxes – through existing law, or through a highly simplified code that fits on a postcard with just two rates and virtually no special tax deductions, credits, or exclusions (except the health care tax credit).
Simplifies tax rates to 10 percent on income up to $100,000 for joint filers, and $50,000 for single filers; and 25 percent on taxable income above these amounts. Also includes a generous standard deduction and personal exemption (totaling $39,000 for a family of four).
Eliminates the alternative minimum tax [AMT].
Promotes saving by eliminating taxes on interest, capital gains, and dividends; also eliminates the death tax.
Replaces the corporate income tax – currently the second highest in the industrialized world – with a border-adjustable business consumption tax of 8.5 percent. This new rate is roughly half that of the rest of the industrialized world.
First thing to note is that this plan for ‘simplification’ sets up two parallel tax systems, allowing people to stay on the existing one if they like. Considering that just about everyone would get a tax cut under the new system why even have this provision in? Because Ryan can only make his revenue projections by assuming that most people will willingly stay on the old system and pay more taxes. But that headshaker pales in comparison to the implications of the text I bolded.
These provisions are billed as encouraging ‘savings’, but on inspection ‘savings’ here goes far beyond a worker’s 401k, it includes ALL investment by anyone including billionaires like Peter G Peterson and Warren Buffett. Because while you can get to be a millionaire by being paid direct compensation by your employer and even a multi-millionaire you don’t become a billionaire that way, instead billionaires get their money from a combination of dividends, asset sales (capital gains), regular interest, and in some cases ‘carried interest’. Under the Ryan Roadmap all of that would be 100% tax free as would passing it on to your heirs. In turn that would mean that all inheritors and their heirs in turn could if they choose live their whole lives without paying a penny in federal taxes, as distributions from their trust funds would all come in the form of dividends, asset sales, and interest. And of course they would get full enjoyment of all real and personal property accumulated: mansions, art collections, yachts, jewelry, after a couple of generations even the Queen of England might get jealous of all your swag.
This isn’t a deficit reduction plan, this is a Randian wet dream that would reward the ‘Producers’ (here defined as the Trustafarian class living off of grandpa’s wealth) at the total expense of the ‘Parasites’ (that is though people actually contributing to future productivity via labor). This is what passes for ‘serious’, for ‘intellectual’, for ‘courageous’ in the Republican Party today. BOLD ENOUGH TO GIVE 100% TAX BREAKS TO BILLIONAIRES.
Note that there is no hint of this in the WaPo article. Now I might have just let this WaPo article pass as being, after all old news, except this Ryan worship seems to be coming a trend. Because CNN followed up with this puff piece this morning A Young Republican With a Sweeping Agenda
In this highly charged election season with both houses of Congress at stake, not a lot of politicians are lining up publicly behind Mr. Ryan. He is, nonetheless, suddenly a rising star in some corners. And like many other politicians whose ideas were once considered extreme, only to later be mainstream — like Ronald Reagan — Mr. Ryan is seen as on the leading edge of something.
Why? His “Roadmap for America’s Future,” an elaborate (critics say drastic) plan that aims to erase the federal debt by 2063, simplify the tax code and significantly alter (his critics say eviscerate) Medicare and Social Security. When asked to handicap the 2012 Republican presidential field, Sarah Palin called Mr. Ryan “sharp.” Newt Gingrich dubbed him “extraordinarily formidable.” And, in a column, George Will imagined him as vice president to a President Mitch Daniels (now the Republican governor of Indiana).
Mr. Ryan, 40 and the ranking Republican on the House budget committee, has been in Congress 12 years, but it may have been President Obama who gave him and his Roadmap the broadest attention yet. This year, Mr. Obama alluded to the plan as a “serious proposal,” though the White House promptly made it clear that it had problems with its details.
Just kill me now. This plan that proposes to cut almost all taxation on capital, and all taxation on individual holders of capital, is billed as ‘simplification’, as something that in time might be seen as ‘mainstream’, that even Obama is willing to dub a ‘serious proposal’ although he might have some ‘problems with its details’. Ya think? Anyone want to calculate the cost of THIS proposal over the Infinite Future Horizon?
No one who had read through this plan and thought through the implications could take it seriously.
Many people in the major media and in the Beltway take it seriously.
Well it doesn’t take a lot of logical chops to complete this syllogism and draw the right conclusion. These people are fundamentally not serious, in large part because they know that the American people as a whole are not likely to hold them accountable for not doing their homework. Or maybe one of our crack commenters can explain how you describe a plan to slash trillions in tax on capital still can be scored as solving the long-term budget crisis. You can start with the CBO score of the Roadmap. CBO: Letter to Congressman Ryan. Why didn’t CBO notice and score the huge hold the Roadmap would blow in future revenue. Simple, they were instructed to ignore it (bolding mine) .
Other Tax Provisions. The proposal would make significant changes to the tax system. However, as specified by your staff, for this analysis total federal tax revenues are assumed to equal those under CBO’s alternative fiscal scenario (which is one interpretation of what it would mean to continue current fiscal policy) until they reach 19 percent of gross domestic product (GDP) in 2030, and to remain at that share of GDP thereafter.
Although in truth it is not all just supply-side fairy dust, because the plan does raise some significant revenue. By putting new taxes on labor.
The Roadmap would also eliminate the income and payroll tax exclusions for employment-based health insurance. As a result, more earnings would become taxable for Social Security purposes, thus boosting future benefit payments, and payroll tax revenues credited to the Social Security trust funds would increase.
Yep, even if you don’t earn enough to actually be exposed to income tax, you get to pay a payroll sur-tax from the first dollar on the value of your employer supplied health insurance (if any). The implications of this would require a post of their own.
Ryan Roadmap: Cut taxes on the rich, increase taxes on the poor. Now that is tax simplification we can all believe in! (Not).
by Linda Beale
crossposted with Ataxingmatter
Kash on Angry Bear put together a really good graph in 2006 comparing where we might have been if Clinton policies (bad as they were in many cases) had stayed in place compared to where we were and expected to be with the Bush tax cut and spend policies. Responsibility for the Federal Budget Deficit, Angry Bear 2006. Deficits under Bush were projected for more than $500 billion annually. Of course, that was before the greedy, reckless banks threw the financial system into a tizzy with too much credit invested in too many houses by people with too little income to pay for them. Add the costs of backstopping the Big Banks, and we end up with the trillion dollar hole we are currently in.
Answer would seem to be–1) make the banks pay with a tax based on leverage and 2) end the tax cuts or at least a goodly share of them and 3) reinstate an estate tax that has some bite, so that those at the top who can afford to pay do pay.
Seems like there are at least a few in Congress realizing that item 3 makes some sense. Sanders, Harkin and Whitehouse have proposed that the estate tax should have a $3.5 million exemption and a graduated rate, with those at the top paying a rate of 65% (a base rate of 55% and a surtax of 10% on the amount above $500 million or above $1 billion for a couple). The surtax would mean that the estate tax would hit the 403 billionaires who have a net worth of $1.3 trillion harder than it hits the smaller estates. See Janet Novack, Three Senators Call for Billionaires Estate Tax, Forbes.com, June 24, 2010. Now that makes some sense.
Senators Kyl and Lincoln are pushing the so-called “compromise” that would eviscerate the estate tax by creating a $5 million exemption and lowering the rate to 35%. That is a step in the wrong direction. Especially when Congress is making such big noises about the deficit that it is unwilling to pass stimulus funding for unemployment benefits to support Americans hard hit by the Great Recession.
by Linda Beale
for the complete post go to Ataxingmatter
Estate Tax–Kyl continues working for the ultra wealthy
Jon Kyl doesn’t think much about the government helping the unemployed who have been laid off because of the financial crisis, triggered by greedy excesses at the nation’s biggest banks and mortgage lenders. He’s afraid that providing additional unemployment compensation will keep people from working–as though it is laziness and not trying circumstances that has forced people out of jobs and on the public dole. Kyl clearly doesn’t get it. He must not know the people I know, who were laid off from jobs here at auto supply companies in southeastern Michigan and have tried everything they could to find work, even trying to start their own businesses. That last is hard, when banks won’t lend and folks don’t have the basic cash to do it.
But Kyl does work hard for his friends. He would like to repeal the estate tax, so the country’s millionaires and billionaires wouldn’t ever have to pay their fair share of the tax burden. Most of them pay almost no taxes during their lifetimes–especially if their wealth is inherited and most of their income is financial. They get preferential rates for the taxes they do pay, they devise all kinds of scheme to defer payment (using loans to monetize assets that need not be sold til after death), and yet are the primary beneficiaries of the governmental stability and economy that ordinary folks’ taxes pay for. The Republicans set the estate tax to return in 2011 at the pre-Bush tax cut rates and exemption levels.
Why can’t Congresspeople act like grown-ups. They bawl about deficits and say we absolutely have to cut Social Security benefits, even though we know that a very small tax increase (or even a very small difference from the conservative trustee estimates) can solve that problem (if there is one). But we can’t do any further stimulus, they say, even though we have millions out of work and ordinary people are hurting while bankers and shadow bankers continue to make millions off the cheaper cost of fuinds handed them because of the governmental bailout–because it would cost too much. Yet at the same time that they whine about the deficit, cry crocodile tears over the cuts they so regretably find themselves forced to make in Social Security, they can contemplate another giveaway entitlement package for the ultra wealthy–one that will cost $15 billion a year.
by Linda Beale
A quote from Amartya Sen, and my New Year’s Tax Resolutions (for Congress and the Obama Administration)
The time between December 30 and January 4 seems to be filled with lists. Along with the ever-present list of “to dos” that haven’t been done and still are hanging around waiting for our attention, there are everyone’s “10 best” lists (e.g., the ten best movies–regretably, I don’t think I saw ten new movies in 2009, so can only say I thought Slumdog was a decent showing) or their opposite (e.g., the ten worst celebrities of the year, every one of them with Tiger Woods and Gov. Sanford firmly placed near the top). And of course there are those New Year’s resolutions that we are supposed to deliberate over and then deliver on when the New Year rolls around–mine is to join my hubby in his morning walk and to give up doughnuts completely.
Not being one to gather quotes all year just for this final celebration, here’s one quote that I believe is worth thinking about as we head into the new year. Amartya Sen writes, in “The Idea of Justice” (Belknap Press 2009), at 32:
Being smarter may help the understanding not only of one’s self-interest, but also how the lives of others can be strongly affected by one’s own actions. Proponents of so-called ‘Rational Choice Theory’ (first proposed in economics and then enthusiastically adopted by a number of political and legal thinkers) have tried hard to make us accept the peculiar understanding that rational choice consists only in clever promotion of self-interest (which is how, oddly enough, ‘rational choice’ is defined by the proponents of brand-named ‘rational choice theory’). Nevertheless, our heads have not all been colonized by that remarkably alienating belief. There is considerable resistance to the idea that it must be patently irrational–and stupid–to try to do anything for others except to the extent that doing good to others would enhance one’s own well-being.”
In light of Sen’s helpful clarity about the ridiculousness of ‘rational choice theory’, I also offer the following as the resolutions that I wish Congress and the Obama administration (and/or various administrative agencies thereof) would make (and follow through on) for this new year of 2010.
1) The Treasury should resolve that it will no longer provide special dispensation to the financial institution powers that be, such as its invalid notice indicating that it would not enforce the law on loss corporations for too-big-to-fail banks, thus allowing too-big-to-fail banks to become even bigger by buying loss banks, and then allowing them to use those losses in direct contravention of the law and avoid paying income tax for years (or perhaps decades). A similar “notice” went out recently–Notice 2010-12–stating that Treasury will continue to fail to enforce the rules under section 956 regarding what constitutes an obligation and hence relieving US shareholders of controlled foreign corporations ( many of them possibly the same too-big-to-fail banks) of further US taxpaying obligations. (This notice continued the nonenforcement decision Treasury had made in 2008, in Notice 2008-91. Too bad decisions do not make a good decision.)
2) The Supreme Court should resolve to deal with the problem of financial institutions claiming patent protection for all kinds of financial software and financial engineering “solutions” and for others claiming patent protection for tax planning strategies by releasing a decision in the Bilski case that clarifies the “abstract idea” exception. The Court should say that no patent can be granted for innovations that merely utilize the positive laws to assert that a transaction carried out in a particular way will have a particular legal result, or for other methods of conducting transactions or of organizing human activity that do not involve the technological arts, as understood under European patent law.
3) Congress should resolve to end the preferential treatment of those few Americans who own most of the financial assets of the country by ending the capital gains preference.
4) Congress should resolve to eliminate the preferential tax treatment of the earned income of hedge fund and equity fund managers (the so-called “carried interest”), and any other “partners” that manage partnerships and earn a share of the partnership’s gains as their compensation (such as real estate partnerships).
5) In order to restore some sort of balance between worker and employer, Congress should eliminate the business deduction for any compensation in excess of 20 times the average salary (about $1 million). The cap on compensation deduction to apply to compensation in any form (stock, assets, cash), whether or not “performance related”.
6) In order to treat the gifts of ordinary Americans to charities of their choice the same as the gifts of multi-millionaires to charities of their choice, Congress should repeal the special rule that permits a charitable contribution deduction for the value of stocks rather than the investment basis in the stocks. Will that limit contributions that are made? Perhaps, though it is clear that contributors do so for many reasons and not merely for the contribution deduction.
7) Congress should resolve to resolve the estate tax situation once and for all, before some do-nothing heir-to-be decides that 2010 is the right time for the wealthy person in his life to go. Congress should enact a modest exemption of $2 million but should make the estate tax rates progressive (beginning at2009s 45%, but moving up to at least 65% for the largest estates).
8) Congress should resolve to revisit the tax brackets. We have an economy in which the average income is around $50,000, but there are individuals who make more than $500 million a year. That spread is so large that it cannot be adequately addressed by brackets that focuse on the first $350,000 or so. Those who make $200 million a year have incredibly more freedom of choice, and the few dollars they pay in taxes are merely peanuts compared to the precious funds from an average family. We need to make the income tax more progressive by adding additional rate brackets–perhaps as many as 3 or 4 more. That would still be a far cry from the income tax system before Reagan took office, when we had top rates more than double today’s top rates. But it would address the dire fiscal need of the country in a way that is doable without creating undue suffering.
9) Congress and Treasury should resolve to clean up the partnership tax rules so that they do not offer such extraordinary flexibility to partners to arrange their affairs to avoid taxation–for example, by eliminating the electivity permitted to partners in many places in the rules (make the remedial method the only method allowed for taking into account book-tax disparities in contributed property) and by changing the way that partners take account of partnership debt (such as being able to get distributions of nonrecourse debt that monetize partnership property appreciation).
10) Congress should re-visit the rules on mergers and acquisitions, so that a tax-free merger becomes an unusual event. Part of the problem we are facing today is that multinational corporations have grown so big that they wield enormous power globally and can sometimes appear to be able to order laws to suit them. Witness the fact that we are well beyond the beginnings of the financial system crisis, and no single piece of legislation imposing new and better regulations on the banks have been enacted. The size of corporations ensures that they will become as focused on raising rents for their managers as they will on making profits for shareholders, and that they will care not one whit for the ordinary American who is their customer, or their low-wage employee, or the resident of a town that they leave derelict when they move to sunnier shores. We say that the rationale for tax-free reorganization provisions is to encourage efficient organization of corporations. But efficiency is not God, and in fact focus on efficiency may leave democracy and fairness far behind. We should give tax-free treatment only to shareholders who get no boot for any of their stock, and only in transactions where a high percentage of the consideration is stock (perhaps 80% or more).
It’s coming closer:
Once the tax expires, those inheriting estates after Dec. 31 will have to pay capital gains taxes on any asset sold. The cost will be based on the original price of the property, which could mean record-keeping headaches and bigger tax bills for some people.
“If we do not extend our estate tax law, all taxpayers, all heirs will be subject to massive, massive confusion in trying to determine the value of their underlying asset,” Baucus argued on the Senate floor.
Fortunately, unlike Health Care “Reform,” this only affects a few people:
The estates of about a quarter of 1 percent [0.0025 — ken] of Americans would be subject to the tax under the House bill, according to the the Brookings Institution-Urban Institute Tax Policy Center.
I guess someone hasn’t blown Joe Lieberman enough this week.
by Linda Beale
(cross posted with ataxingmatter)
More on the Estate Tax–the Heritage Foundation speaks gobbledygook
hat tip to Tax Prof and its commenters
The Heritage Foundation, I’m afraid I’ve concluded, is not a “think tank” at all–it’s a propaganda tank. And the propaganda it spews tends to be in support of ideas that may sound sort of okay if you don’t probe them very deeply but are apparently intended to further the benefits of society for the elites who already enjoy most of the benefits of society.
Look at their most recent take on the estate tax. Beach, Seven Reasons Why Congress Should Repeal, Not Fix, the [Estate] Tax (Nov. 9, 2009). (Yes, I “corrected” the title–after all, the use of “death tax” is an attempt to use emotions about death to move people to hold particular positions about the tax. And there’s no such thing as a tax on death–death is not taxable income. What is taxed is the estate left by the decedent to heirs or beneficiaries who did nothing to earn it. So estate tax is the correct name, and death tax is a manipulative play on words.)
I’ve argued here, of course, that the current fiscal crisis (brought on by many of those people, by the way, whose estates will likely be big enough to be subject to the estate tax if we are not so foolhardy as to repeal it before they die) calls for rethinking the “tax cuts are always good” mentality that was set in motion with Ronald Reagan’s “privatization, deregulation, militarization, and tax cut” dogma. We do need to rebalance our budget once we are through this crisis, and a good place to begin is by getting rid of tax loopholes that don’t make sense and retaining or even increasing taxes that make a lot of sense. The estate tax is a tax that makes a lot of sense and should probably be increased, not eliminated.
(ASIDE: Reagan is often treated as though he was a great philosopher. What he was was a master of sound bites and a person with rigid views that were self-contradictory. You can’t increase military spending, privatize government function at great costs to the government, and cut taxes to pay for those new subsidies for private business and the military-industrial lobby without running up huge deficits. So he had a big tax cut, and then tried to make up for it with a bunch of tax increases.)
So how does the Heritage Foundation seek to justify its proposal for repeal of the estate tax? It provides seven arguments:
1) the estate tax discourages savings and investments
True, to some extent, but probably much less so than proponents of repeal would have us believe. Any tax discourages what is taxed, so labor taxes discourage labor and taxes on capital income discourage savings. But much less so in the case of the estate tax (compared to a tax on wealth as it is accumulated). The estate tax doesn’t have much effect on living accumulators, because their goal is to accumulate ever more–if anything, the estate tax may encourage saving so that they will have “enough” to leave. So while the Heritage Foundation says that the estate tax sends a signal in favor of consumption, the fact is that estates are continuing to grow at phenomenol rates. IN fact, we might well want to encourage the wealthy to consume more and even say that this might be a very positive incentive effect of the estate tax, if only it were true. Wealthy consumption would reduce the size of the estate and limit the windfall power of plutocracies.
Of course, the estate tax doesn’t have any effect once the one who gathered the estate dies–the decedent can no longer be incentivized to save or not. The estate tax doesn’t have any incentive effect on the people who acquire the estate (heirs, beneficiaries) since they are getting a pure windfall, whatever they receive.
2. The estate tax undermines job creation.
The Heritage foundation is claiming that the tax money is kept out of the investment stream and therefore undermines job creation. This is just a restatement of the same argument in item one.
Again, no empirical evidence here, of course. Right-wing economists consistently claim that the wealth in estates would be the source of powerful job creation entrepreneurialism if only we would leave that tax money as well to heirs, so they could invest to create jobs, but there’s no evidence to support that claim. Entreprenuerialism doesn’t ordinarily come from wealthy heirs to estates sitting in their effortlessly acquired empires. In fact, again, it is more likely that dispersal of big estates would do more for job creation than letting heirs continue to horde the wealth set aside by their benefactors in hidden overseas bank accounts or invested in emerging markets or in other ways passively collecting income as most capital assets do. Even if letting heirs receive that tax money to invest rather than giving it to the federal government might create a few jobs, it is equally true that government spending with the same money creates jobs and perhaps does it better. Heritage’s argument here just amounts to the same old saw that government is less efficient at using money than the private sector is. And again, this is simply not an established fact. In fact, we have evidence to the contrary in many instances–there are numerous examples that privatization is less efficient/more costly at getting the same job done. Take subsidized student loans compared to direct student loans without banks as intermediaries. The first costs the government money (to subsidize the banks) while the latter makes money for the government. Take Blackwater (now Xe Company). It’s employees are paid 2 to 6 times what soldiers are paid for doing the same job. Not more efficient, and in fact more costly. and fewer jobs because each job is paid so much. There are numerous examples that privatization is less efficient at getting the job done and that government may in some, maybe many, instances be better at job creation than rich guys hording wealth or buttressing up under-utilized family ranch empires.
3. Estate taxes suppress productivity and wage growth
This is just another version of two which was another version of one, since what the Heritage Foundation says is that productivity and wage growth are suppressed because there is less investment that keeps businesses from buying tools and equipment that keeps them from hiring new employees. As noted, maybe some investment isn’t made that would have been made, but also government spending takes place that wouldn’t have taken place. Hard to be sure where the tradeoff is in terms of productivity and wage growth. To the extent that the estate tax repeal amount would be horded in unproductive, locked in investments, releasing it to the government, which spends it back out into the main stream of the economy might well multiply the productivty much faster.
4. Estate taxes contradict the central promise of American life–wealth creation.
Folderol. The central promise of American life is not plutocracy–it is the promise that everyone has opportunity to live a decent life–to acquire life’s necessities and to live secure in their homes. There is in fact a conflict between that true conception of the central promise of American life and the conception forwarded by the Heritage Foundation, because if the wealthy elite is able to continue consolidating their stranglehold over the wealth of this country without contributing to the common good through taxation (as the capital gains preference, nontaxation until realization, and repeal of estate tax would mean), we will end up with a have and have-not society, with the haves living in gated communities and the have-nots left to struggle in a very rigid and immobile class structure without opportunities for advancement.
5. Estate taxes hurt those who have tied their savings up in land
This is the same old canard that the estate tax causes the loss of family farms and ranches. It’s simply not even true, as has been explained countless times (there are special provisions to provide an installment payment so that the limited taxes due can be paid out of the income).
Then the Heritage Foundation seems to suggest we should pity those wealthy farmers and ranchers whose land value has increased astronomically so that their immensely grown wealth means they do have some tax to pay and they might end up deciding to sell some small part to pay whatever taxes are due. So? just because they own it in the form of land, we are supposed to say–don’t ever pay any taxes, just continue to accumulate immense wealth, and pass it on to your heirs so that they can become a plutocracy? I don’t think so.
6. Estate taxes hurt African American business owners
The Heritage Foundation only talks about African Americans when it is attempting to co-opt a group and get them to support something against interest. This is not about African Americans but about businessmen–an argument that people who have businesses ought to be able to pass them along without being taxed.
7. Estate taxes hurt women business owners
Again, this hasn’t got anything to do with women. It’s about business owners, just like number 6. A
nd there is no real showing, by the way, that the estate tax hurts small business owners. The estates of small business owners are almost always below the exemption level. The estate tax gets the Bill Gates (Microsoft) and Waltons (WalMart) type business owners. And they can clearly afford to pay some tax. The Heritage Foundation in items 6 and 7 is simply trying to pull on heart strings. In fact, there is no reason at all to let the Walton billions accumulate and consolidate power once Sam Walton is gone.
This is pretty much a garbage piece. Although Beach, the author, has a title with the terms “data analysis” in it, there is no data analysis in this opinion piece. There are three footnotes. One presents a very incomplete picture about the politics behind the Bush Congress’s ridiculous bill dealing with estate tax (gradual decrease in the amount of tax collected until 2010, when the tax would be repealed for one year, but then the tax would spring back into life as it was pre-2001 when all of the Bush Congress’s tax cuts died their natural planned death). One is a quote to the author’s own work claiming that estate taxes “kill the economy” (hardly credible, since the economy actually has done much better in periods of history when it was much higher than it is now, and performed only weakly under the Bush tax cuts). One is work by Holtz-Eaken and Cameron Smith where they “present an argument” that repealing the estate tax–ie “investing” (if it was invested) the taxes saved–would create 1.5 million jobs. That’s a very weak piece itself.
For more comments, look at the commenters on tax prof. I particularly like an anonymous posting, where he notes (again substituting the correct term and providing only part of his comment) that:
1) lack of [estate] taxes encourages investment lock-in and inhibits efficient allocation of investments
2) lack of [estate] taxes inhibits job creation (see 1)
3) lack of [estate] taxes discourages the real central promise of American life–that hard work and smarts, and not being born lucky, are to be rewarded
4) lack of [estate] taxes discourages the 19th century view that wealth comes from holding huge tracts of under-utilized land…..
And there’s Chet Hardy’s statement (an excerpt only here):
Its just amazing that the same people who decry deficit spending (Sen. Jon Kyl) turn on a dime and advocate repealing the estate tax. That’s $20 billion per year folks. To put that in perspective, that’s enough to provide health care to every child who doesn’t have it. Its enough to build a new High Speed Rail line every single year.
edited 072909 to correct link for giving online, by Linda Beale
One of my big gripes (in case you haven’t noticed) is the ease with which ordinary Americans can be fooled about tax issues by organizations, often ones with greedy purposes of furthering their own interests in lower taxes for themselves, that publish misleading or downright untruthful information and just keep repeating it. This has been a special problem with estate taxes, which hit only the very wealthiest amongst us and for a relatively small amount even for the large estates. It is also true of income taxes in general, the way flat taxes would work, the rationales for the corporate tax and many other key tax policies. Lobbyists frame the issues with inflammatory language, and most are too unknowing about the way tax really works to recognize the ruse for what it is.
Here are two of my pet peeves. (Many tax practitioners–and lots of tax academics–disagree with me on these.) Some of the worst phrases that have furthered the cause of cutting taxes for the wealthy so that the majority of Americans can either pay higher taxes themselves or do without the kinds of things that governments, not private enterprises, do best are “death taxes” and “double taxation” .
Much of the estate that is taxed when a decendent passes it along to his heirs as an unearned windfall has never been taxed at all during the decedent’s lifetime, in the case of wealthy people with mostly financial assets. If there is not a good-sized bite out of the estate upon the transfer to beneficiaries, there’ll be very little contribution to taxes from an agglomeration of wealth that has benefited enormously from the US legal system. And the heirs won’t have any taxes to pay either–they’ll just keep holding or will have a stepped up basis when they sell. All that is is a system for perpetuating or creating oligarchy–letting the wealthy become a ruling class with all the money and all the power without contributing anything much to help pay for the system that made all the wealth possible in the first place.
Similarly, the phrase “double taxation” is used to make people think that taxing corporations is unfair. But the decision about whether we tax entities or not is a reasonable one for societies to make. We made it a long time ago–deciding that we should treat corporations as taxpayers and thst we should tax capitalist owners of corporations on the income they are paid out of their corporate ownership as well. It is one of the most progressive parts of the federal income tax when it works, and it makes a lot of sense from a democratic egalitarianism perspective. Corporations can horde money and have enormous power because of their ability to lobby for their own benefit. Look at the way Big Pharm and Big Insurance has gotten Max Baucus in their pocket–putting money in his, and getting out of that a watered down health bill that doesn’t do half of what we should be doing to move towards a single payer, single provider system like the most advanced countries already have. The presupposition behind the term “double tax” is that you are overtaxing and that you are taxing somebody that shouldn’t be taxed. Yet corporations get to deduct salaries and purchases paid for with their own stock, which doesn’t cost them a thing to issue. Corporations get basis in property transferred to them by shareholders in exchange for issues of corporate stock, even though that stock does not represent an after-tax investment by the corporation. So the taxable income of a typical corporation is generally much less than the corporation’s actual economic income, and in addition to these provisions that are basic to the way the corporate tax is set up there are lots of provisions for reducing corporate tax–too fast depreciation, deferral of income through matching rules coming from court opinions where judges have been unduly influenced by financial accounting (the seventh circuit, in particular), depletion allowances and myriad other tax expenditure items favoring corporations, etc. Since Reagan, there has been a huge push by the same economic thinkers that brought us our current Great Recession to undo the US classical corporate tax system. It’s really a push for giving more money back to the wealthy and cutting the size of government. (Of course, the push for lower corporate taxes, more uneconomic credits like the R&D credit, etc., and the push for zero taxation of corporate dividends have been coordinated and have the same effect of huge reductions in taxes on the wealthy.) But it’s all argued in the name of economic efficiency–a theory without basis in reality that is probably more to blame for the greed that dominates today’s society and the consolidation of huge megafirms–Big Pharm, Big Oil, Big Banks, Big multinationals in general–than anything else. And strangely, no one makes the same “horrid double tax” arguments about the maid being taxed on her salary paid out of already-taxed compensation income of her lawyer-employer…
Of course, even for those who don’t pay much attention to the various organizations that are peddling particular views of tax issues and haven’t been particularly swayed by the push for repeal of the”death tax” or repeal of “double taxation”, there is a huge gap in information that isn’t filled in by the media. Most schools, for example, don’t teach much of anything about the tax system in the basic civics course. Most students don’t take a finance course in college, much less a course that teaches the basics of tax law. In fact, most law schools don’t even require that their graduates have a basic course in federal income tax law before graduating. (That is a major problem, I think, since almost every legal issue has tax consequences, one way or another, that a competent attorney should be aware of.) As a result, we are frighteningly ignorant, as a society, about how tax works, why it works that way, and what other possibilities there are. And as a consequence of that ignorance, it is all too easy for citizens to be in the dark about the consequences of tax legislation under discussions, for lobbyists to influence members of Congress to vote in their favor on bills (the public won’t know the difference), and for members of Congress to fail to fully inform their constituents about the tax issues they are voting on (or even, in far too many cases, for the members of Congress to understand, as when a certain person from Colorado supported windfalls in the agricultural bill based on his apparent failure to understand the difference between gross income (revenues without business or other deductions) and adjusted gross income (revenues with business deductions taken into account)).
So I’m glad to see Marjorie Kornhauser’s project take off. Maybe others won’t agree with me on these pet peeves, but if we have better educated citizens who have more basic knowledge about taxes and how they work, it won’t be so easy to bamboozle them into voting against their interest to support tax cuts for the wealthy and service cuts for everybody else while the boondoggles for the big corporations just keep pouring out (like an agreement that the government can’t use its bargaining power to get cheaper drugs, or that Big Pharm can prevent generics being sold for 12 years and other crap that is getting put into the “health reform” bill that is becoming, like so much else these days, a corporate giveaway).
What’s her project? It’s called The Tax Literacy Project–“a non-partisan effort to informally educate the public about taxes through popular methods such as web-based games and other internet activities.
Want to help? Donations are being accepted. What follows is the appeal, direct from Kornhauser and the ASU Foundation.
Money from Taxes Helps Every Person Every Day!
But polls show most of us do not understand anything about our taxes.
Why should we bother learning about taxes? Because:
Tax ignorance costs each of us money. Many of us pay more tax than we actually owe.
Because tax ignorance makes it hard to discuss and enact sound tax policies, we are not able to raise money in the fairest and most efficient manner possible.
Why do we need taxes?
Taxes support democracy. They fund government services and goods such as court systems and national defense that protect your life, your property, and your constitutional rights.
Taxes support economic growth. Governments use taxes to encourage economic growth in numerous ways such as maintaining a stable currency, enacting and enforcing laws that protect both workers and employers (their lives and proeprty), and helping to build and maintain large and dependable energy, transportation and communication systems.
Taxes support your daily quality of life. They help you and your family buy a house, breathe clean air, have safe food and drugs, travel safely and efficiently on highways, trains and planes. Taxes help pay for your health care (in the form of tax benefits or direct care) and they pay to educate you and your family. Taxes help you at work (e.g., enforce contracts, provide a safe workplace) and help you at play (e.g., national parks).
Become a part of a solution to the problem of tax ignorance by contributing to the Tax Literacy Project.
What is the Tax Literacy Project?
It is a non-partisan effort to informally educate the public about taxes through popular methods such as web-based games and other internet activities.
Can you support the Tax Literacy Project regardless of your political outlook?
Yes, the Project’s only pupose is to help provide information about tax, not to support any particular type or amount of taxes. No matter what kind of government people want, that government will cost money. Americans must understand how that money can be fairly and efficiently raised.
How can you make a charitable contribution?
Make your donation payable to the Tax Literacy Fund at https://secure.asufoundation.org/giving/online-gift.asp?fid=418 (no appeal code necessary) or Make your check payable to the ASU Foundation and mail to the Sandra Day O’Connor College of Law, Arizona State University, PO Box 877906, Tempe, AZ 85287-7906. Please write Tax Literacy Fund (3000 4788) in the memo line of your check. Thank you in advance for your support.
For more information or to become involved–
Please contact the project director: Marjorie E. Kornhauser, Professor of Law, Sandra Day O’Connor College of Law, Arizona State University, Marjorie.email@example.com, 480.965.0396.
All funds will be deposited with the ASU Foundation, a separate non-profit organization that exists to support ASU. YOur payment may be considered a charitable contribution. Please consult your tax advisor regarding the deductibility of charitable contributions.