Jacob Lew, Obama's nominee for Treasury Secretary, will be coming into office (assuming confirmation) at a time when the harpy forces on the right are gathering steam, to try to use the artificial debt ceiling as a weapon to push the Democrats to needlessly eviscerate the New Deal programs while the harpies claim to be focused on cutting the deficit.
The worry, of course, is that Lew was already involved in White House budget negotiations that appeared to buy that line, offering up COLA adjustments and age-eligibility extensions that cut back on benefits, rather than dealing with the resource issue (lifting or removing the Social Security cap; moving towards universal single-payer to cut back on the wasteful health care expenses generated by all of the rent-seekers in the health care chain of providers). See WPAA, Obama Picks Lew for Treasury as Fiscal Issues Loom, AP (Jan. 10, 2013).
Remember, readers. There is no evidence whatsoever that the right-wing really is interested in the well-being of the US economy. If they were, they would not threaten to use the archaic, artificial debt-ceiling limitation as an occasion to swing a cudgel at that very economy and send it reeling into another recession. They would more readily admit that once they have legislated X dollars of spending and Y dollars of revenue, any excess of X over Y has to be made up by debt. Given that debt is very very cheap right now, that's no big deal. Congress should simply eliminate the debt ceiling and authorize borrowing as needed to make pay for the spending they have already authorized in lieu of raising more revenues to do so. Even Ben Bernanke has finally said what is obvious--the debt ceiling has no fiscal value. See Ben Bernanke: Get Rid of the Debt Ceiling, The Examiner, Jan. 15, 2013 (hat tip to Naked Capitalism's Yves Smith).
Robewrt Pollin, another academic interested in the issues of employment, wages, fair benefits, workers rights and, yes, tax and debt policy, has a good blog on Lew and the need for clear statements about debt, deficits and the US economy: A Modest Proposal for Jacob Lew: Acknowledge Three Simple Facts about US Fiscal Reality (Jan. 15, 2013). The three facts are straightforward (and he has some good charts to support them).
1) The US is not facing a fiscal crisis: our interest payments as a percent of our expenditures are considerably lower now than they have been in the past (including the past under GOP presidents).
2) Interest rates on US bonds are at historic lows, making borrowing even cheaper today than it has been in the past and causing even less worry about a "fiscal crisis" than borrowing might have caused in the past. As Pollin notes, "[w]e should expect Jacob Lew to at least state the obvious here: that the deficit hawks have been wrong about an impending interest rate spike for four years running."
3) The deficits that we are running right now are due to the Great Recession, not to out-of-control spending. The spike (to 10.1% of GDP) occurred in 2009, right after we nearly went off the speculation cliff built by Wall Street, and the deficit has now fallen to around 8.5% of GDP in 2012.
Lew should be able to acknowledge each of these points. And if he could, it would help convince people like me that the Obama administration is finally really ready to fight the teaparty naysayers who seem prepared to destroy the economy in order to be able to bring down benefits under Social Security and Medicare.
Pollin has it right when he says the following:
"[T]he single most important thing we can do to lower the fiscal deficit further is to push unemployment down. This will generate increased government revenues with people paying more in income and sales taxes, and it will reduce government payments on unemployment insurance and supplemental aid for health care and family support. The U.S. has the capacity to pursue a stimulus agenda now quite easily, precisely because interest rates and interest payments to creditors remain historically low." Id.
The IRS announced today that it would permit many taxpayers who run their businesses out of their homes to use a much-simplified method for determining the allowable deduction. Taxpayers that elect this method merely take $5 per square foot for up to 300 square feet of home office space, with the result that the home office deduction is capped at $1500 per year.
The IRS release says that this is "a common-sense rule to provide taxpayers an easier way to calculate and claim the home office deduction." The acting commissioner also noted that the agency is continuing to seek "similar ways to combat complexity." This method avoids the rather complicated calculations of involving depreciation (not deductible for any part of a home other than a home office) and mortgage interest (allocable between home office and the rest of the home for calculating the home office deduction, but generally nonetheless deductible in full) and does make the taxpayer's task much simpler, probably without a significant loss to the fisc.
This is an administratively created "safe harbor" for taking the deduction that the agency won't pursue as being illicit. The core restrictions on the deduction--namely, the requirement that the office be used "regularly" and "exclusively" for business and that the deduction not exceed the income derived from the business--still apply. Note that there are probably many taxpayers who claim a home-office deduction who are not entitled to one--either because they have nothing resembling a business being run from their home and are simply making it up to grab the deduction, or they do use a space in their home for a business but it would not qualify for the deduction under the requirements of the code. This safe harbor has nothing to do with that kind of mistaken use of the deduction--it is wrong under the "long-form" calculation and wrong under the short-form safe harbor. There is no safe harbor for someone taking the deduction, however calculated, if they do not qualify for a deduction under the essential requirements.
Details about the new home office deduction are available in the relevant rev proc: Revenue Procedure 2013-13
It is not clear under what authority the IRS actually releases such administrative simplifications. As the Rev. Proc. itself notes, this simplified mechanism is an "alternative" to the calculation "otherwise required under section 280A." The provision and similar ones are essentially regulatory exceptions to the statutory provisions, granted at the discretion of the executive branch and provided often after intense lobbying but sometimes on the agency's own determination that a problem needs addressing.
The New York Times ran an op-ed about Social Security, in which well-heeled researchers opined in favor with the line funded (with half a billion) by the Petersen Institute and similar groups that want to gradually privatize and/or phase down benefits under the earned benefit programs (Social Security, Medicare).
Not surprisingly the original writers thought the various proposals for cutting back on benefits made sense. If people are living longer, they say, then we should make them work longer before getting to retire on Social Security.
This completely misses the point that in the US we not only have an extraordinarily unequal distribution of wealth and income, but a correspondingly extraordinarily unequal distribution of the goodies of a life in modern society. Those longevity gains--they've gone to those at the top who've also garnered all the producitivity gains (from the labor of others) these last lost decades of the Reagan/BushI/Bush II radical right takeover.
. . . The worst [suggested fix] is the idea of lowering initial benefits for workers with lifetime wages above the national average, currently $43,000. This would simply exacerbate the already shameful levels of regressiveness of the Social Security payroll tax.
But the idea of taxing wages above the current $113,700 earnings limit should be a no-brainer. Currently, a person with income of $250,000 pays only 2.8 percent in Social Security taxes. The $500,000 earner pays less than 1.5 percent. These are insignificant amounts for people at those levels, but the $50,000 earner paying 6.2 percent feels it where it hurts.
Paul Krugman appeared on Bill Moyers PBS program Sunday night, talking sanely and rationally about the economy and why jobs (should) come first--and along the way noting how politics now dominates what and how we can talk about economic policies. See Moyers & Company, Paul Krugman on Why Jobs Come First (Jan. 11, 2013).
(While you are at the site, also watch Moyers' essay, The Crony Capitalist Blowout, about the goodies that corporations got out of the fiscal cliff deal, which included everything from immediate expensing to the active financing exception and the R&D credit--all subsidies for big corporations that spent lots of lobbying power ensuring they would get them).
We have all kinds of reasons to know that the US is not Greece and will not be like Greece--we are a powerful economy, we have our own currency, and our debt is widely respected. Nonetheless, the right-wing radicals want to destroy the New Deal programs--Social Security, Medicare, and Medicaid, and they are willing to take the entire economy hostage to try to get their way. Just look at Pat Toomey in the clip Moyers shows on the show, threatening to put the US government into default unless the majority in Congress accedes to the will of the wacky minority.
That wacky minority hopes to use brinksmanship games around the debt ceiling to force progressives to yield on their dream target--decimating the New Deal.
The radicals on the right don't really care about the debt ceiling--look at the way they willingly raised it throughout the Bush administration, even while viciously cutting taxes for the wealthy and creating huge deficits out of the surplus existing when Bush took office! They don't really care about deficits. Look at the way they viciously cut taxes for the wealthy and spent on military budgets and preemptive wars when Bush was in office!
What they want is a radical restructuring of the economy in a way that will maintain and further the new gilded age, where bankers and private equity titans get rich off the labor of ordinary folk and ordinary folk find themselves eeking out a living at more or less the same rate they were before the Bush decades. The top 1%, as Moyers pointed out, have seen a 275% increase in incomes over the last decade (due in large part to the Bush tax cuts, but also to the misappropriation of productivity gains by the rich). Meanwhile, average American workers have seen their wages barely increase by $1.23 an hour.....not even keeping up with inflation.
Obama has said he will not negotiate on the debt ceiling. He must hold firm. There are various ways he can combat their "leverage". The obvious one is that it is unconstitutional for Congress to pass laws that require spending, pass laws that raise too little revenue to pay for that spending, and then refuse to permit the government to borrow to make up the difference that they have legislated into being. That is irresponsible, and can be viewed as a violation of their constitutional obligation to ensure that the nation can pay for the debts it has already incurred. See Taylor, Top Dems Urge Obama to Weigh Unilater Debt Hike, Salon.com (Jan. 13, 2013). Obama is correct when he highlights this. And surely as President, his power reaches to borrowing to fund the government that he is obligated by Congress to run under the laws he is obligated to implement. He should make it clear that he is willing to risk impeachment to test that power rather than be held hostage by their petty, selfish games.
What about the "trillion dollar platinum coin" idea? This is the law that grants the executive the right to mint platinum coins of any denomination. Why not mint a few that add up to a trillion, and then pay it to the Fed and draw cash from the Fed based on that coin, to pay our bills? That is perfectly legal--Congress did not limit the use of the coins in the legislation authorizing them. If Congress can play brinksmanship games by threatening to put the US in default and destroy our economy unless the majority enacts the pet legislation of the minority to destroy the Social Security, Medicaid, and Medicare safety net programs, then the Executive should be willing to use every tool at his disposal to prevent that. Of course, Treasury today said it wouldn't do that. See Anne Lowrey, Treasury Won't Mint Coin to Defy Debt Ceiling, New York Times (Jan. 12, 2013). Stupid of them to do so, since it is clearly within the law. Obama cannot "wimp out" on this debt ceiling issue (to use Krugman's term): if he lets the zanies in the GOP use these tactics to force changes in the safety net programs, he will have destroyed the Democratic party and the recovery from the Grand Recession in one fell swoop.
Remember, the analogy of US government debt to household debt is a silly one, just as is the analogy to Greece. The government is not a family; our income is not the fixed wages of a head of household; our debt may feel staggeringly large for ordinary people to comprehend, but it is not too large a share of our GDP and our cost-of-funds right now is incredibly low. We should borrow while the borrowing is good, to pay for the vital infrastructure repairs that need to be made and to ensure that we do not default on a key obligation to our people--the provision of a decent standard of living through measures that encourage job creation (by creating demand) and provide security against job loss and the vulnerabilities of old age and sickness.
The Peterson INstitute is spending half a billion dollars to distort the public's understanding of debt and deficits, in order to convince Americans that we should run the government like they run their households, in terms of amount of debt. But Peterson is a right-wing billionaire whose views are antiquated and wrong for the time. Keynes is the only one who has had it right, and we should listen to Keynes, not Friedman's brute capitalism theories of a "free" market in which the wealthy control the assets and confiscate the rewards, not Peterson's cacophonous sounds about debt.
Look again at Moyers' program. He runs a tape where Lloyd Blankfein--head of Goldman Sachs, filthy rich, and one of the culprits of the financialization of the economy and the speculation that threw us into the Great Recession--talks about how ordinary people will have to give up on their expectations from Social Security and Medicare. Entitlements, he says, just can't deliver what people want--we can't afford it. This from a guy who has socked away millions garnered from the everyday lives of ordinary people. This from a person who has ridden the easy street rail line of subsidized profits for his banking firm (cost-of-funds extraordinarily low due to the government bailout; and subsidies in the code both internationally (active financing exception) and at home (the tax treatment of derivatives has been extraordinarily kind to banks in terms of sourcing and therefore taxability), etc. This from a person who has enjoyed a priviledged preferential rate of taxation on much of his income, lobbied for through the revolving door of Treasury officials and banksters and their attorneys.
No, Obama shouldn't listen to the Blankfeins of the world, or the Norquists, or the Toomeys. He should turn a deaf ear to Mitch McConnell and to Rand Paul and all of those who insist that we have to keep funding the military-industrial oligarchy but that we can't afford to keep funding the earned benefit programs that have made the difference between an intolerable standard of living and a decent standard of living for millions of Americans.
Pretty much as I predicted, Obama's failure to go over the fiscal cliff--instead "negotiating" and settling for a half-assed deal that hardly got rid of any of the stupidities of the Bush tax cuts--convinced the Republicans that they can play their brinkmanship game on the debt ceiling debate yet again and perhaps finally get the Democrats to undo their own most significant programs of the last 100 years--Social Security and Medicare.
What we ought to be doing is cutting the military/defense and corporate welfare budgets. And then increasing taxes--with (1) new layers of tax brackets and tax rates corresponding to our new levels of income inequality, so that multimillionaires are taxed at a higher rate than mere millionaires and billionaires are taxed higher than multimillionaires and (2), at the least, legislation to eliminate the farce of the so-called "carried interest: privileged compensation taxation for LBO managers, who get mostly preferential capital gains for their "services" in buying companies and loading them with debt that makes the managers but not the workers wealthy.
But the Democrats somehow still thought they would get some kind of credit, even from the staunchest of the right-wingers, for being "bipartisan" and working out a "deal" to avoid the "fiscal cliff." So they made the ridiculous Bush tax cuts permanent, except for those in the upper-upper crust making three times as much as anybody in the middle class. And they made the estate tax cut even larger than it was--with a $5.2 million exemption (double for a couple) and only a 40% rate. Inequality will continue to grow at accelerated rates. And they extended the litany of truly egregiously stupid corporate tax breaks, like the bonus depreciation/expensing provisions that ultimately permit corporate multinational giants a NEGATIVE effective tax rate (read Cary Brown on the way noneconomic frontloading of expensing amounts to nontaxation under time value of money principles).
The GOP however is currently running deranged. The party that purports to care about fiscal conservatism only wants to fund more military and make sure that vulnerable elderly don't get as much in their Social Security checks and have to pay even more for their health care. McConnell--the MINORITY leader in the Senate--has pronounced his party's views on the matter: "The tax issue is finished." Brian Knowlton, McConnell Takes Taxes Off the Table in New Talks, New York Times (Jan 6, 2013).
Folks, the stuff about the debt ceiling and the need to cut benefits under Social Security and Medicare is baloney. The US government isn't a family--it's a sovereign regime . We should learn from the Euro nations that are embroiled in a self-defeating austering regime that leaving citizens suffering while trying to toady to big business is a recipe for disaster.
President Obama had damn well better take Social Security and Medicare off the table as well as any corporate tax reductions. Get rid of corporate loopholes and let corporate tax revenues INCREASE. It is the only way left to try to re-balance an economy that is skewed in favor of the uber-rich and the multinational corporations and against ordinary Americans. Oh, it would also help to move to single-payer single-provider health care and get profit-making out of what should be an important human right.
And are we "spending way too much" anyway, as McConnell declares? Surely not, since we are only spending on things that the Congress has voted to spend on. If McConnell wants to spend less, let him propose a spending cut and put it to the vote. If it fails, then he should vote the taxes or borrowing needing to pay for the spending Congress has legislated.
So, just as my advice in the "fiscal cliff" debate was to go over the cliff, let the Bush tax cuts expire, and then put in place some decent cuts for the REAL middle class (those making less than $100,000 a year), my advice here is to go over the "sequester cliff" and let the across-the-board cuts, with the first real cuts to the military in decades, take place. We should damp down our military zeal and start to put our money where it will build good schools, good colleges, good public transportation, and ultimately good jobs.
As for the debt ceiling, the best thing would be for the Senate to eliminate the filibuster rule (or at least make the right-wingers do a physical filibuster) and eliminate the debt ceiling. It is an artifact of a different age, and is meaningless. Think about this.
1) we have spending bills that require us to spend X dollars
2) we have tax bills that only raise X-Y dollars.
3) we have a governmental obligation to pay the X dollars that we spend to those who provide the goods and services amounting to X dollars.
4) Therefore we have a governmental obligation to borrow the Y dollars that we don't raise with taxes.
A Taxing Matter has reported frequently on the scandals of offshore banks aiding and abetting US taxpayers in avoiding tax due on income from their capital held overseas. The opening of the UBS case cracked open a vast network of mostly wealthy US taxpayers who had held money overseas and avoided tax. With the exposure of the bank's role in assisting tax avoidance, and the requirement that taxpayers "come clean" about the particular bankers and banks that assisted them, the government began to create a web of information leading to tax evaders, even those who thought they had moved Swiss accounts to Liechtenstein banks to avoid capture. That web has already led to the demise of one of the oldest Swiss banks--Wegelin. See Robert Wood, FATCA Cliff: Tax Evasion Guilty Plea and Death for Oldest Swiss Bank, Forbes.com (Jan 3. 2013); Swiss Bank's Demise: Glass Half Empty or Half Full?, Jan 9, 2013.
The IRS offered a number of voluntary disclosure programs with slightly escalating penalties but, importantly, no criminal prosecution, for people who would come forward before their names/accounts turned up in the ongoing chase after tax avoiders. (There is considerable suspicion that one of the reasons Mitt Romney refused to release the usual number of tax returns is that he may well have been a participant in that voluntary disclosure program.)
For those who don't come forward soon enough and are caught by the IRS, the statutory penalties and potential for criminal punishment are very real. The statute in effect allows the government to collect amounts that could well exceed the amount left in the account, and criminal punishment for filing falsified tax returns can well mean jail time.
Mary Estelle Curran fell into that trap when she choose not to report the Swiss accounts her husband had established after he died, from 2001 through 2007, using foundations in Liechtenstein and Panama. By the time she tried to participate in the voluntary disclosure program, it was too late, because she was one of the Americans revealed by UBS in its deal to defer US prosecution. The taxes she evaded amounted to about $667,000, but the penalty under the law for this type of willful evasion is quite severe, allowing the government to take 50% of the highest account balance for each failure to report. Forbes notes that "[b]y 2007, the accounts totaled over $42 million. Her penalty? 50% of the highest balance: $21,666,929, and that’s not all. She has not yet been sentenced but faces a potential prison term up to six years." Florida Widow Guilty + $21M penalty for Inherited Swiss + Liechtenstein Accounts, Forbes.com (Jan. 8, 2013).
The moral of this tale--if you have money sequestered offshore on which you haven't filed the required FBAR reports or paid taxes, you'd better 'fess up before you get discovered in this continuing sweep. And next time, go on and pay your fair share. You really owe those taxes, you know.....
Media headlines continue to tout Obama's white male choices for rounding out his 'new' cabinet. Latest to the list is that he has offered his Jacob Lew, his current White House Chief of Staff, the post of Treasury Secretary. See, e.g., Obama to tap Jack Lew for top Treasury post, Washington Post.com (Jan. 9, 2013).
Jack Lew has been a slew of things--hedge fund manager at Citigroup (bailed out big bank), university administrator (administrative stuff, not academic stuff) at NYU, Clinton and Obama administration OMB administrator, State Department official, and of course White House Chief of Staff. That means he is well embedded in the Wall-Street-respecting culture of Geithner, Summers, Paulson and the rest of the DC crowd that pays too much credence to what bankers say and not enough to what ordinary Americans think. So that is one strike against him. On the other side, as the news story in the Post notes, the GOP generally views him as a tough negotiator who stands his ground on issues that Democrats have tended to consider important. That is one big strike in his favor, especially since it is not something that his current boss is especially known for (or good at, as evidenced by the way he caved on not letting the Bush tax cuts just die of their own accord so that less stupid provisions could be put in place, especially on the corporate and estate tax side).
But what about the fact that Treasury is where most tax policy thinking goes on, and thinking about the ins and outs of statutory provisions and exceptions, and thinking about "administrative" lawmaking through regulations. Under the Bush administration, the Treasury Department put through a series of regulations that greatly facilitated concentration of corporate giants into even larger corporate giants, and did so in ways that appear to have allowed, for the first time ever, a taxpayer who engaged in a reorg transaction and received boot and stock to recognize a LOSS in the reorg transaction by allocating consideration.
In other words, the internal goings on at Treasury are just another place that corporate lobbyists (including continuing contact between former Treasury and IRS officials with the bar as they move back and forth) can influence the law in favor of lower taxes for business. Shouldn't we care how much Lew knows about tax law and what his views on that are? I think we should.
Lew is a Harvard graduate with a JD from Georgetown (so yes, we continue to see the elite nominating their comrades in elitedom to offices in this country). He was a congressional aide and then policy adviser to Speaker Tip O'Neill in the late '70s, when he worked on Social Security, Medicare, budget, tax and similar issues. So at least he's got some depth of experience on those issues. He practiced law for several years, but not as a tax lawyer--he worked on electricity generation. Wikipedia says he has also dealt with Middle East issues and various other things in other short-term posts he has held. So a peripatetic acquirer of bits of experience and knowledge across a range of things, but not an economist and not a tax lawyer.
Does that make him qualified to head Treasury and to advise on what has become one of the most important areas of the law, in which we subsidize whole industries, give huge tax breaks to huge multinational corporations without even understanding how much of a break we are giving them (the bonus depreciation/accelerated depreciation/expensing regime and the active financing exception), and continue to consider that some of the richest people in the country are just "middle class"? I have my doubts.
Remember that in both of the big "economic" commissions of the last couple of years (Alice Rivlin's, Erskine Bowles') there were no actual tax lawyers--not even tax academics--involved. Maybe that's one reason the ideas miss out so much on what is reasonable. Maybe it's time that a range of tax academics were listened to about what shape the tax code needs to take, and why.
The denouement of the fiscal cliff debate behind us (and not, I regret, with the best results--more on that later) we now face the next stage, in which we can expect the right-side extremists to threaten to hold the government hostage unless spending is cut (meaning, to the right-side, spending for people-oriented projects like the safety net but not extending generally to spending on the military or the corporate welfare with which the tax code was reinforced through the fiscal cliff deal that extended or made permanent many of the notorious giveaways from the Bush years) and debt is limited.
All of this will be pushed by those in the "tea party" and Koch-funded right-wing as so-called "fiscal conservatism."
It isn't. The agenda on the right is about as far from fiscal conservatism as anything can be. The right is quite happy to take a "no tax increases forever" position, at that same time as gleefully opting for more and more expansive defense and defense-related spending. Similarly, the fiscal cliff deal with its reinforcement of corporate welfare in the extension or making permanent of the Bush year corporate tax giveaways demonstrates that there is hardly a corporate tax expenditure that this gang doesn't like. Take two examples: the R&D credit and the "active financing" exception to Subpart F.
The R&D credit allows companies to understate their corporate income by giving a dollar-for-dollar credit for R&D expenditures. The purported objective is to encourage more R&D. But this credit was examined closely ages ago and came up short--it really is just a subsidy to corporations (like Big Pharm) that do considerable research. And those companies happen to be companies that HAVE to do considerable research to stay competitive. The subsidy just comes along for the ride; it doesn't drive the research. This is evidenced by the fact that several times the temporary subsidy was extended after the year of the research had closed--there is no way that a retroactive subsidy can incentivize additional research in a past year!
The "active financing" exception lets banks forego immediate Subpart F taxation on their international interest and dividend income, because, they say, that's their "active" business. But then of course they are encouraged to locate as much passive income in those active financing subsidiaries as possible, to be able to exempt as much as possible from Subpart F immediate taxation. It is just one of the many crutches we give multinational banks, yet they continue to be a genuine risk for the US economy and a genuine risk for again requiring US bailouts.
Other corporate welfare examples include everything from the continuing subsidy (after more than a 100 years of profits) to Big Oil and other natural resource extraction, to Big Pharm and Big IT from inadequate rules against the so-called sales of critical IT property to offshore affiliates, to companies that set up captive insurance companies, and to companies that use the vastly frontloaded "expensing" of equipment purchases through the accelerated depreciation system and the more recently added separate expensing provisions. (On the latter: The benefit of frontloading is considerable deferral of taxes, which means higher profits to the companies and lower revenues to the government. It might arguably make sense as a temporary stimulus from time to time, but it has been a permanent part of our system now for more than a decade and is not justifiable in that framework.)
So corporate welfare should be what is cut, not Social Security or Medicare benefits, when we start looking at areas where cash is senselessly flowing in ways that don't further the quality of life of typical Americans. See Carl Gibson, Cut Corporate Welfare, Not the Safety Net, HuffPost Politics (Jan. 7, 2013). As Gibson notes,
In Congress' latest "fiscal cliff" deal that supposedly had to be passed in order to avoid economic calamity, we spent $30 billion on extending unemployment benefits for a year, and $205 billion in corporate tax breaks, subsidies and excessive tax loopholes. Most of these Christmas gifts for corporate America are benefiting major, multi-billion dollar corporations that haven't paid a dime of U.S. income taxes in years, like GE and Boeing. In other words, taxpayers spent six times more on giving free money to companies making record profits than we did to making sure the people who were laid off by these corporations can still feed their families. $205 billion in corporate goodies was okay with Speaker Boehner, but $60 billion in Hurricane Sandy relief apparently wasn't.
And the New York Times today hit on another of the absurd subsidies that crept into our Code in a well-intentioned provision to help small farmers but has resulted in most real estate investors seldom paying taxes on their gains and many corporations using the device to avoid millions in taxes annually. That's the "section 1031" like-kind exchange. There's really no normative policy justification for allowing this kind of exchange to avoid taxation of the realized gain whereas other exchanges (non-like-kind) do not. There is even less justification for the avoidance of taxation for the kinds of intermediary exchanges that have evolved over time, allowing actual sales to occur, so long as the seller ensures that the money is put into an escrow account until it is used to buy "replacement" property. While it is hard to see any real justification for any of the like-kind exchange provisions, and certainly not for the intermediated sales + replacement regimes, it is especially problematic when the intermediated regimes become subject to abuse--where intermediaries allow the exchanging taxpayer full access to the cash, e.g., as collateral for loans, etc. during the period when no use is permitted. The New York Times covered that issue today. See David Kocieniewski, Major Companies Push the Limits of a Tax Break, New York Times (Jan. 6, 2013).
The federal government now allows more than $1.1 trillion a year in this and other tax expenditures. Each of those incentives — which include hundreds of exemptions, exclusions, deferrals and preferential rates — either adds to the budget deficit or shifts the cost of government to other taxpayers.
Some are narrowly targeted and offer aid to specific industries like Nascar owners, asparagus farmers, oil companies, yacht makers or solar panel producers. Others, like accelerated depreciation or the tax code’s preference for debt financing over equity, provide tax benefits for wide swaths of businesses.
“Tax expenditures are very similar to an entitlement program, so they’re easy to start,” said George K. Yin, former chief of staff of the Congressional Joint Committee on Taxation, and now a professor at the University of Virginia School of Law. “But once a tax break gets started, people think they’re entitled to it, so they are very difficult to end.”
Professor Yin has it exactly right--those tax breaks are very "easy to start" and very lucrative for corporations. Once they get them, they will say (as the real estate people do here) that jobs depend on keeping them going. That is usually not true, or much less of an impact than claimed. But Congress caves easily on those items, and we go on with a giveaway code for Big Business.
If you are a company that depends on IP for a lot of your revenue, you may be able to avoid considerable taxes by funnelling profits from subsidiaries in high-tax countries into a Bermuda shell company. Google avoided about $2 billion in worldwide income taxes in 2011 by shifting about 80% of its total pretax profits-- $9.8 billion -- into Bermuda. See Jesse Drucker, Google Royalties Sheltered in No-Tax Bermuda Soar to Nearly $10 Billion, Bloomberg.com (Dec. 10, 2012).
Meanwhile, the US decided not to take action against HSBC for its fraudulent behavior because it was considered so big that it could damage the financial system (again) to interfere with its continuing corporate existence. See Glenn Greenwald, HSBC, too big to jail, is the new poster child for US two-tiered justice system, guaradian.co.uk (Dec. 12, 2012) (noting that "one of the world's largest banks, HSBC, spent years committing serious crimes, involving money laundering for terrorists; 'facilitating money laundering by Mexican drug cartels'; and 'moving tainted money for Saudi banks tied to terrorist groups' " but US officials decided "not to prosecute HSBC for accepting the tainted money of rogue states and drug lorgds on Tuesday, insisting that a $1.9bn fine for a litany of offences was preferable to the 'collateral consequences' of taking the baqnk to court").
Maybe this kind of information will finally incense governments against corporate tax dodging. What we need are laws that refuse to recognize shell companies set up in tax-haven countries to siphon profits from the countries where they originate. What we need are fewer possibilities for companies to expand through tax-free mergers and acquisitions that allow them to get so big that they become immune to ruin when they commit major crimes.
As most readers know, the federal government is currently in what passes for negotiations between the President's Democratic Party Senate and House members and the GOP members that control the House.
The Tea Party and its right-wing rhetoric has of course had a radicalizing impact on the GOP positions, with members not only beholden to Grover Norquist and his anti-tax pledge (all strongly supported by various right-wing propaganda tanks like the Tax Foundation, Heritage, American Enterprise, and other organizations) but also to the anti-social welfare corporatists like David and Charles Koch, the Wal-Mart heirs, and other oligarchic families that constitute the top 1% of US income and wealth. As a result of these two strong influences, the GOP now stands for
tax-cuts-no-matter-what (and for tax cuts that benefit the wealthy most of all, as reflected in the rigid position in favor of the "carried interest" scam used by private equity profits partners and the extraordinarily preferential rate for capital gains and dividends included in the "net capital gain" definition under section 1(h)(11)); and
so-called "entitlement reforms", by which GOPers generally mean reduction in benefits and/or privatization of social welfare programs including Social Security, Medicare and Medicaid. (All of this is argued in terms of caring about "saving" the programs for the future, but the truth lies in the ways that the right proposes changes to the programs--not changes in costs related to profits taken out by Big Pharma and similar interests, but changes in benefits to ordinary Americans (such as raising the working age for eligibility even though those who work at the hardest labor need benefits earlier, not later, or lowering the cost-of-living-allowance adjustment to benefits for Medicare, even though seniors generally have a HIGHER cost of living because of their increased medical needs, including prescription drugs for diabetes, high blood pressure, and similar diseases particularly prevalent in the elderly population.)
The sum of those positions stands for a corporatist philosophy of benefitting the oligarchy and their business enterprises at the expense of everyday Americans who work for a living.
This is even more obvious when one looks at the same groups' position on government subsidies for business. The New York Times recently ran an article on this issue, noting that governments typically pay out a lot of money to support profits of companies and receive very little benefit in terms of tax revenues received and jobs created! Louise Story, As companies seek tax deals, governments pay high price, New York Times (Dec. 1, 2012).
Over at MauledAgain, one of my fellow tax professors Jim Maule has, like me, long criticized the hypocrisy of supporting tax breaks for private enterprise and opposing earned benefits programs for ordinary citizens and has repeatedly pointed out that the economics of the tax breaks for business don't work out for anybody but the owners and managers of the businesses. They certainly don't work for taxpayers of the jurisdiction providing them. As Jim notes:
These tax breaks are nothing more than welfare payments to private enterprise. Opponents of social welfare spending defend these outlays with as much passion as they bring to their attempts to end government assistance for individuals in need of help.James Maule, The Hidden Government Spending Game, MauledAgain (Dec. 5, 2012).
Jim rebuts one of the sham arguments for corporate subsidies--that they are just "keeping what belongs to them." Those special subsidies to one private enterprise sector cause ripple effects throughout the economy--higher taxes to the other taxpayers to make up for the lost revenues, or cuts in important programs that can no longer be sustained without the revenues. Prices and wages may change as well. Id.
What I want to focus on is the hypocrisy of claiming an interest in ending "entitlements" but applying that philosophy only to programs that are intended to help ordinary citizens and not to those intended to beef up the profits of corporations or their managers and owners. This is especially hypocritical for today's right-wing, since they almost universally claim to ascribe to the view that competition is good and that businesses should fail when they cannot successfully compete.
Look at two cases involving WalMart, a multinational enterprise that fights unionization of its employees (and supports right-to-work laws that weaken worker rights) in every way imaginable.
1) In Champlain Illinois (personal experience), WalMart had a huge spralling complex on one side of the road. It had gotten various tax support for the complex. It decided to move across the road and down the block into another jurisdiction. It got new tax subsidies there. It abandonned the old building and left whatever environmental pollution there. Who gained? Mostly WalMart managers and owners. Not the town and counties. Not the employees. Not even the consumers who shopped there, who had to deal with the blight of the abandonned building and the multiplication of vast expanses of ugly parking lots.
2) WalMart in Bangladesh. WalMart delivers cheap goods because it outsources its clothing and other manufacturing needs to impoverished countries where workers can be paid almost nothing and get almost no protections. In Bangladesh last month, a clothing factory burned, killing hundreds of workers. It was a WalMart supplier. See Natasha Leonard, WalMart's Connection to Bangladesh Clothing Factory, Salon.com (Nov. 26, 2012), where a critic noted that:
"Wal-Mart is supporting, is incentivizing, an industry strategy in Bangladesh: extreme low wages, non-existent regulation, brutal suppression of any attempt by workers to act collectively to improve wages and conditions." Id.
This was a modern-day repeat of the Triangle Shirt Factory incident in the early nineteenhundreds in New York City: workers unable to escape burned to death in factory rooms without fire exits and yet dangerously littered with lint and other debris that made their workplace a fire hazard.
These things are all tied together: hostility to workers rights to bargain collectively for some fair share of the productivity gains that their labor brings about, hostility to workers rights to a safe working place; hostitlity to workers rights to decent health care; hostility to ordinary people's rights to a sustainable lifestyle; and hostility to any effort to make the oligarchic uber-rich pay a fair share of the costs of the infrastructure to sustain an economy and a people.
Tax policy, spending policy, policy towards workers, policy towards the wealthy uber-rich--these are all closely intertwined and must be considered of a piece. Tax policy needs to establish reasonable levels of contributions based on a progressive income tax that takes into account the marginal utility of the dollar. Spending policy needs to set priorities based on something other than the lobbying by special corporate and oligarch interests for tax-and-spending provisions that privilege themselves. Policy towards labor rights and workplace safety need to recognize that the worker is disemplowered within the workplace and needs some legal support to provide a reasonable share of productivity gains--minimum wage laws, unionization laws, workers safety laws need to protect workers rights against the all-powerful employer.
If the right succeeds in continuing to pass right-to-work laws (Michigan's lame duck GOP is trying to do that right now), if the oligarchs succeed in capturing all the profits from workers' labor--there will be social unrest on the scale of the Great Depression. Everybody will suffer from that kind of austerity and class warfare policy. Broad based economic growth that comes from workers sharing in the profits of their industry and those at the top not getting an unreasonable share of the productivity gains is better for all.
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