Taxes and Billionaires: The “Carried Interest” Loophole Has To Go
The House speaker, John Boehner, suggests that the Republican threat of letting the United States default on its debts is driven by concern for jobs for ordinary Americans.
“We cannot miss this opportunity,” he told Fox News. “If we want jobs to come to America, we’ve got to give American businesspeople the confidence to invest in our economy.”
So take a look at one of the tax loopholes that Congressional Republicans are refusing to close — even if the cost is that America’s credit rating blows up. This loophole has nothing to do with creating jobs and everything to do with protecting some of America’s wealthiest financiers.
If there were an award for Most Unconscionable Tax Loophole, this one would win grand prize.
Wait, wake up! I know that “tax policy” makes one’s eyes glaze over, but that’s how financiers have gotten away with paying a lower tax rate than their chauffeurs or personal trainers. Tycoons have bet for years that the public is too stupid or distracted to note that in many cases they’re paying just a 15 percent tax rate.
What’s at stake is the “carried interest” loophole, and President Obama is pushing to close it. The White House estimates that this would raise $20 billion over a decade. But Congressional Republicans walked out of budget talks rather than discuss raising revenues from measures such as this one.
The biggest threat to the United States this summer probably doesn’t come from Iran or Libya but from the home-grown risk that the nation will default on its debts. We don’t know the economic consequences for America or the world, and some of the hand-wringing may be overblown — or maybe not — but it’s reckless of Republicans even to toy with such a threat.
This carried interest loophole benefits managers of financial partnerships such as hedge funds, private equity funds, venture capital funds and real estate funds — who are among the highest-paid people in the world. John Paulson, a hedge fund manager in New York City, made $4.9 billion last year, top of the chart for hedge fund managers, according to AR Magazine, which follows hedge funds. That’s equivalent to the average per capita income of 184,000 Americans, according to my back-of-envelope calculations based on Census Bureau figures.
Mr. Paulson declined to comment on this tax break, but here’s how it works. These fund managers are compensated mostly with a performance bonus of 20 percent or more of the profits they make. Under this carried interest loophole, that 20 percent is eligible to be taxed at the long-term capital gains rate (if the fund’s underlying assets are held long enough) of just 15 percent rather than the regular personal income rate of 35 percent.
This tax loophole is also intellectually vacuous. The performance fee is a return on the manager’s labor, not his or her capital, so there’s no reason to give it preferential capital gains treatment.
“The carried interest loophole represents everyone’s worst fear about the tax system — that the rich and powerful get away with murder,” says Victor Fleischer, a law professor at the University of Colorado, Boulder, who has written about the issue. “Closing the loophole won’t fix the budget by itself, but it gets us one step closer to justice.”
At a time when the richest 1 percent of Americans have a greater collective net worth than the entire bottom 90 percent, there are other ways we could raise money while also making tax policy more equitable. The White House is backing some of them in its negotiations with Congress, but others aren’t even in play.
One important proposal has to do with founder’s stock, the shares people own in companies they found. Professor Fleischer has written an interesting paper persuasively arguing that founder’s stock is hugely undertaxed. It, too, is essentially a return on labor, not capital, and shouldn’t benefit from the low capital gains rate.
Likewise, Europe is moving toward a financial transactions tax on trades made in financial markets. That is something long championed by some economists — especially James Tobin, who won a Nobel Prize for his work — and it would also raise tens of billions of dollars at a time when it is desperately needed. It makes sense.
The larger question is this: Do we try to balance budget deficits just by cutting antipoverty initiatives, college scholarships and other investments in young people and our future? Or do we also seek tax increases from those best able to afford them?
And when Congressional Republicans claim that the reason for their recalcitrance in budget negotiations is concern for the welfare of ordinary Americans, look more closely. Do we really want to close down the American government and risk another global financial crisis to protect the tax bills of billionaires?
By: Nicholas Kristoff, Op-Ed Columnist, The New York Times, July 6, 2011
“Norquistism”: Republican Zeal Runs Amok
To watch Republicans in action today, in Washington and in legislatures around the country, is to be reminded of Casey Stengel’s amazed query to the 1962 Mets, whom he had the cosmic misfortune to manage: “Can’t anybody here play this game?”
In California, in Minnesota and here on Capitol Hill, Republican legislators in divided governments seem incapable of taking half or even three-fourths of a loaf — of recognizing when they’ve won. By holding out for more when they’ve already attained plenty, they run the risk of coming away with nothing for themselves or inflicting avoidable calamity on everyone else. As Daniel Bell once said of American socialists, they act as if they’re in but not of the world.
In California, for instance, where Republicans hold just over a third of the seats in each legislative house — enough to block any tax increase, which requires two-thirds support — Democratic Gov. Jerry Brown told reporters on June 16 that he was willing to submit to voters proposals to reduce both state pensions and business regulations if Republican lawmakers agreed to let voters also decide whether to extend some tax increases. Brown’s goal was to avoid having to cut more deeply into spending on schools, universities and medical care. California businesses, which have complained of overregulation for decades, were hot for the deal, but the
Republicans refused to budge. In consequence, in the state budget passed last week, without the tax extensions, the state’s public universities will have to raise tuition roughly 10 percent (on top of another 10 percent increase that will take effect in September); and the poor will pay more for medical care. Pensions and regulations will remain unrevised.
What makes the California Republicans’ intransigence so loony — “idiotic” is, I think, not too strong a term — is that they are likely to lose legislative seats as soon as next year as a result of redistricting, and they are sure to lose legislative seats over the next decade because of their ongoing estrangement of the state’s Latino voters. When Republicans drop beneath one-third representation in the statehouse, Democrats will be able to raise taxes without their support. In other words, this may well have been Republicans’ last chance to extract concessions they considered vital. And they blew it off.
What we have here is an extreme world view — let’s call it Norquistism — that ensures impasse, paralysis or perverse outcomes whenever control of government is divided. It’s the doctrine preached by GOP activist and lobbyist Grover Norquist, who trots around the country collecting pledges from GOP candidates and elected officials that commit them to never, ever raise taxes, no matter what they may be offered in return. In Minnesota, a state with a Democratic governor and a Republican legislature, Gov. Mark Dayton sought to raise taxes on only the relative handful of Minnesotans with annual incomes in excess of $1 million. The legislature opposed that, insisting on cuts (including to services for those with disabilities) that Dayton wouldn’t countenance. Absent a budget, most state services in Minnesota closed down on July 1; it’s not clear when, or how, some compromise can be reached to reopen the state.
In the nation’s capital, Republicans also seem to have lost their capacity for compromise — even when that compromise looks to be a GOP victory. Senate Republicans, for instance, have been urging President Obama since before he took office to finalize three trade accords — with South Korea, Colombia and Panama — and bring them before Congress. Obama has now done so, asking in return only that Republicans approve the renewal of Trade Adjustment Assistance, a program that aids workers who lose their jobs as a result of these kinds of trade deals. But Republicans are balking — boycotting last week’s meeting of the Senate Finance Committee at which these treaties were to be taken up — because they don’t like TAA. This is hardly a major program, mind you, but the GOP’s loathing of any program that provides government assistance to workers (who really shouldn’t need any assistance, as free trade is good for us all) has eclipsed its long-term commitment to American corporate priorities.
When zeal runs amok, the sense of proportion suffers. Today’s Republicans remind me of some leaders of the American Communist Party whom I got to know decades ago, after they’d left the fold. “We believed in the party line, in its infallibility, so completely,” one ex-commie told me, “that we’d forget the larger strategy for the momentary tactic.” So it was with Communists of yore; so it is with Republicans today.
By: Harold Meyerson, Opinion Writer, The Washington Post, July 5, 2011
Justifying Cuts: A Well-Used But Misleading Medicaid Statistic
“Cash-strapped states are also feeling the burden of the Medicaid
entitlement. The program consumes nearly 22 percent of states’ budgets today, and things are about to get a whole lot worse.”
— Sen. Orrin Hatch (R-Utah), June 23, 2011, at a hearing of the Senate Finance Committee
“Medicaid is the lion’s share of that spending burden as it now consumes about 22 percent of state budgets now and will consume $4.6 trillion of Washington’s budget over the next ten years.”
— Former Kentucky governor Ernest Lee Fletcher (R), June 23, 2011, at the same hearing
“Across the country, governors are concerned about the burgeoning cost of Medicaid, which in fiscal 2010 consumed nearly 22 percent of state budgets, according the National Association of State Budget Officers. That’s larger than what states spent on K-12 public schools.”
— Washington Post front page article, June 14, 2011
When a statistic is universally tossed around as a certified fact, it’s time to get suspicious.
Such is the case with this oft-cited statistic that 22 percent of state budgets is being gobbled up by Medicaid, the state-federal program that provides health coverage for the poor and the disabled. Medicaid supposedly is even dwarfing what is spent on educating children and teenagers.
But note the phrase “state-federal.” There’s billions of dollars in federal money involved, and the “22-percent” statistic obscures that fact. Let’s dig a little deeper into the numbers.
The Facts
Medicaid was a central part of President Lyndon Johnson’s “Great Society” initiative in the mid-1960s. Each state administers its own Medicaid program, but with federal oversight, federal requirements—and plenty of federal dollars. On average, the federal government provides 57 percent of Medicaid funds.
Initially, Medicaid was focused low-income Americans, but elderly nursing home care has also become a big part of it. The new health care law would also greatly expand eligibility to people up to 133 percent of the official poverty line.
There’s no question that the recession has put pressure on Medicaid spending, as more people lost jobs or income and so became eligible for coverage. The new requirements of the health care law also will boost Medicaid spending.
The assertion that Medicaid is 22 percent of state spending, and thus now exceeds education spending, comes from an annual survey of the National Association of State Budget Officers (NASBO). But if you dig into the report — if you just go to page
one — you will see that this number includes the federal contribution, in what
is known as “total funds.”
If you want to see what states themselves are spending on Medicaid —“general funds” — you have to use another set of statistics.
As NASBO says on page one, “For estimated fiscal 2010, components of general fund spending are elementary and secondary education, 35.7 percent; Medicaid, 15.4 percent; higher education, 12.1 percent; corrections, 7.2 percent; public assistance, 1.9 percent; transportation, 0.8 percent; and all other expenditures, 27.0 percent.”
In other words, without the federal dollars included, Medicaid falls to second place, far behind education. It turns out that on average, states spend 15.4 percent of their funds on Medicaid — not 22 percent.
Brian Sigritz, NASBO’s director of state fiscal studies, said, “You are correct that there are several different ways of looking at Medicaid spending that you can use. If you consider just general funds, K-12 easily remains the largest component of general fund spending, as it historically has been.”
Indeed, when you look at NASBO’s historical data (table three of this report), it becomes clear that Medicaid spending, as a proportion of general funds, has remained relatively consistent since 1995 — about 15 percent — in contrast to the popular image of being a drain on state budgets.
Sigritz said that the two figures provide a different picture of state spending. “General funds gives you a sense of spending deriving from state revenue, while total funds gives you a sense of total state expenditures,” he said. “Typically when you discuss overall state budgets you examine the various funding sources that go into them including general funds, other state funds, bonds, and federal funds.”
The Office of the Actuary for Medicare and Medicaid makes this distinction. The 2010 Actuarial Report for Medicaid notes the broad figure, but then takes pains to add: “This amount, however, includes all Federal contributions to State Medicaid spending, as well as spending from State general revenue funds and other State funds (which for Medicaid consists of provider taxes, fees, donations, assessments, and local funds).” The report concludes: “When only State general revenues are considered, however, Medicaid spending constitutes an estimated 16.2 percent of expenditures in 2009, placing it well behind education.”
Antonia Ferrier, a spokeswoman for Hatch, defended the 22-percent figure, noting its wide use. “It is part of their budgets, and there are many different streams of funding that fund those state budgets (including federal funding, taxes, etc.) that fund their many programs,” she said.
But Colleen Chapman, a spokeswoman for the Georgetown University Center for
Children and Families, a policy and research center, said, “In the current budget debate, the data are being misused to argue that the Medicaid program in states is out of control and needs to be cut dramatically, when in fact, Medicaid is still much less of state spending than education and has not grown, as a portion of state budgets, in any way close to the mammoth way that others argue it has.”
The Pinocchio Test
We will label this with one of our rarely used categories: TRUE BUT FALSE.
(We still need to get an appropriate icon for this one — suggestions are welcome.)
Yes, the 22-percent figure is a valid number. But it is being used in an inappropriate way, and therefore is misleading. Hatch and Fletcher are only the latest in a long line of public figures — and news outlets — who have seized onto this number without apparently realizing that it is the wrong statistic to use. If people want to understand the impact the Medicaid is having on state budgets, politicians should begin to use the 15-percent figure — or at the least offer a caveat to the 22-percent number. Otherwise, there might be some Pinocchios in their future.
By: Glenn Kessler, The Fact Checker, The Washington Post, July 5, 2011
“We Hold These Truths To Be Self Evident”: Real Patriots Pay Taxes
Some of our nation’s biggest corporations are planning a tax holiday and they want you to pick up the tab.
Actually, you already pay for their routine tax avoidance through the use of tax havens in Bermuda, the Cayman Islands and elsewhere. These accounting acrobatics cost the U.S. Treasury $100 billion a year. Now they want Congress to pass a special tax holiday for money they “repatriate” back to the United States.
There’s nothing patriotic about this repatriation being pushed by Google, Cisco, Pfizer and other companies in the Win America campaign. To sell the tax holiday, they claim it will produce a burst of jobs and investment. In fact, Congress passed a “one-time-only” tax holiday in 2004 with similar promises. Instead, it produced a burst of shareholder dividends and stock buybacks, which goosed the pay of CEOs.
Corporations laid off workers and shifted even more income and investment to offshore tax havens in the wake of the 2004 tax holiday.
“Why should we reward firms for successfully gaming the tax system when we in turn are called on to make up the missing tax revenues?” Edward Kleinbard, former chief of staff of Congress’s Joint Committee on Taxation, told Bloomberg. “Much of these earnings overseas are reaped from an enormous shell game: Firms move their taxable income from the U.S. and other major economies — where their customers and key employees are in reality located — to tax havens.”
A favorite accounting trick is transferring a patent from the U.S. parent company to a subsidiary — often a shell company — in a tax haven. Profits from the patent go largely untaxed offshore while the costs of development, marketing and management remain in the U.S., where they are taken as tax deductions.
Pfizer was the largest beneficiary of the last tax holiday, bringing $37 billion back to the United States and paying just $1.7 billion in federal corporate income taxes. It laid off 10,000 American workers in the following months. The U.S. is the world’s most profitable drug market and yet over the last three years, Pfizer — maker of Lipitor, Viagra and much more — has reported $7.9 billion in U.S. losses while claiming $37.8 billion in profits in the rest of the world. Pfizer, like the rest of Big Pharma, is heavily subsidized by taxpayer-funded research at the National Institutes of Health and elsewhere. It should not be rewarded with another tax holiday.
Bloomberg reported that “Google reduced its income taxes by $3.1 billion over three years by shifting income to Ireland, then the Netherlands, and ultimately to Bermuda.” What a corporate ingrate. Google would not exist without the Internet, and the Internet grew out of U.S. government research beginning in the 1960s. In the 1990s, the U.S. National Science Foundation funded the Digital Library Initiative research at Stanford University that Larry Page and Sergey Brin, now billionaires, developed into Google. Brin was also supported by an NSF graduate student fellowship.
Increasingly, U.S. multinational corporations want to benefit from government spending on education, infrastructure, research, health care and so on without paying for it. Today, large corporations pay, on average, 18 percent of their profits in federal income taxes and as a group contribute just 9 percent toward federal government bills, down from 32 percent in 1952. The Congressional Joint Committee on Taxation says a new tax holiday would cost $79 billion.
A dozen national and state business organizations led by Business for Shared Prosperity recently wrote members of Congress urging them to oppose the tax holiday. The letter said, “When powerful large U.S. corporations avoid their fair share of taxes, they undermine U.S. competitiveness, contribute to the national debt and shift more of the tax burden to domestic businesses, especially small businesses that create most of the new jobs.”
There is no excuse for repeating a policy that’s a proven failure. It would be even worse this time around, as corporations would redouble their efforts to shift profits overseas in anticipation of the next tax holiday. Congress should close the tax loopholes that reward companies for transferring U.S. profits, jobs and investment abroad — not encourage them.
Real patriots pay their fair share of taxes. They don’t run out on the bill.
By: Holly Sklar and Scott Klinger, CommonDreams.org, July 4, 2011
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