By Abigail Caplovitz Field, an attorney and a freelance writer. She writes news for Benzinga.com and others, and posts a new blog every Sunday morning at Reality Check. Jointly posted with Reality Check
Our nation’s tax code reflects our corrupt politics. The code contains many provisions that benefit our wealthiest, most powerful companies and people while hurting the rest of us.
(“Our” most powerful people in the sense that they claim to be American, regardless of how transnational and unpatriotic they behave.)
For Benzinga, I did a set of stories on some of the visible corruption in the code. Like the “carried interest” provision. That’s the income naming rights deal purchased by private equity, hedge funds and other extremely wealthy people with lobbying and campaign contributions.
Income Naming Rights
The carried interest provision lets these 0.1%ers call most of their income “long term capital gains” instead of “income.” The difference? About twenty cents out of every dollar.
These folks’ capital gains are taxed at 20 percent; their income over about $407k is taxed at 39.6 percent. And given the salaries involved–the “best” hedgies can make $1 billion in a year–that adds up to meaningful money.
(Best is in quotes because at least Steven Cohen, who took in $2 billion last year, made lots of money from his firm’s illegal trades.)
On $1 billion, labeling the money income or capital gains means $200 million more dollars that are either paid in taxes and benefit all Americans, or aren’t, and just get added to the unspendable cash horde the hedgie already sits on top of.
Aren’t taxes the more efficient use of that capital, from a system perspective?
Consider: as much as $200 million more from a single person in a single year. As much as $11 billion/year in all, just by more accurately labeling the money extremely wealthy put in their pocket.
That’s an enormous amount of money.
Just ask Maine.
Off Shore Tax Loopholes
The Maine Governor is considering signing a law that will close the “Water’s Edge” loophole, and reduce tax haven abuse by multinationals. For its efforts, Maine will get about $10 million/year. As the law’s sponsor explained, that’s real money in Maine, enough to justify changing their law.
Update: This section on NY State an the carried interest loophole has been revised to be accurate:
The Waters’ Edge loophole isn’t the only one that affects states.
For example, New York forgoes “hundreds of millions of dollars a year” in taxes on ‘carried interest’ income earned by unincorporated businesses, the NY Post reported. NYC’s Comptroller Scott Stringer wants to tax it.
What could New York afford if it did?
Note, the detail of this version of the carried interest issue is different, but the spirit, at least as reported by the Post, is exactly the same:
“Sometimes they are guaranteed a return on the waived fee even if the fund does not generate a profit, a source said.” [ACF: that means it cannot be characterized as ‘capital gain’; the capital was never at risk.]
“Some firms, though, including Blackstone, do not convert their management fees into capital gains. They pay the 4 percent tax.” [ACF: that proves any claim that taxing it will result in mass exodus should be skeptically greeted.]
“Meanwhile, the IRS is looking into the matter.”
“State Attorney General Eric Schneiderman in 2012 also opened an investigation into management-fee waivers, and, a source said, has been waiting for the IRS to make the first move.”
[ACF: I’m shocked, shocked at the idea that AG Schneiderman is waiting to make the first move.]
“Gregg Polsky, a University of North Carolina Law School professor, who has written a special report on PE firm fee conversions and the tax issue, said he believes the management fee waivers should be against the law.” [ACF: the more you know about it, the more clear its wrongness is.]
Congressional Priorities
Speaking of loopholes and corruption, consider how the Do-Nothing Congress is moving toward passing–yet again–several heavily lobbying multinationals’ favorite loopholes, including GE‘s and Apple‘s. But it can’t manage to pass extend unemployment insurance benefits or fund our infrastructure, and it cut food stamps.
Those priorities are criminal, morally speaking.
Congress can prioritize the agenda of GE’s 98 lobbyists (including 28 “revolvers”—former members of Congress, former Congressional staffers, or former Executive Branch officials) even though it costs $6 billion in waived revenue for the two year “extension.”
Like solving the carried interest problem, solving the GE and Apple loophole is simply a matter of making income reported for tax purposes more accurately reflect the underlying economic reality. For the loopholes, it is about correctly identifying the country in which the income was earned; where the value generating happened.
$52 Billion in 2014 Alone from Making The Tax Code More Accurate.
Imagine spending $6 billion on our crumbling infrastructure instead of giving it to GE and other profitable multinationals.
Imagine if we failed to re-enact misguided (at best) tax provisions like “bonus depreciation” and the badly designed “research and experiment” tax credit. Those two would get us $90 billion over the two years Congress is considering expanding it for, according to CBO data.
Depreciation is a substantive concept about how to allocate the cost of something over its useful life. “Bonus depreciation” is a totally artificial version, where the relevant time frame has nothing to do with the useful life of the purchase.
The research and experiment tax credit’s stated purpose is to spur investment into important discoveries. Again, without questioning the policy judgment, it’s easy to see the tax credit, as designed, has unintended consequences.
Rebecca Wilkins, Senior Counsel for Federal Tax Policy, Citizens for Tax Justice explained to me (a couple weeks ago, when I reporting the tax stories for Benzinga) that
“The way the rules are written, taxpayers can get a dollar for dollar credit for all kinds of stuff that most of us wouldn’t consider valuable research. One sign of how badly it is designed,” Wilkins continued, “is that you can claim it years after doing the ‘research’ by filing an amended return. That means the credit was not an incentive to do that ‘research’.”
In just 2014, failing to re-enact just bonus depreciation and the research & experiment credit would net $35 billion, nearly double what it would take to extend unemployment benefits. In fact, it’s enough to both fund the unemployment extension and restore the $8.6 billion food stamp cut. And there’d still be more than $6 billion for infrastructure.
Add $6 billion to the $6 billion from GE and Apple loopholes; throw in the $11 billion from no-longer carried interest, and we can pay for unemployment and food stamps and plow $23 billion into our infrastructure each year.
Total transportation and infrastructure spending in the 2009 stimulus was only $98 billion. In 5 years making our tax code more accurate in those ways would pay for more infrastructure than the stimulus bill did, and it could do it for as many years as needed.
What’s important to focus on is that these changes are about accuracy; they’re not really about basic policy.
Note too, a thorough review of the tax code would surely turn up more examples where policy choices were made and then undermined by adding statutory language allowing the 0.1% to legally though dishonestly subvert the policy choice. So simply making the code honest would probably net far more.
Congressional Corruption
A Congress that can enact the “active financing” GE loophole, the “CFC look through” Apple loophole (and continue preserving the related “check the box” loophole”), bonus depreciation, the research and experiment tax credit (as currently designed) and preserve carried interest, but fail to provide even a tiny modicum of income and food security to ordinary Americans is corrupt.
I don’t mean corrupt only in the Chief Justice John Roberts sense of directly proveable quid-pro-quo.
(Though donors threatening Republicans because of a House member’s tax reform proposal and conventional wisdom that the reform package is DOA sure looks like cause and effect.)
By corruption I mean Congress’s strong legislative bias in favor of the interests of 0.1% of Americans at the expense of the 99.9%. As a matter of majoritarian public policy, these tax and budget decisions are indefensible. Instead of representing us, ‘our’ Congress is representing the 0.1%.
I’m not claiming that Congress is corrupt whenever majoritarian demands are trumped by minorities’ interests. Often in policy conflicts minorities should win, because the majority is striving to deprive the minority of Due Process, Equal Protection, or other constitutional guarantees. Upholding the minority interest in such situations is upholding our constitution.
But Congress should be defined as corrupt whenever it legislates public policy choices that increase the economic insecurity and stress of the 99.9% while furthering the economic interests of the handful of people who are already so wealthy three generations of their families will be unable to liquidate their entire fortunes.
In a democratic country, the only explanation for such policy choices is that a sufficient number of Congress members personally benefit enough by legislating that way that they do it.
And I call that corruption.
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Speaking of taxes, the old argument put forward that “the rich pay most of of the taxes in the U.S.” seems deceptive to me. The truth of the matter is “the rich collect most of the taxes”. Those that own the productive assets in this country are in a position to pass those taxes along as a cost of doing business. Does anyone think that General Mills asking price for a box of cereal does not include a provision for it’s tax costs? When pricing strategy is developed for a product line, it is after-tax profit that is used to project the products projected profit margin. No one seriously thinks in the long-run General Mills is going to continue to market a cereal that doesn’t make them a profit on an after-tax basis do they? Put another way, if the company’s tax rate was doubled, does anyone think that additional cost would not be reflected in the cereal price? So it is the end consumer who ends up paying the taxes and the poorest of these consumers, who it is claimed “pay no taxes”, actually end up paying the highest rate of taxes, because a box of cereal and other basics they purchase actually represent most of their income. The price of everything they buy includes a provision for “taxes the rich must pay” and have passed on to them. So yes, close the tax loop-holes, but don’t be afraid to spend those tax receipts on the average citizen, because they are paying most of the taxes. And poor people should be complaining to their elected representatives about the high “rate” of taxes they pay vis a vis the rich, who own the productive assets and are in the enviable position of passing those taxes along to them. Who do you pass your taxes along to?
Quite right. The rich are tax farmers. Arguing that they pay most taxes are just like saying tax farmers “paid” the Roman Empire’s taxes.
I believe the same way. The business interests in this country are just another vehicle used to collect taxes from the end users. I would like to see the actual income collected by the federal government from tax payers by income class. I believe that the lower income wage earners pay a much larger percentage of their income in taxes. Taxes should be limited to a percentage of gross national product. The government should be restricted to a fixed level of income that is based on how well the economy is doing. We need to look at the other taxes and fees that are collected by state and local governments and cap them too. Reagan era politicians were very clever in their manipulation of the laws by forcing states to collect taxes to enforce federal mandates that allowed the federal government to lower federal taxes.
Some loopholes are purely give aways to the rich. One of them which I used on occasion is the tax deduction for relocating my household goods — to overseas locations. I deducted the entire amount of my moves. Why should someone in Chicago, for instance, pay for such a thing?
The most egregious tax loophole is the deductibility of overseas homes. If you own properties in some foreign land you can deduct big chunks of the expenses just because you, as an American, own them. Keep in mind these same deductions that are OK on your 1040 are not ok to deduct in the country where you own the property and pay local taxes.
I am able to trim what I owe to Uncle Sam every year because of the mere fact of owning overseas properties.
Yep, the US has a very, very corrupt tax code that supports the rich and helps export jobs.
Great article but I think some reframing would be useful..
“”In just 2014, failing to re-enact just bonus depreciation and the research & experiment credit would net $35 billion, nearly double what it would take to extend unemployment benefits. In fact, it’s enough to both fund the unemployment extension and restore the $8.6 billion food stamp cut. And there’d still be more than $6 billion for infrastructure.
Add $6 billion to the $6 billion from GE and Apple loopholes; throw in the $11 billion from no-longer carried interest, and we can pay for unemployment and food stamps and plow $23 billion into our infrastructure each year.””
I think it’s more useful to separate these concepts. We can fund all these things without taxes. What taxes can do is better direct economic activity such as not favoring the destructive carried interest problem you mention.
Viewing taxes as funding programs enhances the us vs them philosophy as in our tax dollars are funding these entitlements rather than government spending is being used to create useful investment and demand.
http://neweconomicperspectives.org/2012/12/a-meme-for-money-part-4-the-alternative-tax-meme.html
A Meme For Money, Part 4: The Alternative Tax Meme
December 6, 2012
By L. Randall Wray
“”It does little good to argue that those who can “afford” to pay taxes ought to do so for the benefit of those who need welfare. That is what the charity meme is for. Of course we all ought to give to charity—from each according to ability to each according to need. If the tax system comes down to charitable contributions, then it should be based on voluntary contributions. Good luck with that! The mixing of these memes will at best lead to confusion, but more predictably it will lead to tax revolt and social spending cuts. (Ex post predictions are relatively easy to make—that is precisely what happened after 1980. Liberals are still struggling to come up with a response.)
We need new tax and spending frames.””
Mancur Olson’s The Logic of Collective Action explains pretty well (imho) how this kind of thing happens. Those who benefit from these tax loopholes benefit enormously from them. Those who would benefit from removing them would benefit only marginally. Therefore, organizing the former group to effective collective action is much easier than organizing the latter. Find a way of overcoming that dynamic and you could change the world. Until then, I’m not too optimistic.
Question: if you know a system is corrupt and rigged (and not in your favor), but you keep going along with it anyway–playing by the rules even though others break them repeatedly or ignore them entirely–does that make you a “chump” or a “mark”? I mean, technically speaking…
Unfortunately, I don’t think Abigail is quite connecting all the dots here. The tax code is corrupt: point one. Our ability to do anything about it is essentially nil (see Gillens and Page): point two. Therefore, the attempt to reform the system is a waste of time, tilting at windmills (to use that phrase for the 2nd time today): point three.
Sadly few writers/thinkers on “our side” will make the leap to point three. It is, perhaps, too psychologically challenging to accept that our government is irredeemable. Most, as Kierkegaard put it, “do not have the courage to think a thought through to its end.” Here’s hoping more find that courage…
Precisely why the left is moribund. No courage and connecting dots is forbidden (conspiracy theory–beware, beware)–only moral posturing and some bootless shaking of the fist and plan that vacation in Peru.
The situation has grown too dire to do anything but revolt–but we prefer to rehash “it’s not fair” and “look how bad the rich are.” No one with resources and power is interested in doing anything more than making a case for revolt. I’ve done what I can–it’s time for the younger folks to take action. Hopefully, the sheer mass of information on the corruption of the current system or some kind of environmental disaster may spur some to act beyond the waving of hands.
I think there are strategies which would be more effective than simple revolt.
Ideally, we get a 0.1%er “class traitor” like Earl Grey (1832) or FDR (1932) on our side and play an insider-outsider strategy, where Earl Grey or FDR threatens the other 0.1%ers with revolution unless they submit to his demands, and whenever the other 0.1%ers seem resistant, the 99% respond with mass action in the streets to prove his point (Days of May, Bonus Army)
We seem to be missing the necessary class traitor.
Maybe you did not live through the Kennedy deaths. To many of us pond scum the message to potential upper class traitors seemed quite clear……follow the money.
Since then any sort of budding leadership seem to have tragic deaths…..so maybe you are suggesting one of the Romney kids or Paris Hilton?
You have a point about the mysterious “tragic deaths”. Usually in small airplanes.
However, remember that the Kennedy assassination got us the Great Society. *Some* people — like Lyndon Johnson — weren’t scared.
Even *after* the assassinations, Jimmy Carter wasn’t scared.
Things only went seriously downhill after Reagan, when the 99% were routinely *voting for* the oppressors, voting to destroy their own livelihoods and give more cash to the people oppressing them.
I think that may have caused potential upper class traitors to give up. What’s the point in betraying the upper class for the lower class if the lower class isn’t on its own side?
It’s worth noting that George Soros wasn’t scared either (and personally supported the economies of most of Eastern Europe during the collapse of the Warsaw Pact). But of course he didn’t grow up in the US.
everything is related as all the top 0.5% has to do is yell “abortion” or “gay marriage” or “immigration amnesty” and the bottom 99.5% scurries to their respective sides and argue their heads off while a pro-0.5% tax provision is quietly slipped into some random farm bill or unemployment extension.
at this point it’s gridlock for the bottom 99.5% until a truce for the culture wars can be found.
the current Democratic leadership aren’t friends of the middle class. and can’t let the faux argument that Obama/Clinton & Co. are better than the GOP—they aren’t. and while the GOP has many deep flaws, at least the GOP is honest about their plans to gut the middle class.
Actually Democratic leadership is arguably worse, because the groups that naturally are opposed to this type of looting are mostly asleep when Democrats are in power.
The people who were so up in arms over this kind of thing promptly went to sleep in 2008 when Obama won even though nothing changed.
Yes, the Republicans tell us they’re going to f**k us over, and then they f**k us over.
The Democrats tell us they’re going to help us, and then they f**k us over.
Good Abigail. I had not been thinking about state coffers, but clearly that is where closing loopholes for the rich will have the most direct benefit to society. If only all states act in unison.
RE: Our Corrupt Tax Code
Great article and comments.
It’s important NOT to forget the pet hates of the 0.1% (Social Security, Medicare, the need for a real solutione to the medical insurance crisis,conomic development for all, infrastructure for the country, and many more) all fanatically opposed, and the nutty pet projects of the the same clowns (the Israeli “planetoid” as a special case gaining incredible and unjustified benefits, uncontrolled military spending and the consequent and artificial crises to justify it, constant swindling and chicanery by and for the pluocrats, and many more), all fanatically favored!
It’s easy to see, that the corruption revealed will destroy the republic much sooner rather than later. Get ready!
The use of bonus depreciation leaves a misimpression here. Bonus depreciation merely accelerates the depreciation that may be claimed, but does not affect the total amount that can be claimed, which is the basis of the property in question. I used it in Leasehold Improvements situations; 50% depreciation taken in the first year (ordinarily somewhere in the singe digits, depending on timing and amount), but the remaining 50% over the remaining life of the asset. As such, the tax shield provided by bonus depreciation affects the timing of governmental tax receipts, but not the amounts. Lots of things to pick on in the tax code (the thrust of the article is generally correct), but bonus depreciation appears to get its bad rap more from its name than from any effect on governmental revenue.
I’m going to give you $1,000. Would you prefer that I give you $100 a year for 10 years, or $500 the first year and $50 a year for 10 years. This is not a trick question.
I want as much up front as possible, since gifts at this level in the United States are not taxed. If you’re going to give me more than $14,000, then it gets more complex.
Someone told me that NY taxes “carried interest as income, but not as business activity subject to the NYC UBI tax.”
Thank you. I am trying to get this straightened out so I can correct it. The corrupt nature of the tax code, however, is not diminished by my error. Nor is the idea that NY chooses to forgo tax revenue from carried interest.
Thanks again
Hi
This is how I’ve revised it on my blog:
Update: This section on NY State an the carried interest loophole has been revised to be accurate:
The Waters’ Edge loophole isn’t the only one that affects states.
For example, New York forgoes “hundreds of millions of dollars a year” in taxes on ‘carried interest’ income earned by unincorporated businesses, NY Post reported. NYC’s Comptroller Scott Stringer wants to tax it.
What could New York afford if it did?
Note, the detail of this version of the carried interest issue is different, but the spirit, at least as reported by the Post, is exactly the same (http://nypost.com/2014/01/12/stringer-targets-rich-with-bid-to-close-tax-hole/):
“Sometimes they are guaranteed a return on the waived fee even if the fund does not generate a profit, a source said.” [ACF: that means it cannot be characterized as ‘capital gain’; the capital was never at risk.]
“Some firms, though, including Blackstone, do not convert their management fees into capital gains. They pay the 4 percent tax.” [ACF: that proves any claim that taxing it will result in mass exodus should be skeptically greeted.]
“Meanwhile, the IRS is looking into the matter.”
“State Attorney General Eric Schneiderman in 2012 also opened an investigation into management-fee waivers, and, a source said, has been waiting for the IRS to make the first move.” [ACF: I’m shocked, shocked at the idea that AG Schneiderman is waiting to make the first move.]
“Gregg Polsky, a University of North Carolina Law School professor, who has written a special report on PE firm fee conversions and the tax issue, said he believes the management fee waivers should be against the law.” [ACF: the more you know about it, the more clear its wrongness is.]
sigh. ‘…waiting for someone else to make the first move…’
In spite of the ingenious methods devised by statesmen and financiers to get more revenue from large fortunes, and regardless of whether the maximum sur tax remains at 25% or is raised or lowered, it is still true that it would be better to stop the speculative incomes at the source, rather than attempt to recover them after they have passed into the hands of profiteers.
If a man earns his income by producing wealth nothing should be done to hamper him. For has he not given employment to labor, and has he not produced goods for our consumption? To cripple or burden such a man means that he is necessarily forced to employ fewer men, and to make less goods, which tends to decrease wages, unemployment, and increased cost of living.
If, however, a man’s income is not made in producing wealth and employing labor, but is due to speculation, the case is altogether different. The speculator as a speculator, whether his holdings be mineral lands, forests, power sites, agricultural lands, or city lots, employs no labor and produces no wealth. He adds nothing to the riches of the country, but merely takes toll from those who do employ labor and produce wealth.
If part of the speculator’s income – no matter how large a part – be taken in taxation, it will not decrease employment or lessen the production of wealth. Whereas, if the producer’s income be taxed it will tend to limit employment and stop the production of wealth.
Our lawmakers will do well, therefore, to pay less attention to the rate on incomes, and more to the source from whence they are drawn.
In the United States, people are wont to talk feverishly and vindictively about the “non-taxpayer”, for it is here that our brother from Mexico, our cousin from over the Canadian Border, our friends from India and the Middle East come to escape the rigors of their respective locations
They proceed to use our highways and our libraries, our water systems and our police protection. If they have children old enough and stay long enough, they use our public schools etc., whereupon there is a great cry about non-taxpayers taking advantage of our benefits of government. Because these visitors and temporary residents don’t own property and are not listed with the tax man, the general supposition is that they pay no taxes.
A itemized account of the money spent by these “guests” over a period of time would yield some surprises. Naturally, the itemization includes practically everything permanent residents would buy, food, clothing, housing, luxuries and the usual necessities.
A little thought will show clearly that while the guest owned no property here, the hotel proprietor, the restaurateur, the merchant, the grocer, the druggist, everyone in fact, from whom he made purchases did own property, and that property was subject to taxation. The tax on the buildings and merchandize was simply added to the other overhead expenses in the bill of the proprietor and merchant.
The property owner acted as a collector and ultimate consumer, whether a native son or a wandering guest, paid the tax. The guest who owned no property himself in the United States paid a tax whenever he slept with a roof over his head, paid taxes every time he bought a cigar or steak. A man could no more pass through the United States and purchase a meal or a night’s lodging without paying taxes than he could buy a gallon of gasoline for his car without paying the gasoline tax.
The “non-taxpayer”? He belongs to the class of griffins and unicorns and other fabulous animals. There is no such creature.
Amen
In all the long history of human governments, there NEVER has been a tax code that is fair and/or honest. At long last, has it occurred to anyone that such a tax code is 100% impossible?
Rather than endlessly whining about not achieving the impossible, why not adopt the one solution that IS possible.
See: http://mythfighter.com/2010/12/16/which-taxes-are-fairest-which-taxes-are-least-fair/
My peronal favorite is nailing early withdrawel of IRA’s etcetera when the withdrawel was clearly to a keep a roof over one’s head after bewilderingly being considered as unemployable, yet allowing a penalty exemption if same person had blown off those retirement funds on an Updated College [Indu$try] Education (depite the fact that lack of education was not the reason they were mowed over by the bus and jobless in the first place), even if doing so would have forced them to live under a bridge.
In an outraged moment I phoned founder Robert McNamara ((202) 299-1066 x22 (at least that was the extension when I dialed) of Citizens For Tax Justice (CTJ), and ‘got lucky.’ Paraphrasing his response: we can’t cover everything ….that was over a year ago ….I’ve yet to see CTJ mention the issue.
Abigail Field, some more examples for you, from the oil and gas industry:
Percentage depletion
“Domestic production activities deduction”
“Intangible drilling expenses expensing”
And then there’s the big kahuna: the totally unjustified tax discount for dividends and capital gains. Tax it like other income — why not?