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Category: Tax

Economic Policy for the Worried Wealthy

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:
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Neo-Feudalism: Shaxson on Tax Havens

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.

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Why Big Banks Fail to Act in Their Own Self Interest

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?
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A Thanksgiving Message From Bill Black

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 Ten Million Dollar-per-week Club

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 Importance of a Graduated Inheritance Tax

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.

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Book Review: Bank’s From Sword to Shield: The Transformation of the Corporate Income Tax, 1861 to Present

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. Read More

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The Boss and the Estate Tax

One odd angle surrounding George Steinbrenner’s death is that there is currently no federal estate tax. The estate tax lapsed at the end of 2009 and Congress is deadlocked about how or whether to bring it back. The initial thought was that any restoration would be made retroactive to January 1, 2010, but that might not happen now.  As a result, Steinbrenner’s heirs may reap a huge windfall.

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.

Switzerland: Lawless Zone?

Today’s big Swiss story is on the Polanski (non-)extradition. This recent article on Swiss banking helps situate Swiss non-cooperation with authorities in a larger context:

The anonymous emails carried a tantalizing subject line: “Tax evasion: client list available.” The messages, sent two years ago to tax authorities across Europe, made an audacious claim: The sender could provide a large client list of a Swiss-based private bank, plus access to its computer systems. . . .

Switzerland strenuously objects to foreign authorities using [this] data to pursue tax dodgers and has warned it won’t cooperate with any investigation stemming from what it regards as stolen data. . . .

France has said it would use the data to pursue tax cheats. “We obtained those data in a legal manner,” then-budget minister Eric Woerth said in February. “France isn’t on the line for fraud, tax evaders are.” In a twist, it is the French government that is now making the data available, promising to hand it over to other governments in pursuit of tax cheats.

While many have claimed that “privacy is dead,” Switzerland strenuously tries to protect it for many of the worst tax cheats. Such actions not only exacerbate global inequality, they also create an environment that aids the formation of some of the biggest crime and terror networks in the world. If financial secrecy jurisdictions and tax havens grow, we should expect the same “total information awareness” network advanced by homeland security experts applied to the transactions of anyone who does business in them.

Disparate Impact and the Tanning Tax

I have previously blogged in favor of a vanity tax, so I was happy to see the health reform legislation included a 10% tax on tanning salons. But not everyone is so pleased to see it:

When an article about the fallout from the tax — which took effect last week — appeared on the Washington Post’s Web site Wednesday, dozens of commenters questioned the tax’s legality. The case can seem deceptively simple: Since patrons of tanning salons are almost exclusively white, the tax will be almost entirely paid by white people and, therefore, violates their constitutional right to equal protection under the law.

Randall Kennedy dismisses that claim out of hand. But I hope the angry tanners join me in endorsing a plan to address the grave injustice here: legal scrutiny of face-whitening creams. Tax tanning, tax lightening, and we may well move closer to a society that can transcend the fickle “beauty bias.”