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.
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.]
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.
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.