The Yale Law Journal Online recently published an essay by Michael C. Dorf and Neil Siegel entitled “Early-Bird Special” Indeed!: Why the Tax Anti-Injunction Act Permits the Present Challenges to the Minimum Coverage Provision. In the Essay, Dorf and Siegel examine whether the Tax Anti-Injunction Act (TAIA) bars the Supreme Court from reviewing the current challenges to the Patient Protection and Affordable Care Act (ACA). While most of the commentary on the TAIA issue has focused on the question of whether the ACA’s penalty provisions fall within the TAIA’s definition of “tax,” Dorf and Siegel adopt an alternative and original approach. They argue that the TAIA does not bar the review because “the present challenges to the ACA do not have ‘the purpose’ of restraining [...]]]>

In a Note just published by the Stanford Law Review Online, Daniel J. Hemel discusses a jurisdictional issue that might delay a ruling by the Supreme Court on the constitutionality of the Patient Protection and Affordable Care Act, and a novel way in which the Solicitor General could bypass that hurdle. In How to Reach the Constitutional Question in the Health Care Cases, he writes:

Although the Supreme Court has agreed to hear three suits challenging the 2010 health care reform legislation, it is not at all clear that the Court will resolve the constitutional questions at stake in those cases. Rather, the Justices may decide that a Reconstruction-era statute, the Tax Anti-Injunction Act (TA-IA), requires them to defer a ruling on the merits of the [...]]]>

In a Note just published by the Stanford Law Review Online, Daniel J. Hemel discusses a jurisdictional issue that might delay a ruling by the Supreme Court on the constitutionality of the Patient Protection and Affordable Care Act, and a novel way in which the Solicitor General could bypass that hurdle. In How to Reach the Constitutional Question in the Health Care Cases, he writes:

Although the Supreme Court has agreed to hear three suits challenging the 2010 health care reform legislation, it is not at all clear that the Court will resolve the constitutional questions at stake in those cases. Rather, the Justices may decide that a Reconstruction-era statute, the Tax Anti-Injunction Act (TA-IA), requires them to defer a ruling on the merits of the constitutional challenges until 2015 at the earliest. . . . Fortunately (at least for those who favor a quick resolution to the constitutional questions at stake in the health care litigation), there is a way for the Solicitor General to bypass the TA-IA bar—even if one agrees with the interpretation of the TA-IA adopted by the Fourth Circuit and Judge Kavanaugh. Specifically, the Solicitor General can initiate an action against one or more of the fourteen states that have announced their intention to resist enforcement of the health care law, and he can bring this action directly in the Supreme Court under the Court’s original jurisdiction. Such an action would be a suit for the purpose of facilitating—not restraining—the enforcement of the health care law. Thus, it would open up an avenue to an immediate adjudication of the constitutional challenges.

Read the full Note, How to Reach the Constitutional Question in the Health Care Cases by Daniel J. Hemel, at the Stanford Law Review Online.

It really is a war against the poor. The inequity that has existed in the past is going to continue unless civil society is informed, asks the right questions of its government, of its business leadership, and [...]]]> The past few years I’ve tried to find an inspiring quote for the New Year for the blog. There’s a rich vein of insight to be mined from the Carnegie Council podcasts, which I recently discovered on iTunes. One speaker I particularly enjoyed was Krishen Mehta, a former partner with PricewaterhouseCoopers who is now the co-chairman of Global Financial Integrity’s advisory board. Asked about what motivated him to try to stop the shocking abuse of tax havens and mispriced trade by oligarchs, he said the following:

It really is a war against the poor. The inequity that has existed in the past is going to continue unless civil society is informed, asks the right questions of its government, of its business leadership, and asks for more responsibility. One of my favorite writers is Blaise Pascal, who said that “justice and power must be brought together so that whatever is just may be powerful and whatever is powerful may be just.”

A recent study concluded that, “For a salary of between £75,000 and £200,000, tax accountants destroy £47 in value, for every pound they generate.” Mehta, by contrast, is not only creating value, but doing so for the most vulnerable people. How appropriate that a thinker admired by both mathematicians and philosophers would inspire him.

Image Credit: Augustin Pajou. As described on Wikimedia Commons: “Blaise Pascal (1623–1662) studying the cycloid, engraved on the tablet he is holding in his left hand; the scattered papers at his feet are his Pensées, the open book his Lettres provinciales.”

[A] one-strike clause . . . allows the public housing authority to evict [the tenant] if any member of her household or any guest engages in certain kinds of criminal activity. . . . Stories abound about the one-strike policy being wielded in seemingly egregious ways to evict “innocent tenants,” such as a disabled elderly man in California whose caretaker was caught with crack. . . .The Chicago Reporter wrote in September that 86 percent of Chicago’s one-strike evictions last year did not arise from criminal activity by the person named on the lease.

“These policies, the effect of them on children, families, women, families [...]]]> Most readers of this blog are already familiar with draconian treatment of the poor by various law enforcers and state bureaucracies. Here’s yet another example:

[A] one-strike clause . . . allows the public housing authority to evict [the tenant] if any member of her household or any guest engages in certain kinds of criminal activity. . . . Stories abound about the one-strike policy being wielded in seemingly egregious ways to evict “innocent tenants,” such as a disabled elderly man in California whose caretaker was caught with crack. . . .The Chicago Reporter wrote in September that 86 percent of Chicago’s one-strike evictions last year did not arise from criminal activity by the person named on the lease.

“These policies, the effect of them on children, families, women, families of color, were not thought through. And I think now a national conversation is beginning to rethink that,” said Ariela Migdal, a senior staff attorney with the Women’s Rights Project of the American Civil Liberties Union. Migdal pointed to a June 2011 letter from HUD Secretary Shaun Donovan to public housing directors, encouraging the directors to use their “broad discretion” to create a flexible set of standards for who will be admitted to and allowed to stay in public housing.

Certainly the Obama administration has ample experience deploying “discretion” and “mercy” in other areas.  For example, consider Barry Ritholtz’s summary of a shocking Reuters report by Scott Paltrow on foreclosure fraud:

There have been . . . “tens of thousands of fraudulent documents filed in tens of thousands of cases.” Sworn affidavits have been filed containing false information. This is easily prosecuted perjury. . . . The size and scope of the fraud on the U.S. court system is unprecedented in U.S. history.

NY State court judge Arthur Schack, ruled in 2010 that pleadings by the Baum Law Firm— who handle 40% of NY foreclosures — were “so incredible, outrageous, ludicrous and disingenuous that they should have been authorized by the late Rod Serling, creator of the famous science-fiction television series, The Twilight Zone.”  There has been no fraud prosecution to date. . . . [and banks] have routinely filed falsified mortgage promissory notes — in some cases, six different documents have been filed, all claimed to be the original. At the least 5 must be forgeries — an easy felony to prosecute.

 The administration slapped BofA/Countrywide on the wrist for massively discriminatory action.  Its OCC has initiated a program where “servicers agree[] to submit foreclosure fraud for review by ‘independent’ third-party companies” that is not credible.  Matt Stoller describes the dynamics that are now wrecking lives and neighborhoods around the country:

The attitude during the go-go days of the housing bubble was “here today, gone tomorrow,” as Joe Nocera and Bethany McLean make clear in their book “All the Devils Are Here.” This was a refinement of the financial deal makers’ code, “IBG-YBG,” meaning “I’ll be gone, you’ll be gone,” described by Jonathan Knee in “The Accidental Investment Banker.” In this environment, why bother getting your paperwork in order when the goal is to put someone into a predatory loan, reap fees and disappear tomorrow?

Now that these homes are in foreclosure, however, the lack of paperwork is a serious problem. And, since no one has yet been held accountable for the fraud perpetrated during the housing bubble, the business model of financial institutions is often still predatory. This fraud is now coming back to haunt our courts — for example, in the falsified foreclosure paperwork required to cover up the corner-cutting of the subprime lenders and the banks that funded them. . . .The [Obama] administration is now attempting to quash state-level officials by fiercely lobbying for a 50-state settlement to paper over the foreclosure fraud scandal. Obama may talk about his fealty to the “99 percent,” but his administration is engaged in an aggressive coverup of bank crimes.

 But wait, as they say in the infomercials, there’s more.  It would be bad enough if the wholesale campaign of primitive accumulation via predatory loans and sloppy foreclosures merely contributed to destitution and inequality.  But, as CBS’s 60 Minutes documents, the same banks evicting families are not exactly putting the empty houses to their “highest and best” use in many cities:

 Cuyahoga County ripped down 1,000 homes this year. And they have 20,000 more to go. That’ll cost about $150 million dollars. . . . In theory there shouldn’t be this many abandoned houses. When homeowners walk away, the bank is supposed to take responsibility. But one little known feature of the great recession is, that many banks are walking away too, unwilling to maintain a house whose value has crashed. “Very often a bank will take a property to the point of foreclosure, but won’t go to the sheriff’s sale, ’cause they don’t want that property. They don’t want the responsibility of the $8-$10,000 bill that comes with tearing this house down” [says Jim Rokakis, a former county treasurer].

There is no concern for communities, none for struggling families, none for the public treasury.  There is simply a Kafkaesque interlinkage of contracts and incentives that keep the foreclosure machine humming (along with Potemkin programs like HAMP), putting families on streets with dubious documentation for the paper gains of banks and servicers.  The law enforcement apparatus will hammer a disabled man for inadequately monitoring his caretaker, but moves slowly and ineffectively (if at all) against a wholesale abandonment of legality. Glenn Greenwald’s and Bernard Harcourt’s books on such discrepancies, already damning, appear to have understated the extent of our 2-tier justice system.

Banks’ Economic Impact

This is not simply a problem for lawyers, but for anyone concerned about the overall health of the US economy.  The foreclosure disaster is only one particularly pure example of a financial system prone to overcentalization,  bubble-blowing, opacity, and disregard for long-term productivity.  Henry Mintzberg has warned that the economy will never be “fixed” as long as problematic alliances between business and government consume such a disproportionate share of resources:

When economists boast about America’s great productivity, what they have in mind is exploration – finding ways to do things better, especially through superior processes. But much of this “productivity” has in fact been destructively exploitative. Think of all the corporations that have fired great numbers of people at the drop of a share price, leaving behind underpaid, overworked employees and burned-out managers, while the CEOs escape with their bonuses.  To see where this leads, imagine a company that fires all of its workers and then ships its orders from stock. Economic statistics would record this as highly productive – until, of course, the company runs out of stock. American enterprise is running out of stock.

There have been a number of recent studies on the productivity of the financial sector (see, e.g., here, here, here, and here). Many have asked whether it increases GDP, but perhaps the more telling question is how it raises GDP.  Mike Konczal recently evocatively compared the foreclosure crisis to an earthquake or storm affecting millions:

Imagine a natural disaster that hit the United States and internally displaced over 5 million families.  We’d understand that would require a major policy response.  But for the 5 million estimated foreclosures, and the millions more that are going to happen, there’s no response from the administration to match this challenge.

US GDP probably got some kind of “bump” in 2006 as some homes of Katrina victims were rebuilt.  But I’ve heard few people try to describe hurricanes as a form of “creative destruction,” or “information creators.”  Maybe the hurricane lobby just needs to donate to the right think thanks.

A New Way Forward?

Is there any solution to these problems? The Clinton administration diverted law enforcement resources from financial to health care fraud, and later Bush did the same thing in response to terror fears.  Health care fraud detection and deterrence has become extraordinarily sophisticated.  For instance, as Wheeler, Fuller, and Broussard have noted (in 4 J. Health & Life Sci. L. 1, 2011):

Recently, the number of Medicare- and Medicaid-affiliated government contractors charged with detecting fraudulent and abusive practices by enrolled providers has expanded dramatically. The contractors’ role has been to monitor and investigate providers rather than simply to administer these programs.   [T]he healthcare government contractor landscape continues its transformation with an increased number of contractors actively pursuing the recovery of erroneous payments and the identification of potential patterns of fraud and abuse.

There is a veritable alphabet soup of entities devoted to this goal, including Program Safeguard Contractors (PSCs) and Zone Program Integrity Contractors (ZPICs).  They perform “auditing, data mining, and improper billing and fraud investigation.”  

In my next post on financial institutions, I will outline some potential lessons for financial fraud prevention from the realm of health care fraud.  The critical conceptual issue here is to begin to see the banks as a sector as permanently embedded in a web of state subsidy and support as health care, defense, and energy.  Mintzberg convincingly complains about “the energy companies with their cozy tax deals, the defense contractors that live off government budgets, and the pharmaceutical companies that buy their innovations and price what the market will bear, thanks to patents that governments grant, but without policing their holders.”  I also worry about all these sectors. But it may well be the finance sector that is the most menacing to economic growth, and the least accountable.  We cannot simply accept lawlessness in the sector as the status quo.  Creative and forceful responses are possible, and have precedents both historically, in other nations, and in other sectors in our own economy.

Image Credit: Keith Allison.

“Blessed are the peacemakers, for they shall be called sons of God”, as Jesus says in the Sermon on the Mount (Mt 5:9). Peace for all is the fruit of justice for all, and no one can shirk this essential task of promoting justice, according to one’s particular areas of competence and responsibility. . . .

Peace . . . is not merely a gift to be received: it is also a task to be undertaken. In order to be true peacemakers, we must educate ourselves in compassion, solidarity, working together, [...]]]> Pope Benedict’s interpretations of Catholic Social Thought have been consistently inspiring. His recent message on the World Day of Justice and Peace focused on the material foundations of a just and well-ordered society.

“Blessed are the peacemakers, for they shall be called sons of God”, as Jesus says in the Sermon on the Mount (Mt 5:9). Peace for all is the fruit of justice for all, and no one can shirk this essential task of promoting justice, according to one’s particular areas of competence and responsibility. . . .

Peace . . . is not merely a gift to be received: it is also a task to be undertaken. In order to be true peacemakers, we must educate ourselves in compassion, solidarity, working together, fraternity, in being active within the community and concerned to raise awareness about national and international issues and the importance of seeking adequate mechanisms for the redistribution of wealth, the promotion of growth, cooperation for development and conflict resolution.

This position confirms a long line of encyclicals urging the fair distribution of global resources. As Pope Benedict earlier stated in Caritas in Veritate, “Without internal forms of solidarity and mutual trust, the market cannot completely fulfil its proper economic function.”

While Catholic Social Thoughts acknowledges the innovation that capitalism sparks, Caritas in Veritate also judged that “[o]n the part of rich countries there is excessive zeal for protecting knowledge through an unduly rigid assertion of the right to intellectual property, especially in the field of health care.” The Vatican has long demanded that the basic needs of all be met. As Leo XIII put it in Rerum Novarum,

Justice . . .demands that the interests of the working classes should be carefully watched over by the administration, so that they who contribute so largely to the advantage of the community may themselves share in the benefits which they create—–that being housed, clothed, and bodily fit, they may find their life less hard and more endurable.

This language insists on the importance of basic human needs as a reflection of a deeply incarnational religion. In contrast with economists’ efforts to fragment reality into more tractable units of analysis, a holistic, synthetic vision drives Catholic Social Thought. The encyclicals articulate a vision of global justice, based on an account of the nature and destiny of humankind as a whole. As Caritas in Veritate puts it:

In an increasingly globalized society, the common good and the effort to obtain it cannot fail to assume the dimensions of the whole human family, that is to say, the community of peoples and nations, in such a way as to shape the earthly city in unity and peace, rendering it to some degree an anticipation and a prefiguration of the undivided city of God.

Traditional economic goals of maximizing efficiency (at the micro-level) and gross domestic product (at the macro-level) do not necessarily create an “earthly city in unity and peace.” Indeed, when the lion’s share of growth is taken by the top 1%, such growth can merely reinforce conditions of exploitation. While contemporary economists resort to complex mathematics to model production and measure aggregate well-being, Catholic Social Thought is concerned with the basic conditions for human dignity and flourishing. Since its inception, it has been willing to challenge economic precepts in order to advance that vision.

Does this create a new conflict between science and religion—the rigor of economics, and the emotion of faith? Not really. As thinkers ranging from Mirowski to McCloskey to Roberts to Klein have demonstrated, the economic crisis has ripped the veil of scientism from the rather pedestrian interest-advocacy embedded in dominant strands of contemporary economic thought. It will fall to thinkers of good will of diverse perspectives to put real human needs back at the center of policymaking.

This task is particularly urgent in the field of financial and monetary systems. The Pontifical Council for Justice and Peace’s document, “Towards Reforming The International Financial And Monetary Systems In The Context Of Global Public Authority,” is a worthy contribution to this emerging dialogue. As the Council states, “The economic and financial crisis which the world is going through calls everyone, individuals and peoples, to examine in depth the principles and the cultural and moral values at the basis of social coexistence.” Here are some of their conclusions:

[T]he crisis has revealed behaviours like selfishness, collective greed and the hoarding of goods on a great scale. No one can be content with seeing man live like “a wolf to his fellow man”, according to the concept expounded by Hobbes. No one can in conscience accept the development of some countries to the detriment of others. If no solutions are found to the various forms of injustice, the negative effects that will follow on the social, political and economic level will be destined to create a climate of growing hostility and even violence, and ultimately undermine the very foundations of democratic institutions, even the ones considered most solid. . . .

On the way to building a more fraternal and just human family and, even before that, a new humanism open to transcendence, Blessed John XXIII’s teaching seems especially timely. In the prophetic Encyclical Pacem in Terris of 1963, he observed that the world was heading towards ever greater unification. He then acknowledged the fact that a correspondence was lacking in the human community between the political organization “on a world level and the objective needs of the universal common good”. He also expressed the hope that one day “a true world political authority” would be created. In view of the unification of the world engendered by the complex phenomenon of globalization, and of the importance of guaranteeing, in addition to other collective goods, the good of a free, stable world economic and financial system at the service of the real economy, today the teaching of Pacem in Terris appears to be even more vital and worthy of urgent implementation.

There are many paths to establishing a “financial system at the service of the real economy.” A Tobin Tax appears to be an obvious first step; David Graeber’s work on debt presents other, more radical approaches (such as jubilees, another concept with religious resonance). Whatever path policymakers take, I hope they pay more attention to the deep wisdom and insight reflected in Catholic Social Thought, and the NGO’s like Global Financial Integrity and the Tax Justice Network that help to put it into action.

Image Credit: Parable of Dives and Lazarus, retold in economic terms here.

It’s difficult to answer these questions without understanding the past and present tactics of the groups OWS is protesting. We can learn something about those tactics from Jeffrey A. Winters’ book Oligarchy and his recent articles. In Winters’ treatment of America’s politics of wealth defense, we can discern a transition from high-stakes defiance of government tax authority [...]]]> The OWS protests have provoked reflection on the morality of direct action and civil disobedience. How far should the police go to spy on, disrupt, or punish peaceful protesters? Is pepper spray a dangerous chemical agent or “a food product, essentially?” Does current American inequality merit a direct action follow-up to the Civil Rights Movement, whose mass-arrestees and water-cannoned marchers are now viewed as heroes?

It’s difficult to answer these questions without understanding the past and present tactics of the groups OWS is protesting. We can learn something about those tactics from Jeffrey A. Winters’ book Oligarchy and his recent articles. In Winters’ treatment of America’s politics of wealth defense, we can discern a transition from high-stakes defiance of government tax authority to an established position “inside the system.”

Winters recounts how Congress passed a tax on the top 0.1% in 1894, only to be slapped down by a Supreme Court “which struck it down in a 5-4 decision.” After the 16th Amendment effectively repealed that Supreme Court decision, Congress had the novel idea of actually helping pay for a war (WWI) with revenue from those best able to fund it. As Winters notes, “the highest rate [leapt] from 7 percent in 1915 to 77 percent in 1918,” and “the number of brackets went from seven to 56 over the same period.” This provoked direct action from the wealthiest “through tax avoidance and outright evasion.” At this point, Winters writes,

The government faced a difficult choice. Basically, it could either beef up law enforcement against oligarchs and design better systems to track and tax their incomes to force them into compliance, or abandon the effort and instead squeeze the same resources from citizens with far less material clout to fight back.

Within a few years, the government chose to back down. By 1926, “the single most progressive economic policy ever enacted in U.S. history—–an income tax exclusively on the rich—–was slowly inverted into a mass tax that burdens oligarchs at the same effective rate as their office staff and landscapers.”

New Deal policies helped level the playing field, as the gains from economic growth were spread relatively evenly between income groups between 1947 and 1974. But by the early 1970s, income and wealth gaps skyrocketed once again. Here, Winters adds evidence to the Pierson/Hacker and Bartels theses that the power (not the productivity) of the wealthy is the most important engine of our sky-high inequality. Winters describes the symbiotic and mutually reinforcing effects of legal, political, and cultural power here, coordinated by an “income defense industry:”

The income defense industry is comprised of lawyers, accountants, wealth management consultants, revolving-door lobbyists, think-tank debate framers and even key segments of the insurance industry whose sole purpose is income defense for America’s oligarchs. . . . In the 1970s, oligarchs paid an average effective tax rate of about 55 percent, which was almost 80 percent of the top published rate. By 2007, the top 400 income earners in America paid an effective tax rate of 16.5 percent, which was barely 50 percent of the top published rate.

Navigating through the almost 72,000 incomprehensible pages of tax code they had helped draft, industry specialists today structure complex partnerships and tax shelters that few IRS auditors can disentangle, or in some cases even fully understand. . . . The U.S. Senate estimates that the income defense industry helps America’s oligarchs avoid paying about $70 billion in taxes a year through what the IRS calls “abusive offshore tax avoidance schemes” alone. This is a sum equal to the boon the Bush tax cuts give to the entire top 2 percent of income earners (a group twenty times as numerous as America’s oligarchs). . . .

The top 0.1%’s share of society’s wealth and power is a critical political issue. This top thousandth takes about half of all capital gains, taxed at a delightfully low rate. Although some academics in the wealth defense industry may explain that rate as “economically efficient,” we can also see it as a direct result of plutocrats’ defiance of the law. Tax evaders of the roaring 20s were the 0.1%’s Rosa Parks.

Image Credit: Moderate Voice is trying to find source.

Bay Area radio struggles to have decent music. I tend to cycle through the few stations that may have something of interest. A recent addition to the dial focuses on 60s. 70s, and 80s. As a competitor points out, the new comer tends to repeat the same track several times a day. Recently the song Escape (The Pina Colada Song) has been playing quite a bit. The funny thing to me is that yoga and health food seem to have been dating and compatibility differentiators for more than 30 years. The style of the song and especially the attire, however, may not be as timeless; just reminders [...]]]> “If you like Pina Coladas, and getting caught in the rain.
If you’re not into yoga, if you have half-a-brain.”

Bay Area radio struggles to have decent music. I tend to cycle through the few stations that may have something of interest. A recent addition to the dial focuses on 60s. 70s, and 80s. As a competitor points out, the new comer tends to repeat the same track several times a day. Recently the song Escape (The Pina Colada Song) has been playing quite a bit. The funny thing to me is that yoga and health food seem to have been dating and compatibility differentiators for more than 30 years. The style of the song and especially the attire, however, may not be as timeless; just reminders of the end of the seventies and the start of eighties (It was the last number 1 of the seventies and first of the eighties). Oddly that decade seems a bit more sane regarding taxes.

It took more than two years to produce that tax code overhaul. During that time, Reagan went on the road to plead his case for the plan. At a high school in Atlanta, Ga., in 1985, Reagan said they were going to “close the unproductive loopholes that allow some of the truly wealthy to avoid paying their fair share.”
Meanwhile in Congress, Democrats and Republicans worked together to merge competing proposals for tax reform. Still in office today, Democratic Sen. Patrick Leahy of Vermont was there during the passage of the bill. He says it was a different era.
“We had a lot of grownups in both parties, people who actually wanted the government to work,” Leahy says.

All of which makes me wish there was a world where I could write a personal ad seeking a new politician and find that the one who turned up was already in place. Now that is a fantasy.

Anyway, enjoy the song. Oh as moment of who knew: The song was released on September 21, 1979. The movie “10” which is a rather similar story and also a huge hit of the era was released October 5, 1979. As far I know they were not connected directly; yet they stuck together in my head because of the story lines.

The mistake is found in section 1401 of the ACA, which creates a new section 36B of the IRC. Two subsections of 36B ((b)(2)(A) and (c)(2)(A)(i)) suggest that premium tax credit eligibility under the ACA depends on the applicant being enrolled in a qualified health plan “through an Exchange [...]]]> A few days ago, Timothy Jost offered insights on the Fourth Circuit’s jurisdictional rulings on constitutional challenges to the Affordable Care Act. (That post was part of a terrific series he has done for the Health Affairs Blog.) Today, Jost offers a fascinating perspective on “an ACA drafting error that would seem to deprive millions of uninsured Americans of tax credits to purchase health insurance and invalidate regulations recently proposed by HHS and the Treasury Department:”

The mistake is found in section 1401 of the ACA, which creates a new section 36B of the IRC. Two subsections of 36B ((b)(2)(A) and (c)(2)(A)(i)) suggest that premium tax credit eligibility under the ACA depends on the applicant being enrolled in a qualified health plan “through an Exchange established by the State under section 1311.” This would in turn suggest that individuals enrolled in a qualified health plan through a federal exchange established under section 1321(c) would not be eligible for premium tax credits, contrary to the recent proposed regulations.

That this is a drafting error is obvious to anyone who understands the ACA. Section 1311 of the ACA requests the states to establish American Health Benefit Exchanges and sets out the duties of the exchanges. Section 1321 of the ACA, however, provides that if a state elects not to establish and exchange or fails to do so, HHS must “establish and operate” an exchange in such a state and “take such actions as are necessary to implement” the other requirements of title I of the ACA, which includes section 1401. There is no coherent policy reason why Congress would have refused premium tax credits to the citizens of states that ended up with a federal exchange. None of the CBO reports scoring the ACA suggest that premium tax credits would only be available though 1311 state exchanges and not through 1321 federal exchanges. It is, finally, highly unlikely that the House, whose bill included only a federal exchange, would have approved a bill that only provided tax credits through state exchanges but not through the federal exchange.

For the full argument, check out his post at the Health Reform Watch blog.

Worldwide, the rich are pulling away from the rest as well. Given this political reality, what kind of future is likely for the bottom 99%? Will the sort of precarious existence now [...]]]> The top 10% of Americans now make about as much as the bottom 90%. But within that group, an even smaller fraction dominates. Nobel Prize winning economist Joe Stiglitz has observed that the US is ruled by the top 1%, for the top 1%. And within that top 1%, the top tenth has been triumphant. Earning on average $5.6 million in 2008 (and at least $1.7 million), the group has seen its income rise 385% from 1970 to 2008, while earnings of the bottom 90% declined.

Worldwide, the rich are pulling away from the rest as well. Given this political reality, what kind of future is likely for the bottom 99%? Will the sort of precarious existence now common for the poor and lower-middle classes climb higher up the income ladder?

Michael Lind suggests this is likely, because so many jobs can be done by “less expensive and more deferential foreign nationals,” or prisoners. WSJ reporter Robert Frank has also observed a decoupling of destinies: “the economic fate of Richistan seems increasingly separate from the fate of the U.S.” (or any particular country).

Meanwhile, progressive thinkers like Bruce Judson, Robert Reich, and David Callahan have hoped for the rise of a conscientious superclass. In their view, any nation’s wealthy should see middle class prosperity as part of its own self-interest properly understood. Most of these thinkers hold up Germany or Sweden as models of egalitarianism that helps even those at the top. A book called “The Spirit Level” has made a complementary case, arguing that, as a statistical matter, even the richest in an unequal society tend to be less healthy and secure than those at the top of a more equal social order. (Consider, for instance, that even if you were in the oil-drilling elite of Equatorial Guinea, making $250,000 per year, you might well want to move to Sweden for a similar position paying $100,000 a year.)

I have been skeptical of the progressive “we’re all in it together” line. From a a purely economic perspective, the most efficient business structure would work labor extremely hard, not protect it too much from pollution or other occupational hazards, and deny it expensive health care when expected future productivity declined below the cost of care. The Wall Street Journal editorial page does not advance this cruel calculus as the motivation for its constant praise of developing world “efficiencies.” But any serious analysis of well-being has to begin with an effort to disaggregate competitive advantage that arises out of cheap life and overworked labor, as opposed to improved technology and better educated workers. This is rarely done among those who deign to promote globalization to its cultured despisers.

Drug Shortages and the Medical Commons

Nevertheless, I think that recent market breakdowns may help the top 1% understand the degree to which their fate—at least when they are sick—is intertwined with that of the rest of us. Kate Greenwood describes the complexity of the current drug shortage crisis, and some potential solutions:

Participants in a Drug Shortages Summit convened late last year by the American Society of Clinical Oncology and others recommended that additional legislative and regulatory reforms be explored, ranging from providing incentives to manufacturers in exchange for a guarantee that they continue producing critical drugs, to charging manufacturers fees to fund expedited FDA review of applications for permission to manufacture generic drugs, to requiring manufacturing redundancies (e.g. that more than one source for a drug’s active ingredient be identified) as a condition of approval.

The very wealthy can route around most infrastructural, educational, or health problems. In Sao Paulo, helicopters buzz past traffic jams; in the U.S., massive SUVs insulate their owners from some of the bumpiness of our crumbling roads. Prep schools provide a pricy alternative to dilapidated classrooms and demoralized teachers. Concierge primary care and specialty hospitals can be medical gated communities, oases of pampering that the wealthy can seek out when they want to flee the indignities, inefficiencies, and delay that are common in ordinary health care settings.

But it’s hard to imagine individuals, or even wealthy groups, stockpiling all drugs they might need, particularly the sterile injectables or biotech solutions that are critical to advanced medicine. Even the very wealthy must rely on a steady, more general demand for these products. They can’t just order them up for just-in-time delivery, like a Tiffany watch. Public subvention—ranging from research grants to Medicare and Medicaid funding for the products research generates—provides that demand. Cutting it by providing ever more tax breaks for the wealthy is an astonishingly short-sighted strategy, even for the richest.

Visionary elites also realize that human capital results in cures, and almost all other technological advance. So early childhood education is essential, as Nancy Folbre has argued. Hard-headed economists may be ready to categorize today’s unemployed as “zero marginal product workers,” whose demands on society’s resources need to be minimized via an apparatus of debtors’ prisons, unforgiving reputation intermediaries, and pervasive surveillance. But they should at least see children as potential contributors to our economy, and accordingly protect their health and education.

Sadly, neither of these realizations seems to have dawned upon the political elites most fiercely devoted to the top 1%’s interests. They have an elegantly short-termist vision, where holding the line on taxes trumps everything: childhood hunger, R&D, education. It is a tragic consequence of a worldview where people are more profitably controlled (or cheaply monitored) in the short run than nurtured to contribute to society as a whole in the long run.

At least when it comes to medicine, the rich do need the rest. Cuts to education will reduce our capacity to cure, though that might not be clear for a while. But cuts to basic health care finance could exacerbate drug shortages now that even the richest can’t buy their way out of, given the drugs’ long manufacturing lead time. The Croesuses pushing for austerity might end up with a Midas touch.

Image Credit: Mother Jones special on inequality.

The Yale Law Journal Online has published the first two installments in our new series, Summary Judgment, which will feature timely responses to recent Supreme Court decisions from academics and practitioners. The two inaugural pieces comment on the Court’s April decision in Arizona School Tuition Organization v. Winn, 131 S.Ct. 1436 (2011), in which a five-Justice majority held that taxpayers do not have standing to challenge the constitutionality of state tax credits that support religious schools and other educational institutions.

In Winn and the Inadvisibility of Constitutionalizing Tax Expenditure Analysis, Professor Edward A. Zelinsky responds to Justice Kagan’s blistering dissent in Winn. In that dissent, the Court’s most junior Justice draws on tax law scholarship to argue that tax credits and other tax expenditures are economically [...]]]>

All of my life, developing credentials to cover my field of work, and now I’m up against a guy named Vinny in an efficiency apartment in the Bronx who hasn’t left the efficiency apartment in two years.

Williams himself is careful to maintain his own credibility. According to a 2007 report, Williams “lives in a restored farmhouse in Connecticut where he parks his 477-horsepower black Porsche GT2 (that is, when he’s not decamping on the Upper East Side).” How else would you spend a $10 million annual salary?

Some have insinuated that Williams was trying to help his bosses when he failed to report on NBC’s parent company’s low tax rate. [...]]]> NBC anchor Brian Williams once complained about the amateurization of media in rather colorful terms:

All of my life, developing credentials to cover my field of work, and now I’m up against a guy named Vinny in an efficiency apartment in the Bronx who hasn’t left the efficiency apartment in two years.

Williams himself is careful to maintain his own credibility. According to a 2007 report, Williams “lives in a restored farmhouse in Connecticut where he parks his 477-horsepower black Porsche GT2 (that is, when he’s not decamping on the Upper East Side).” How else would you spend a $10 million annual salary?

Some have insinuated that Williams was trying to help his bosses when he failed to report on NBC’s parent company’s low tax rate. But perhaps it’s more likely that government spending just doesn’t register on Williams’s radar. Poor Vinny, cramped in his studio apartment, may worry about someday needing Medicaid, home heating assistance, or help for his mom in a nursing home. He might wonder why all these programs are under attack, while small changes in the tax system could support them for years, and larger changes could support them for decades. But those are not the serious concerns of serious people with seriously large houses. Perhaps only people like Williams should be able to vote, too.

A few stats & stories in honor of Tax Day:

A. This “could be the best tax day for rich since ’30s:”

17% . . . was the effective tax rate paid by the 400 Americans with the highest adjusted gross income in 2007, the most recent year with IRS data available. The figure is down from almost 30 percent in 2005.  [W]ith top rates on ordinary income, capital gains, dividends, estates and gifts at or near historic lows,” [this year could be even better].

B. A tax loophole for the top 25 hedge funders is worth about 120,000 teachers’ salaries.

C. The favorite shelters and dodges of America’s wealthiest.

D. Journalist states that “”Tax havens have grown so fast in the era of globalization, since the 1970s, that they [...]]]>

A few stats & stories in honor of Tax Day:

A. This “could be the best tax day for rich since ’30s:”

17% . . . was the effective tax rate paid by the 400 Americans with the highest adjusted gross income in 2007, the most recent year with IRS data available. The figure is down from almost 30 percent in 2005.  [W]ith top rates on ordinary income, capital gains, dividends, estates and gifts at or near historic lows,” [this year could be even better].

B. A tax loophole for the top 25 hedge funders is worth about 120,000 teachers’ salaries.

C. The favorite shelters and dodges of America’s wealthiest.

D. Journalist states that “”Tax havens have grown so fast in the era of globalization, since the 1970s, that they are now right at the heart of the global economy.”

E. David Cay Johnston states that, “during seven of the eight George W. Bush years, the IRS report on the top 400 taxpayers was labeled a state secret.”  Johnston also notes that, “When it comes to state and local taxes, the poor bear a heavier burden than the rich in every state except Vermont.”

F. Joshua Holland compares changes in the tax burden over time:

The federal income tax bill for a person making $15,000 is 51 percent higher today than it was 30 years ago — a big jump. . . . If you brought in a half-million dollars, your tab would have dropped by 49.5 percent, saving you around $150,000. It’s about the same decrease for someone making a cool million.

G. A Top 10 tax facts list from Demos (here are the first three items):

1. The government collected less in taxes in 2010 than it has in over three generations, and tax rates are at historic lows.

2. The Bush tax cuts added $1.7 trillion to the nation’s debt over 2001-2008, which is more than it would cost to send 24 million kids to four-year public universities.

3. Corporate income taxes totaled about 1 percent of GDP this year, 60% lower than 40 years ago.

And finally, a link to a group concerned by all this, US Uncut.

Image Credit: Sterin, photograph of Do Ho Suh’s installation Floor. Floor was featured in this week’s Financial Times’s How to Spend It magazine, which sympathetically explored the challenges collectors face as they seek to display installation art. More on money & the art world here.

Perhaps voters have lost faith in the ability of the state to do anything competently, including redistribution. The always-insightful Elisabeth Young-Bruehl suggests as much, noting:

[Americans] have been led to believe that their well-being and their democracy depend upon the success of capitalism, with its limitless growth ideology; but this very capitalism [...]]]> Why is the austerity movement so powerful in the US? Many people are hurting, and corporate, CEO, and finance sector gains since 2008 have been enormous. Why not expect a little more from the wealthy? Why are states from Arizona to New York going after poor Medicaid patients and schools instead? We know the economic case for austerity in a deep recession is bunk. Why its enduring appeal?

Perhaps voters have lost faith in the ability of the state to do anything competently, including redistribution. The always-insightful Elisabeth Young-Bruehl suggests as much, noting:

[Americans] have been led to believe that their well-being and their democracy depend upon the success of capitalism, with its limitless growth ideology; but this very capitalism is taking over their state. They have been promised that if America has a strong, competitive, innovative economy, the benefit of that will trickle down to all, just as Ronald Reagan promised it would. Even Barack Obama speaks this language. But it is becoming obvious that there is not going to be any trickle down. . . . [The system] is a closed loop, which is not designed to trickle anything much down to support those who are not in the loop[.]

As plutonomy advances, buying power is being segregated by the very wealthy into closed circuits of spending and investment. Young-Bruehl makes a similar case about political power in a post-Citizens United world. As Martin Gilens has shown, in the US, “actual policy outcomes strongly reflect the preferences of the most affluent but bear virtually no relationship to the preferences of poor or middle income Americans.”

Yet that still leaves a puzzle. The wealthy in the US may have extraordinary influence over the political process, but they could use it in many different ways. Warren Buffett complained about being taxed less than his secretary, and Bill Gates’s father has fought for the estate tax. Progressive thinkers like Bruce Judson, Robert Reich, and David Callahan have all hoped for the rise of a conscientious superclass. At some point the marginal value of money diminishes; why not spread it around a bit?

Anxious at the Top

I think Reich, Callahan, and Judson have failed to take into account the enduring anxietes of of America’s rich. Consider two studies, and an anecdote, reflecting worry at the top of the income scale:

1) Millionaires: In the world, there are about “10.1 million people worth more than $1m excluding the value of their main homes.” Roughly 8 million of them live in the U.S.. Among those, about a million ultra-high-net-worth households are worth $5 million or more, 120,000 have more than $25 million, and 10,000 have over $100 million.

Given that company, the mere millionaire has a lot of upward comparison to do. “Wealth is relative, and to some extent the more you have the more you realize how much more you need,” according to the President of Boston-based Fidelity Investments’ National Financial Group. His team found that, among “more than 1,000 households surveyed [that] had an average of $3.5 million in investable assets[,] [a]bout 42 percent said they don’t feel wealthy, saying they would need about $7.5 million to feel rich.” For these worried wealthy, the Obama-Boehner tax cut deal must have been particularly comforting. There might be some collateral damage from the resulting budget cuts, but who can really care about such matters with a mere one or two million dollars in the bank?

2) Decamillionaires: Unfortunately for those outside (or on the bottom end) of the “ultra-high-net-worth” winners circle, the more money one has, the more problems that might arise. Consider the research of BU sociologists on the lives of “people with fortunes in excess of $25 million.” It is featured at The Atlantic, which, in between ads for Goldman Sachs and planning for its Aspen Ideas festival, earlier this year informed us that “we need a creative, dynamic super-elite more than ever.” But that super-elite is worried:

[T]hey are frequently dissatisfied even with their sizable fortunes. Most of them still do not consider themselves financially secure; for that, they say, they would require on average one-quarter more wealth than they currently possess. (Remember: this is a population with assets in the tens of millions of dollars and above.) One respondent, the heir to an enormous fortune, says that what matters most to him is his Christianity, and that his greatest aspiration is “to love the Lord, my family, and my friends.” He also reports that he wouldn’t feel financially secure until he had $1 billion in the bank.

The sociologists also found that for many of the respondents, their single greatest aim in life was to give a good life to their children, whom they hoped would find meaning, purpose, and charitable outlets for their great fortunes. I imagine that when these children are surveyed in 20 years or so, we will find that their single greatest aim in life is to give a good life to their children, whom they hope will find meaning, purpose, and charitable outlets for their great fortunes.

3) Hectomillionaires: Finally, consider this exchange between an associate of Rajat Gupta, a Mr. Kumar, and Raj Rajaratnam:

Rajaratnam speculates on Gupta’s motive in joining KKR: “My analysis of the situation is he’s enamoured with Kravis, and I think he wants to be in that circle. That’s a billionaire circle, right? Goldman is like the hundreds of millions circle, right? And I think here he sees the opportunity to make $100 million over the next five years or 10 years without doing a lot of work.”

“At some point, what I worry about is that there can be this massive implosion in him,” Kumar adds, to which Rajaratnam responds: “He didn’t seem comfortable. He seemed like he was tormented, right?”

The mental agony of being so close to the billionaire’s circle, but just not quite there, must be enormous. Those in the upper echelons of industry may well be looking at the 400 persons who own more wealth than half the country, and say, “why not me?”

So a pattern emerges. The “fear of falling” Barbara Ehrenreich diagnosed among middle class households in the 1990s has infected the very wealthy today. In a gentler age, perhaps they could rely on programs like TANF, Medicare, Social Security, home heating aid, and Medicaid to set a floor, some subsistence level of experience for them (or, more likely, the family they are apparently working so hard to keep secure). But the process of cutting taxes for the very wealthy (and campaigns among some of their number, like Pete Peterson and the Kochs) have rendered all those programs precarious. Many millionaires will need to pay a lot less taxes to join the ultra-high-net worth crowd, which in turn envies a finance elite. And why not—given the extremely low tax rates on “carried interest,” hedge funders are getting quite a deal.

Exit, Voice, Royalty

In his moving book Lament for America, Brigham Young Professor of Political Science Earl H. Fry details the “indebtedness and inequalities” that crippled America’s future. He contrasts our third “Gilded Age” with America’s “very thin safety net:” “many live within one or two paychecks of financial disaster” (41). Perhaps the US would have more money for a robust safety net (and the infrastructure investment that Fry also calls for) if so much of our time and talent weren’t plowed into the “guard labor” necessary to preserve present inequalities.

The “worried wealthy” can choose to create a more equal society, where no one could fall too far, or to build a fortress of personal wealth designed to keep generations secure from the vicissitudes of market driven “creative destruction.” With so many choosing the latter course, we should not be surprised by Paul Mattick’s prediction that:

[E]xistence on or over the edge of survival experienced today by the urban masses of Cairo, Dhaka, São Paulo, and Mexico City will be echoed in the capitalistically advanced nations, as unemployment and government-dictated austerity afflict more and more people, not just in the developed world’s Rust Belts but in New York, Los Angeles, London, Madrid, and Prague.

Apart from further squeezing those in the middle and lower classes, there may be no other way to ensure that those on each of the levels of wealth mentioned above can continue their climb to higher income, status, and security.

One important reason is that tax havens are diverting ever more revenue away from social needs. Powerless to confront the wealthy or powerful corporations which take advantage of them, states must tax their middle classes more or cut services. Many authors have noted the proliferation of tax havens in recent years. But one rarely sees the literal trappings of feudalism re-emerge, as Nicholas Shaxson describes in his provocative account of the “City of London Corporation:”

The term “tax haven” is a bit of a misnomer, because such places aren’t just about tax. What they sell is escape: from [...]]]> Parag Khanna has frequently discussed the rise of a neo-feudal age, with power devolving from nation-states to cities. Why are nation-states losing relevance?

One important reason is that tax havens are diverting ever more revenue away from social needs. Powerless to confront the wealthy or powerful corporations which take advantage of them, states must tax their middle classes more or cut services. Many authors have noted the proliferation of tax havens in recent years. But one rarely sees the literal trappings of feudalism re-emerge, as Nicholas Shaxson describes in his provocative account of the “City of London Corporation:”

The term “tax haven” is a bit of a misnomer, because such places aren’t just about tax. What they sell is escape: from the laws, rules and taxes of jurisdictions elsewhere, usually with secrecy as their prime offering. The notion of elsewhere (hence the term “offshore”) is central. The Cayman Islands’ tax and secrecy laws are not designed for the benefit of the 50,000-odd Caymanians, but help wealthy people and corporations, mostly in the US and Europe, get around the rules of their own democratic societies. The outcome is one set of rules for a rich elite and another for the rest of us.

The City’s “elsewhere” status in Britain stems from a simple formula: over centuries, sovereigns and governments have sought City loans, and in exchange the City has extracted privileges and freedoms from rules and laws to which the rest of Britain must submit. The City does have a noble tradition of standing up for citizens’ freedoms against despotic sovereigns, but this has morphed into freedom for money.

A few examples illustrate the carve-out. Whenever the Queen makes a state entry to the City, she meets a red cord raised by City police at Temple Bar, and then engages in a col­ourful ceremony involving the lord mayor, his sword, assorted aldermen and sheriffs, and a character called the Remembrancer. In this ceremony, the lord mayor recognises the Queen’s authority, but the relationship is complex: as the corporation itself says: “The right of the City to run its own affairs was gradually won as concessions were gained from the Crown.” The modern ceremony strikingly marks the political discontinuity at the City’s borders.

The Remembrancer, whose position dates from the reign of Elizabeth I, is the City’s official lobbyist in parliament . . . Then there is the City’s Cash, “a private fund built up over the last eight centuries”. . . . Only part of it is visible: the Freedom of Information Act applies solely to its mundane functions as a local authority or police authority. Its assets are beyond proper democratic scrutiny.

The whole piece is well worth a read, describing the role of shadowy tax havens in diverting revenue from governments. How can we afford decent social programs when, as David Cay Johnston observes,

Total income taxes and income taxes per capita declined even though the economy grew 16 percent overall and 6 percent per capita from 2000 through 2010. Corporate income tax receipts fell 27 percent and declined 34 percent per capita, even though profits boomed, rising 60 percent.

According to US PIRG, in 2009, citizens of Wisconsin saw $1.6 billion in taxes shifted to them because “many of the largest corporations in our country hide profits made in the United States in offshore shell companies and sham headquarters in order to avoid paying billions in federal taxes.” Given that environment, cuts in pay and benefits for teachers, janitors, and other public workers are a foregone conclusion.

Where does it all lead? Matt Stoller frames a choice between the “liquidation” of key societal institutions or some effort to work together to preserve them. I am afraid we are moving toward a point where, as in China, our central government can barely deal with basic problems like air pollution or abusive local authorities.

Two years before the financial crisis hit . . . [n]o one, not even the bank’s own traders, wanted to buy the supposedly safe portions of the mortgage-backed securities [...]]]> In an earlier post, I characterized some financial institutions as “shadowy and unstable ensembles of desks and divisions whose main goal is slipping by whatever bonus-maximizing scheme won’t set off alarms among risk managers and regulators.” Too harsh? Well, today ProPublica’s Jake Bernstein and Jesse Eisinger offer offer yet another confirmation of value-destroying skulduggery at the core of contemporary finance. They explain how payments of a few million in “bonuses” to employees running one division of Merrill Lynch helped those running another division “offload” billions of dollars in toxic assets to their own firm:

Two years before the financial crisis hit . . . [n]o one, not even the bank’s own traders, wanted to buy the supposedly safe portions of the mortgage-backed securities Merrill was creating. Bank executives came up with a fix . . . .They formed a new group within Merrill, which took on the bank’s money-losing securities. But how to get the group to accept deals that were otherwise unprofitable? They paid them. The division creating the securities passed portions of their bonuses to the new group, according to two former Merrill executives with detailed knowledge of the arrangement.

The executives said this group, which earned millions in bonuses, played a crucial role in keeping the money machine moving long after it should have ground to a halt. “It was uneconomic for the traders” — that is, buyers at Merrill — “to take these things,” says one former Merrill executive with knowledge of how it worked. Within Merrill Lynch, some traders called it a “million for a billion” — meaning a million dollars in bonus money for every billion taken on in Merrill mortgage securities. Others referred to it as “the subsidy.” One former executive called it bribery. The group was being compensated for how much it took, not whether it made money.

The three men at the top of the scheme made about $6 million each that year, and there were probably some handsomely paid lieutenants beneath them. Surely, there must have been someone who objected to such deals? There was: “a Merrill trader [who refused to go along] . . . was sidelined and eventually fired.” The power in the firm was held by those who could make quick money in big deals. Has anything changed about the structure of these firms since the crisis to alter that dynamic?

I think there is one key lesson that emerges out of a story like this, one of an excellent series ProPublica has been doing over the past year: we need a financial transactions tax. Dozens of critics of health care finance have observed that if you pay only for procedures and office visits, you get more procedures and office visits—not necessarily better outcomes. In finance, traders are getting fees for deals with no regard for the ultimate outcome. Some tax on the transactions is needed to pay to clean up the mess this excessive churn will inevitably create.

It’s become fashionable nowadays for thoughtful conservatives to acknowledge the damage that Wall Street wreaks, then immediately claim that very little can be done about it. Richard Posner’s A Failure of Capitalism was ahead of the curve in articulating this position; Tyler Cowen offers its latest incarnation:

For better or worse, we’re handing out free options on recovery, and that encourages banks to take more risk in the first place. In short, there is an unholy dynamic of short-term trading and investing, backed up by bailouts and risk reduction from the government and the Federal Reserve. . . . .And it’s not just the taxpayer cost of the bailout that stings. The financial disruption ends up throwing a lot of people out of work down the economic food chain, often for long periods. Furthermore, the Federal Reserve System has recapitalized major U.S. banks by paying interest on bank reserves and by keeping an unusually high interest rate spread, which allows banks to borrow short from Treasury at near-zero rates and invest in other higher-yielding assets and earn back lots of money rather quickly. In essence, we’re allowing banks to earn their way back by arbitraging interest rate spreads against the U.S. government. This is rarely called a bailout and it doesn’t count as a normal budget item, but it is a bailout nonetheless. . . .

[But we] probably don’t have any solution to the hazards created by our financial sector, not because plutocrats are preventing our political system from adopting appropriate remedies, but because we don’t know what those remedies are.

Cowen has opposed a transactions tax in other contexts, and I can’t see him getting too enthusiastic about this one as a risk-deterring method. But there must be some way of targeting these internal accounting tricks to make reckless risk-taking more expensive.

I am personally thankful to the scientists that developed treatments for pneumonia and the doctors and nurses that provided the treatments. I suffered from pneumonia three times in my youth and had I been born a decade earlier I would have died as a child. I am grateful to my teachers, who recognized and cultivated a love of learning in their students. I am grateful to Social Security, which made it possible for our family to avoid economic disaster when my father died of a second heart attack when [...]]]> Bill Black has done extraordinary work as a whisteblower and voice of conscience on financial fraud. I found this blog post of his a heartening reminder of “things to be thankful for” this holiday season:

I am personally thankful to the scientists that developed treatments for pneumonia and the doctors and nurses that provided the treatments. I suffered from pneumonia three times in my youth and had I been born a decade earlier I would have died as a child. I am grateful to my teachers, who recognized and cultivated a love of learning in their students. I am grateful to Social Security, which made it possible for our family to avoid economic disaster when my father died of a second heart attack when he was 41. (The moderately successful governmental effort against cigarettes came too late to save him.) The Social Security survivors’ benefits prevented my mother (and we three kids) from losing the home and allowed me to go on to college and post-graduate education.

Today, all the things Black (and I) are thankful for are under assault. A failing public health and pharma research infrastructure is giving new and dangerous microbes a foothold in our hospitals. States are laying off teachers as society allocates ever more of its resources to other, “more valuable” ends. And Social Security is dismissed as a “milk cow with 310 million tits” by President Obama’s Deficit Commission Co-Chair, who apparently wants blood this Spring.

But all these trends have generated reactions from those who care deeply about educational opportunity, concern for the sick, and respect for the aged. Patriotic pride in programs like Social Security or Medicare may seem outdated in an era of cosmopolitan, globalizing capitalism. But Black’s advocacy of programs like these (and lifelong fight against the frauds that undermine a government capable of funding them) is an inspired message for a day of gratitude. As he states, “I am grateful to the Ancients, who faced a vastly crueler world and recognized that the key was for each of us to try to repair it, and whose advice has led generations to make those repairs rather than accepting cruelty, greed, exploitation, and indifference as the natural state.”

PS: More “New Deal 2.0″ Thanksgiving here.

The number of Americans making $50 million or more, the top income category in the data, fell from 131 in 2008 [...]]]> Many commentators on inequality have focused on bonus culture at financial firms. Finance professionals do represent about 18% of taxpayers in the top tenth of one percent, as Bakija & Heim have shown. (In 2005, the minimum income for joining the top 0.1% was $1,246,000.) But Bakija & Heim also found that “executives, managers, and supervisors” at nonfinancial firms made up about 41% of the top 0.1% earners. And when we look at recent payroll tax data, as David Cay Johnston has, the unequal share of income at the very top of this rarefied group is nothing less than spectacular:

The number of Americans making $50 million or more, the top income category in the data, fell from 131 in 2008 to 74 last year. But that’s only part of the story. The average wage in this top category increased from $91.2 million in 2008 to an astonishing $518.8 million in 2009. That’s nearly $10 million in weekly pay! . . . .

Since 1980, the bottom 90 percent of Americans have seen their incomes go nowhere, while on the highest steps of the income ladder, the further up you are, the greater your gains.

Johnston’s analysis is worth reading in full. We’re moving from a “winner take all society” to a “winner take all politics,” as Hacker and Pierson have shown. Many in the ostensibly populist “Tea Party” resist any taxes to address this inequality, while somehow the “left” position seems unable to distinguish between the taxation of a surgeon making $400,000 and a tycoon making $400,000,000. Indeed, the main goal of some key Clinton and Obama era advisors seems to be to join the club: Robert Rubin collected more than $115 million in compensation.

We often hear about “shared sacrifice” today. If we don’t see more graduated income tax rates at the very top, it will be difficult to resist the suspicion that “austerity” is a guise for, once again, increasing the share of national income at the very top.

The 400 richest families in America, who saw their wealth increase by some $400 billion during the Bush years, have now accumulated $1.27 trillion in wealth. . . . During the last fifteen years, while these enormously rich people became much richer their effective tax rates were slashed almost in half. While the highest-paid 400 Americans had an average income of $345 million in 2007. . . they now pay an effective tax rate of 16.6 percent, the lowest on record.

Last year, the top twenty-five hedge fund managers made a combined $25 billion but because of tax policy their lobbyists helped write, they pay a lower effective tax rate than many teachers, nurses and [...]]]> Bernie Sanders makes some valuable points in The Nation this week:

The 400 richest families in America, who saw their wealth increase by some $400 billion during the Bush years, have now accumulated $1.27 trillion in wealth. . . . During the last fifteen years, while these enormously rich people became much richer their effective tax rates were slashed almost in half. While the highest-paid 400 Americans had an average income of $345 million in 2007. . . they now pay an effective tax rate of 16.6 percent, the lowest on record.

Last year, the top twenty-five hedge fund managers made a combined $25 billion but because of tax policy their lobbyists helped write, they pay a lower effective tax rate than many teachers, nurses and police officers. As a result of tax havens in the Cayman Islands, Bermuda and elsewhere, the wealthy and large corporations are evading some $100 billion a year in U.S. taxes.

Whatever our nation’s tax future, these are vital facts to consider during the debate. Sanders has proposed the “Responsible Estate Tax Act (S.3533),” which would “raise $318 billion over the next decade by establishing a graduated inheritance tax on estates over $3.5 million.” Deficit hawks should applaud his approach.

The U.S. corporate income tax is under attack. The right calls it “the most growth-inhibiting, antitcompetitive tax of all.” Some on the left argue that “canceling the corporate income tax” and replacing it with a value-added tax would “reduce[] the cost [of corporate goods] to all consumers.”

But at the same time the corporate income tax is being excoriated in some circles, it is unlikely to be repealed.  Although it only accounts for approximately 12 percent of the government’s tax revenue, Americans say that increasing the corporate income tax is one of [...]]]>

Steven A. Bank, From Sword to Shield: The Transformation of the Corporate Income Tax, 1861 to Present (Oxford University Press, 2010)

The U.S. corporate income tax is under attack. The right calls it “the most growth-inhibiting, antitcompetitive tax of all.” Some on the left argue that “canceling the corporate income tax” and replacing it with a value-added tax would “reduce[] the cost [of corporate goods] to all consumers.”

But at the same time the corporate income tax is being excoriated in some circles, it is unlikely to be repealed.  Although it only accounts for approximately 12 percent of the government’s tax revenue, Americans say that increasing the corporate income tax is one of their preferred methods of fixing the fiscal straits in which the United States finds itself.

Absent from the arguments over the proper role of the corporate income tax is any consideration of its provenance. If the corporate income tax is such an anticompetitive, expensive, and insignificant source of government revenue, why was it enacted in the first place?  And why did it evolve into the form in which it exists today?

Steven A. Bank’s excellent From Sword to Shield: The Transformation of the Corporate Income Tax, 1861 to Present provides answers to these questions. Ultimately, Professor Bank paints a picture of an undeliberate, though not-quite-accidental, tax, the design and underlying purpose of which changed regularly, and the consequences of which were poorly understood, even by the business interests that lobbied for legislation that would ultimately prove problematic for corporations and their shareholders.

In the early years of the United States, forming a corporation required a special legislative charter. As such, corporations were rare, and their taxation relatively unimportant. Corporations were generally taxed only when the corporate for could otherwise be used to evade some non-corporate tax. Moreover, in the early Republic, taxes were more likely to be imposed on industries than on entities. As such, a state may have imposed a tax on the capital stock of banks, or on insurance companies or transportation companies. But generally, taxes were imposed on the basis of the corporation’s industry rather than merely as a result of being the corporation’s being incorporated.

Fast-forward to the post-Civil War era. As states began to adopt general incorporation statutes, more and more businesses began to incorporate.  At the same time, there was rampant tax evasion; the property tax, especially, was hard to collect, as people began to own more intangible property.  States began to see corporate taxes as a substitute for property taxes on these intangible assets.

Although there was no federal property tax, state corporate taxes influenced federal thinking.  There was a general concern on the federal level that the nouveau riche were not paying their fair share of taxes.  The government began to focus on taxing income at its source, and corporate income had to be part of this focus.  But after Americans’ generally negative experiences with tax collection during the Civil War, a corporate income tax was more palatable than a broad-based individual income tax.  Still, the 1894 corporate income tax was meant to function as a proxy for taxing shareholders’ income.

Struck down as unconstitutional, the corporate income tax of 1894 was never implemented.  In need of revenue, Congress enacted a targeted excise tax which was repealed as the need for revenue diminished (and which was ultimately found unconstitutional).  But by the early 20th century, tarriffs were not generating sufficient revenue for the government and, in 1909, Congress again looked at taxing corporations.  Because of questions about the constitutionality of a corporate income tax, Congress enacted a corporate excise tax.

And then, in 1913, came the Sixteenth Amendment and the modern income tax.  Both individuals and corporations were now taxable on their income at the same normal rates.  The income tax avoided double taxation, though, by exempting dividends from the personal income tax on the theory that the money distributed to shareholders as a dividend had already been taxed when earned by the corporation.  But the design of the personal income tax presented a new problem: although corporate and personal income were subject to normal income tax at a flat rate, there was also a progressive surtax on individual income.  As an individual’s income rose, the surtax would reach rates as high as six percent.  The progressive surtax on individuals presented an opportunity for tax evasion: corporations did not face the surtax and corporate income was only taxable to shareholders when the shareholders received the income as dividends.  To the extent corporations retained their earnings, wealthy shareholders could defer their surtax payments almost indefinitely.

The potential use of corporations as vehicles for tax evasion turned the corporate income tax into Professor Bank’s metaphorical sword: it was intended to cut off tax evasion.  Congress tried several methods to counteract evasion, from undistributed profits taxes (where corporations would be taxed on any profits that they did not pay out as dividends to their shareholders, interestingly, an idea closely related to the current taxation of mutual funds) to excess profits taxes (imposed during World War I, putatively on entities that profited from the war).  Unsurprisingly, business interests disliked these various measures, and fought aggressively against them.

As the difference between individual and corporate income tax rates increased, arguments over the best approach toward taxing corporations became more intractable, and the policies underlying the corporate income tax began to change.  In 1936, the debate over corporate taxation came to a head as the government needed an addition $620 million in revenue to, among other things, fund veterans’ bonuses.  President Roosevelt made a radical recommendation: to use an undistributed profits tax, set at a high rate, not just to supplement the corporate income tax, but to replace it.  In addition to raising additional revenue, the undistributed profits tax would prevent evasion of surtaxes.

The business community was horrified.  The rate necessary for the undistributed profits tax to subsume the corporate income tax, they argued, would force corporations to distribute all of their profits, interfering with the decisions of boards of directors and managers.  If corporations could not retain earnings, they would be unable to grow, and would not have reserves to get them through unexpected difficult times.  Ultimately, Roosevelt’s proposal was gutted, leaving in its place a corporate income tax and an undistributed profits tax set at a relatively negligible rate.  However, individuals lost the exemption from the normal personal income tax for dividends received from corporations they had previously enjoyed.  Dividends would now be taxable at ordinary rates.  Suddenly, corporate income, even if it was distributed immediately upon receipt, was subject to double taxation.  The corporate income tax had transformed from a sword against tax evasion to a shield against interference with corporate decisions (specifically, the decision of whether to retain earnings or pay them out as dividends) by the government.

Interestingly enough, the debate that has consumed corporate income tax policy arguments in the recent past–the debate over double taxation–was entirely absent in the wake of the 1936 changes.  Business was more concerned about eliminating the excess profits tax entirely and about getting preferential capital gains rates enacted.  Business itself had fought for double taxation, as a lesser evil than what President Roosevelt wanted to enact.

Professor Bank continues through the present, discussing the latter half of the 20th century, as well as President George W. Bush’s reduction of the tax rate on dividends in 2003; he sees arguments over the corporate income tax, including arguments over tax rates and over the double taxation of corporate income, as continuing into the future.

From Sword to Shield is a fascinating read on several levels.  It is, of course, a history of the corporate tax.  And it offers a broad history the last 150 years or so of business in the United States.  But it is also a history of the legislative sausage-making process: in tracing one legal regime for over a century, Professor Bank shows the interaction between the President, legislators, the Treasury Department, parties affected by the legislation, and even newspapers and public perception.  The various sides’ discourse is thought-out, passionate, but measured.  Every new iteration of the corporate income tax was a compromise, and sometimes the consequences were unexpected.  As messy as the process was, though, it succeeded in producing a functional corporate income tax.

Which is to say, if you have any interest in tax, you need to read this book.  And even if you don’t have any interest in tax, if you are interested in the legislative process or in economic history (or even on the impact of war on fiscal policy), this book is for you.  Although the tax law has an unfortunate (and inaccurate) reputation for dryness, From Sword to Shield is anything but.  The prose is accessible and compelling; the policy issues are well-explained and cogent.  And the history will help give more depth and context as you listen to or participate in debates about the future of corporate taxation.

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Samuel D. Brunson is an assistant professor of law at Loyola University Chicago School of Law.  He would like to thank Jeffrey Kwall, Matthew Jennejohn, and Jamie Brunson for their thoughtful comments on earlier drafts.

If Congress brings back the estate tax with a prospective resumption date (for example, on October 1, 2010), that would create a rather odd . . . er . . . incentive for the heirs of the elderly.  Let’s hope that mistake doesn’t happen.