Relevant and even prescient commentary on news, politics and the economy.

Kevin Drum on Reid’s gambit on Romney’s taxes

Kevin Drum has an opinion on election tactics:

Come on, folks. Reid didn’t say I’ll bet Romney didn’t pay any taxes. He didn’t say he talked to someone familiar with high earners who told him Maybe Romney won’t release his returns because he didn’t pay any taxes. He made a flat statement of fact. He said he has an “extremely credible source,” which in this context means someone with direct knowledge of Romney’s taxes who decided to pick up the phone and dish about it to Harry Reid. Does anyone really believe this? Really? Then, as if that weren’t enough, Reid made his little bluff even less plausible by deciding that Romney didn’t just avoid all taxes for one year, he avoided them for ten years. Yeah, baby, that’s the ticket! Put these two things together with the fact that Reid hasn’t even tried to make his fairy tale sound believable (it’s just some guy he talked to) and this is not a story that a five-year-old would credit. It’s just Reid making stuff up in order to put pressure on Romney, and I think we all know it.

Can I prove this? Of course not. Given the epistemological limits of proof, I can’t prove Barack Obama was born in the United States either. Nevertheless, I feel safe saying that anyone who claims to have an “extremely credible source” that Obama was born elsewhere is either crazy or lying. The same is true for Reid, and Reid isn’t crazy. It’s simply vanishingly unlikely that he’s telling the truth, and no one — not liberal or conservative — would spend even ten seconds on a story so patently far-fetched if it were anybody but Reid and the background were anything but the frenzy of a presidential campaign.

Politically, of course, Reid’s ploy has worked like a charm. Romney’s taxes are back in the news and Romney’s ham-handed handling of the whole affair has kept it there. And that gives everyone a fifth reason to cheer on Reid: the end justifies the means.

Take a deep breath, folks. This is contemptible stuff and it’s not just business as usual. We’ve spent too many years berating the tea partiers for getting on bandwagons like this to get sucked into it ourselves the first time it’s convenient. It’s time to quit cheering on Reid and get off this particular bus.

Tags: , , Comments (9) | |

Kleinbard: Tax Fairness and Fairness in Tax Data Reporting

From TaxProf blog:

Kleinbard: Tax Fairness and Fairness in Tax Data Reporting

Following up on yesterday’s post, WSJ: Taxing the Rich — The Facts:  Huffington Post:  Tax Fairness and Fairness in Tax Data Reporting, by Edward D. Kleinbard(USC): 

The impetus for this little paper was an op-ed by Ari Fleischer in the Wall Street Journal a couple of weeks ago [The Latest News on Tax Fairness] that unfairly claimed that the Congressional Budget Office had demonstrated that the most affluent Americans were “overtaxed.” That op-ed contained  many rhetorical tricks and incomplete statements that are a staple of the current political right, and I felt it important both to defend the honor of the CBO and to offer readers a more balanced presentation of the underlying issues. Editorials like Fleischer’s simply polarize discussion and distract from the real questions of fiscal policy, which are the appropriate role of government in contemporary society and the best modes of financing it, and as to which reasonable people can come to somewhat different conclusions.

Tags: , Comments (0) | |

What is Mitt Romney Hiding?

by Kenneth Thomas

What is Mitt Romney Hiding?

Mitt Romney has so far released only one year of tax returns (2010), plus an estimate for 2011. This stands in stark contrast to his father, Michigan Governor George Romney, who released 12 years of tax returns when he began running for President in 1967. As his father said at the time, “One year could be a fluke.” So the questions remain about what is in Romney’s older returns.
Two stories this week and last have ratcheted up the pressure. One is a recent web exclusive for “The Last Word with Laurence O’Donnell” where David Cay Johnston has five questions for Romney that can only be answered with his tax returns. The other is a blockbuster story by Nicholas Shaxson (h/t TPM) in the new Vanity Fair on the shadowy world of Romney’s tax havens. Together, they put a laser-like focus on the finances of the man who could become our 45th President.
Johnston is a well-known former New York Times reporter, Pulitzer Prize winner, and the author of the major books Perfectly Legal and Free Lunch. If you don’t have time to watch his 3:45 video, here are the five questions:
“1. Did you buy any illegal or gray area tax shelters?
“2. Did an IRS audit ever uncover serious problems with any of your tax returns?
“3. Did you make use of offshore vehicles to defer, or avoid paying, federal income taxes?
“4. Did you take advantage of any tax strategies that the IRS did not uncover in audits?
“5. Did you fully tithe to the Church of Jesus Christ of Latter Day Saints every year and take a deduction on your tax return that shows that?”

These are important questions. We know that Governor Romney has had a Swiss bank account, as well as money in other tax havens like the Cayman Islands, Luxembourg, Bermuda, and Ireland. Romney’s answer to any question about his taxes has basically been, “Trust me.” But the guy’s running for President, for Pete’s sake. He owes us more than that.
Shaxson, a researcher for the Tax Justice Network and author of the book Treasure Islands, asks us to consider the possibility that maybe not everything Romney has done tax-wise has been legal. He opens with a story told by a former Bain employee about how Romney encouraged him to lie to get secret information on competitors. There is, of course, the fact that Romney has funds parked in numerous tax havens and the fact that his supposedly “blind” trust invested in a business started by Romney’s son Tagg, and the fact that he has $102 million in his IRA despite a contribution limit of $2000 per year for the entire 15 years Romney ran Bain. Obviously nothing to see here…
The standard answer of the Romney campaign to all this is that he always followed the law. As Jon Stewart had to point out since the major media did not, Romney did plenty to affect the law he was supposedly “just following,” including his defense of the “covered interest” tax loophole that let him treat his fees at Bain as if they were capital gains (15% tax) rather than wages (35% tax). All perfectly legal and as Johnston points out in his book by that name, that is the real scandal.
Further, Shaxson reveals that an early filing of the original Bain Capital fund in 1984 showed that many of its foreign investors were routed through tax havens and that at least one was a notorious financial criminal, Robert Maxwell. Thus, Bain helped foreigners take advantage of the fact that the United States has set itself up as a tax haven for non-citizens (see also Jason Sharman’s paper on setting up anonymous companies in the U.S. and elsewhere; h/t Robert Kudrle). Shaxson quotes Rebecca Wilkins of Citizens for Tax Justice, “It is shocking that a presidential candidate should think that is O.K.” for Bain to service the likes of Robert Maxwell.
The bottom line is that there is a lot of unsettling information in what investigators have so far been able to piece together about Romney’s finances. The easiest way for Governor Romney to put to rest what his campaign described to Shaxson as “unfounded allegations and insinuations” would be to release his tax returns. Yet he has not done so and shows no sign of changing his mind. Josh Marshall calls the questions “kryptonite” and thinks Romney will come under a lot of pressure to release more tax returns. Let’s hope so. The guy’s running for President, for Pete’s sake.

Middle Class Political Economist

Tags: , , Comments (19) | |

To pay for the next war…we raise taxes, cut spending elsewhere?

The Armed Services full committee meeting in light of the end of the latest round of talks with Iran and harsher sanctions (oil embargo) scheduled to take effect, points us to the need to figure out how to pay for another conflict that is not quick and victorious.

The Washington Post quotes Senator Leahy:

At last, after 11 years of the United States at war, a few minutes of public discussion of a tax to pay for the fighting. But that would be for the next war.

“What would be the impact of going to war again without committing to pay for that war with up-front taxes, something we did not do in either Iraq or Afghanistan, for the first time in the history of the country?” Sen. Patrick J. Leahy (D-Vt.) asked Defense Secretary Leon E. Panetta at a Senate Defense Appropriation subcommittee hearing on June 13.

That’s a question that should be asked before any president sends U.S. forces into a fight overseas or members of Congress propose legislation that authorizes some sort of military action abroad.

“We basically ran that war [Iraq] on a credit card,” Leahy told Panetta, who was there to discus the fiscal 2013 Defense Appropriations bill. “Now we find people who are calling for more military action in other parts of the world; at the same time, they do not want to consider any way of paying for it.”

Tags: , , Comments (3) | |

Wealthy Non-Taxpayers — From 60 to Thousands in 30 Years

by Noni Mausa

Wealthy Non-Taxpayers — From 60 to Thousands in 30 Years

Bruce Bartlett provides the numbers, but it’s so much easier to see in a chart.

Wealthy Non-Taxpayers 1977 to 2009, showing incomes over $200,000 per year.  Blue is percentage of total households over $200,000 paying no taxes, purple is numbers of high-income households paying no taxes. Numbers from chart here:, drawn
from IRS data.

On this chart, the percentage appears relatively stable with a low of 0.066 to a high of 0.529 (66 per 100,000 to 529 per 100,000) but actually that’s an eightfold increase, mostly accruing after 2004.
The numbers of households, however, leap like a gazelle after 2004, reaching a high of 22,000 high income households paying no taxes, from a low of only 60 in 1977.

Tags: , , Comments (15) | |

Summers says taxes must increase

by Linda Beale

Summers says taxes must increase
For once, I find myself agreeing with Larry Summers. At a conference in Washington sponsored by the Brookings Institute, he emphasized that tax cuts and spending cuts cannot appropriately resolve the US budgetary issues.

“It is a near certainty that we are going to need a significant increase in revenues, and it seems to me that any discussion of tax policy needs to start there,” Summers Says U.S. Tax Overhaul Should Raise More Money, (May 3, 2012).

Without additional taxes, “close to inconceivable” cuts to earned benefits programs like Medicare and Social Security would be required, he noted. Id.

It’s important that people start talking some sense about taxes since they are the lifeblood of a democracy and the primary way that a government can act to limit the concentration of wealth in the hands of the few that diminishes democracy by promoting oligarchy.

I suspect most of the insiders in the Republican Party know this and know that if common sense reigns, taxes will be raised on the upper crust and raised somewhat on most of the middle class, in order to ensure that the US can deal with its crumbling infrastructure, support its citizens, not just the wealthy ones, in developing their human capital, and provide a decent and sustainable standard of living for most of our people. That is why the Republican Party is engaged these days in brinksmanship legislative (and judicial) action. As the extreme right has gained representation through strong turnout of the more ideological base,

Republican congressmen and women have played a one-note tune, using the filibuster in the Senate to stymie majority rule and repeatedly relying on counterfactual assumptions about the economy and meaningless soundbite promotions–such as the idea that tax cuts result in greater revenues (not so) or the notion that Social Security is bankrupt (not so) or the idea that lower income Americans should pay more in taxes rather than increasing the taxes paid by the extraordinarily wealthy upper-crust that has seen its taxes lowered during the three-plus decades of reaganomics–to convince Americans that a return to the laissez-faire, corporate titan economy that reigned at the turn of the nineteenth century would lead to prosperity.

One of the major problems facing this country today, and its economy, is the huge gap between the income of a few ultra rich and the rest of us, and the near-poverty level of income for many Americans. Countries with such inequalities generally have poor quality of life indicators on a lot of fronts, and the US is no exception. Teenage birth rates, illiteracy, health care, low-birth weight babies, unemployment–a litany of societal ills accompanies high inequality within a society, and the US suffers from almost all of them.

Why then is it that our policymakers do not recognize the central role of the tax system in either fostering inequality–as it has been for thirty years under reaganomics, as we reduced the role of the estate tax, provided an extraordinarily preferential rate for capital gains (the type of income mostly enjoyed by the very wealthy), and otherwise provided deductions and preferences that had the effect of redistributing upwards from the vast middle to the few at the top. Yet right wing economists like Martin Feldstein refuse to recognize the devastating impact of huge inequality on the economy.

“Our problem in the income distribution area is poverty, and you should be concerned about combating poverty, not inequality.” Id (quoting Martin Feldstein).

Perhaps Feldstein has bought the Kool-Aid of the American myth, that we are a society with great mobility, no class structure, where everyone can “rise by his own bootstraps” and become a millionaire. That mobile and classless society may have almost existed in the golden years after World War II, when veterans came back, went to college on the GI Bill, and raised families in small towns across the US that were dominated by locally owned stores and regional food supplies. But the US society has lost a considerable amount of that mobility. Yes, there are some at the bottom who win the lottery (literally or figuratively) and move up, and there are some at the top who don’t stay at the top. But generally in this country, the father’s wealth determines the wealth of the son, who inherits it at no tax cost and generally increases it because that wealth is mostly represented by capital assets whose income is preferentially taxed at very low rates.

Ultimately, this nation would be best served by merely allowing the ill-considered Bush tax cuts to expire as they are slated to do under current law. Then hopefully a more reflective group of legislators can get together and discuss how best to modify our tax system to deal with the issues that face us in this century–global companies that move their intellectual property offshore in order to avoid taxes and who no longer have any sense of loyalty to country; too big to fail institutions in banking, insurance, and global multinational corporations; and excessive subsidies for companies that are making billions in profits and paying almost no taxes, such as the oil and gas industry, the agribusiness industry, and multinationals like GE.

I think a big part of the answer requires rethinking in a direction quite different from the one that the right is pushing: to considerably narrow the tax-free provisions for mergers, acquisitions and spin-offs; to modify the transfer pricing formula to reject treatment of intellectual property developed in this country as “sold” to a controlled subsidiary; to recognize the need to protect domestic industry from globalization that leaves us too dependent on imports; and to re-invigorate anti-trust and consumer protection laws so that industries can no longer sell products and leave customers without recourse to information or repair because of unintelligible call services in the Philippines and “company policies” that refuse to reimburse a customer for damage done to a printer by a cartridge sold by the printer manufacturer.

Tags: , Comments (7) | |

Taxes and Economic Growth: Real World & Simulations

by Mike Kimel

Taxes and Economic Growth: Real World & Simulations

Over the past few years, I’ve posted many times on an unpleasant reality: despite the fact that so many people believe otherwise, in general, lower taxes do not result in faster economic growth. It is really too bad, because we could all be better off if only lower tax rates led to faster economic growth. However, the association between slower econoimc growth and lower tax rates is something we can see in data from the US, whether we use national level data, state and local data, or anything in between.

Here’s a post I wrote not that long ago noting that when top marginal tax rates are below about 65% or so, cutting taxes is associated with slower economic growth and raising taxes is associated with faster economic growth. Here’s something a bit more academic showing the same thing.

As I’ve noted before, there’s a logical reason why lowering top marginal rates slows economic growth (except when top marginal rates are very high), and it should be obvious to anyone who has ever run a business: the easiest way to avoid, or at least postpone paying taxes for is not to show taxable income. If your business looks like it will show a profit, reinvest the revenues, pushing up costs and voila, you don’t have any profits for the IRS to tax. But, by doing so, you are also strengthening the company, which means setting the stage for faster growth in later years. And you’re more likely to follow this strategy, rather than consume your profits, the higher the tax rate.
Notice that this little story depends entirely on the self-interest of people in the economy. Money collected in taxes could be put in a big hole and burned, and the story would still work. (Of course, the story works better if whatever is collected in taxes is actually used productively, but that isn’t a requirement.)

The response I’ve gotten via e-mail and commentary comes overwhelmingly in two flavors: a. You lie about the data and you don’t understand how people react to changes in tax rates. b. That may be what the data shows, but it can’t possibly work in theory so it must be wrong.

I can’t help the group folks in group a – I’ve offered up my spreadsheets, and frankly, anyone should be able to replicate it – this stuff ain’t rocket science. But this post is for the folks in the second group.

For grins and giggles, yesterday I made a simple little simulation tool in Excel which is intended to look at the behavior of a very wealthy person reacting to changes in tax rates. In any given period, the person consumes some percentage of the wealth they happen to have. The remainder, the savings, are allowed to grow. Individuals get a benefit from both consumption and holding wealth.

 Their goal is, given the tax rate, to maximize the discounted weighted consumption & wealth over all the periods of their working life. I set tax rates at 0%, 10%, 20%, … 90%, and used Excel’s solver tool to determine the percentage of wealth they will select under each tax rate.

Results are as follows:

Figure 1

Given the parameters selected, here’s what we find: the higher the tax rates, the lower the less of their wealth people consume in any given period and overall. However, the greater the wealth they accumulate… which is essentially the story I’ve been telling to explain the data. As noted previously, in general, higher taxes lead to faster economic growth.

A few additional comments:
a. The simulation is simplistic, and it does not show the quadratic relationship between taxation and growth we see in the real world data. I believe that this can be resolved simply by taking into account satiation resulting from consumption.
b. The simulation indicates that increasing tax rates makes people worse off (the discounted sum of the weighted wealth and consumption tends to be lower for higher tax rates).
b. i. However, they leave behind more wealth. Put another way – individuals in any given period are made worse off, but their descendants are made better off.
b. ii. A more realistic scenario probably shows increased returns as wealth increases. (Mr. Romney, to use one example, has investment options available to him that you and I do not, and Mr. Buffett has options available to him that Mr. Romney does not.) Higher taxes might very well make a person worse off today but better off in the long run. Its great to live during the Gilded Age, a period during which tax rates fell from 75% to 24%… provided you die before the effect of the Gilded Age spits out the Great Depression.
c. Because of the way taxes are defined in this model, they play a similar role to compulsory savings. Put another way: this model can also explain countries with relatively low taxes but compulsory savings, such as Singapore.
d. The model also explains Tyler Cowen’s Great Stagnation.
e. Government spending does produce a benefit, though that is ignored by this model.

I haven’t decided whether I want to spend time improving the simulation tool, but, as usual, if anyone wants my spreadsheet, drop me a line. I’m at my first name (mike), my last name (kime), at gmail.

Tags: , , Comments (79) | |

Real Estate Insanity…working off the excess inventory?

by Tom aka Rusty Rustbelt Real Estate Insanity So my son and me are thinking about buying a duplex in Ohio and fixing it up this summer. He would live in half and we would rent the other side. Given the number of foreclosures this should be an easy deal, right? Wrong. The realtors tell me no one will finance the properties, not even the banks that own them. Why? It seems many of the banks did not get around to assigning “asset managers” for a year or two, which means the water pipes froze in the winter, burst in the spring and destroyed the interior of the properties. Even when asset managers were promptly assigned, many were incompetent and/or corrupt. So there are many thousands of properties with reasonable looking exteriors but with ruined interiors. Even with sweat equity labor the fix up costs will be very high. This will eventually be fixed with bulldozers.

Tags: , , , , Comments (9) | |

Guest post: Why Tax Cuts for the 1% Are Self-Defeating

Tim had written as a guest poster for Angry Bear as ‘reader T-bone’ a few years ago and is returning to writing, currently at Polymic.  This post was published about a month ago.

Guest post by Tim Martinez

Why Tax Cuts for the 1% Are Self-Defeating

Why Tax Cuts for the 1% Are Self-Defeating
Annual U.S. income share of the top 1%.

A new GOP budget released Tuesday brings renewed attention onto the issues of tax policy and the economy. Of course, there will be debate over what effects various policy options would have on the economy, something I have previously addressed in a previous article. But inevitably, there will also be arguments made by Republicans regarding the fairness of those policies as well.

The problem with many of the GOP arguments made in regard to fairness is that they lead to a self-defeating paradox in either the logic of the argument, or in the outcomes of their recommended policy solutions.
For example, one common argument made is on the grounds that it is unfair for the wealthiest to pay higher taxes since they are already paying the most federal income tax while many people pay none at all. But this argument is flawed in multiple ways.

First of all, the logic of this argument is paradoxical. As the wealthy get wealthier while others fall behind in comparison, the share of tax burden on the wealthy would continually increase. In other words, this logic would suggest that the closer the wealthiest come to earning 100% of total income, the more unfairly they are being treated since their share of income taxes edges closer to 100% as well. And by contrast, it would be considered more fair for the wealthy if their incomes fall while others’ incomes rise, since taxes paid would be more equal.

Second, the big irony here is that the policies that would seem to make it more fair for the wealthy in the short-term (lowering their tax rates at the expense of other policy options) are policies that would tend to further increase income disparity in the long-term. This is due to these policies’ lower effect on creating demand (lower economic multiplier), which means less need for labor (a weaker labor market).
Let me explain. The wages that average working people can expect depends on the overall demand for labor. If unemployment is very low, businesses must compete harder for labor. People will find more opportunities available, more competing offers, and find it easier to change jobs. This pressures business to offer more competitive wages, among other things.

In other words, policies that facilitate strong demand and thus strong employment lead to higher incomes for labor, which narrows income disparity. This real income growth due to strong employment is something we can see happening in China, for example.

In addition, this type of stronger income growth will itself fuel stronger demand. We typical refer to this as a strong middle class. The stronger demand it generates in the economy supplants the need for demand-creating policies, which means those polices can be slowly rolled back. This can even happen automatically to an extent, as a larger, wealthier middle class pays more taxes, and that increased revenue can be used even for a tax cut for the wealthiest.

Achieving an ideal conservative vision of the economy and of government tax policy by enacting conservative-favored policies is a self-defeating paradox. Ironically, the path to this ideal conservative outcome can only be achieved by first enacting liberal policies

Tags: , Comments (17) | |

Still haven’t filed your FBAR? Don’t wait till you get hit with forfeiture

by Linda Beale

Still haven’t filed your FBAR? Don’t wait till you get hit with forfeiture like this Alaska Plastic Surgeon

It looks like the leads from the various voluntary disclosures are beginning to pay off, as the U.S. is beginning to develop high stakes cases related to Americans who have tried to maintain secret caches of cash offshore–to hide from the taxman and from their ex-spouses! The forfeiture complaint in the case, filed Feb. 9, 2012 in California’s Central District, is available here.

The government seized $4.656 million belonging to Michael and Sheila Brandner (he’s the plastic surgeon) from an account at Bank of America in the name of Evergreen Capital LLC, an entity set up by Brandner and under his (hidden) control. The government’s tale is a sordid one–In the middle of Brandner’s divorce proceedings in May 2008, he drove to Panama where he deposited checks worth about $3.5 million in a non-US bank, with the purpose of concelaing the assets from his soon-to-be ex-wife. A person who became a “cooperating witness” helped him open the account and told him about the FBAR requirement, but Brandner didn’t file the required report. A few months later, Brandner transferred an additional $1.4 million, mostly from his pension fund, to that account (also to conceal it from his wife. The pension fund was awarded to his wife in the divorce proceedings, and when Brandner learned that the Panama account might be susceptible to discovery, Brandner moved the money through wire deposits in 2011 into the Bank of America account of Evergreen Capital, allegedly to conceal it from the IRS and from his ex-wife.

As the Atkinson story notes, this mess was doubly stupid. It was stupid of the surgeon to try to cheat his wife of assets and it was really stupid to do it in a way that could well ultimately subject him to criminal charges. See Jay Atkinson, Brandner: Alaska Plastic Surgeon Faces Forfeiture Of $4.656 Million For Undisclosed Offshore Account Used To Attempt To Cheat Ex-Wife, Forbes (Mar. 17, 2012). Anybody else that is still waiting out there with millions in an undeclared offshore account, watch out. The time to file and pay up has arrived.

Tags: , , Comments (4) | |