“A Rigged Democracy Produces A Rigged Economy”: Citizens United, Democracy For Sale
When the Supreme Court struck down the core of our country’s campaign finance laws in 2010, in the landmark Citizens United case, most of America didn’t take notice. After all, politicians already looked too cozy with the wealthy donors who bankrolled their elections. How much worse could it get?
Plenty. Even as super PAC spending was set to break the $100 million mark before Memorial Day, it was easy to consider corruption less pressing than issues like finding a job. But this election cycle is showing us how a rigged democracy produces a rigged economy — and how the ironically named Citizens United decision now stacks the deck against the 99 percent of Americans still working too hard to make ends meet.
How have things gone from bad to worse?
First, these “independent expenditures” are proving to be anything but independent. Restore Our Future is known openly as former Gov. Mitt Romney’s PAC, and he’s its chief fundraising draw. The PAC is staffed by former Romney aides, and its treasurer is Romney’s former general counsel from 2008. Oil billionaire Harold Hamm gave $985,000 to the “independent” PAC one month after Romney named him as chairman of his Energy Policy Advisory Group.
Second, their size is exploding. Romney’s super PAC alone spent $46 million before Memorial Day — more than all the outside groups combined in the past election cycle. This allowed Romney to outspend Rick Santorum’s grass-roots campaign by 400 percent during the pivotal Ohio primary — which Romney won by just 1 point.
Third, people writing million-dollar checks are not neutral observers without a financial stake in the policy debates of the day. As of mid-May, 15 organizations backed by these individuals had contributed more than $1 million each to Romney through his super PAC. Of those donors, 10 are hedge fund managers or investment holding companies that stand to profit handsomely from tax loopholes and financial deregulation that they are now actively promoting to Romney. This is about a return on investment. Small donors can’t afford to play at this table.
Restore Our Future then funnels these mega-donations into campaign ads with populist themes about job creation. But the real agenda is a disaster for middle-class and working-class Americans.
Consider the “carried interest tax loophole,” a special deal that exempts the fund managers who bankrolled the ad from paying the 35 percent income tax on the bulk of their compensation. Romney’s top donors instead pay a much lower 15 percent, and leave the middle class to pick up the $10 billion tab. A hedge fund manager with $100 million in gains could save as much as $25 million in taxes — not a bad return on the investment in Romney’s candidacy.
As consumers were taking it on the chin at the gas pumps this spring, oil speculators profited from the price spikes. And worse, a leaked document showed the new profits were funneled directly into ads attacking President Barack Obama for trying to close tax subsidies for big oil companies — thanks to Citizens United. This Orwellian twist was lost on most voters, because there’s no obligation to disclose the donors behind these attacks.
Before Citizens United, corporations were banned from making contributions to candidates running for federal office, and individuals were limited in how much money they could contribute. Citing this decision, an appellate court then effectively removed any limits on individual or corporate contributions to candidates, by allowing this money to go to groups clearly identified with the candidate. The court reasoned that contributions given to outside organizations could not be corruptive in the same way that money given directly to the candidates can be.
Now, super PACS are actively accepting unlimited contributions from individuals, unions and corporations. The vast majority of Americans have never had the influence of the powerful — but what was once an uneven playing field now resembles Mount Everest.
A Congress elected by the people can take immediate steps. The DISCLOSE 2012 Act will require super PACs to list their top donors as part of any advertisements and provide for more timely disclosure of all donors after large expenditures.
But the larger burden lies with the Supreme Court. A majority of its nine justices now or in the future must reclaim our democracy from the highest bidder and hand it back to the American people. This tightly rigged political process will only exacerbate the growing insecurity of our working and middle class.
This elections season, we would all be wise to tune out the flood of nasty political spots. But we must not ignore the buying and selling of influence it represents — and how this system silences the voices of the American people.
By: Tom Perriello and Amy Rosenbaum, Politico, May 29, 2012
The “Bane” Of His Existance: How Mitt Romney Stiff’s The IRS
Unlike Mitt Romney, most Americans who will pay their taxes today can’t afford fancy accountants. But Romney has reluctantly made public his tax returns, and thus shared valuable strategies to ensure that he pays a far lower rate than, say, Warren Buffett’s secretary. Citizens for Tax Justice recently waded through Romney’s 2010 return—in which his $22 million in income was miraculously taxed at just 13.9 percent—to come up with a handy primer for how you, too, can beat the IRS at its own game. To paraphrase:
1. Don’t work for a living
The tax rate on money earned actually working (“salaries and wages”) can be more than double the rate on money earned sitting around watching your investments go up in value (“capital gains”), thanks to the work of other people. Almost all of Romney’s income is taxed as capital gains.
2. If you work, disguise your compensation as capital gains
About half of the $15 million in capital gains and dividend income Romney reported in 2010 was actually compensation for his work at Bain Capital. But using a tax loophole favored by private-equity guys, he was able to get paid by taking equity stakes in deals that he put together (“carried interest,” in tax parlance) instead of in the proletarian form of a fully taxable salary. Bonus: This allowed Bain to avoid paying Medicare payroll taxes.
3. Give to charity—but not with cash, checks, or money orders
In 2010, Romney was able to write off $1.5 million worth of Domino’s Pizza stock he donated to a charity. It is likely that he originally received the stock as compensation from Bain, in which case the price he paid for it would have been close to zero. In this scenario, by donating the stock instead of selling it and donating the cash, Romney would have saved about $220,000 in taxes.
4. Give to charity—but not now
Romney’s return reports income from the W. Mitt Romney 1996 Charitable Remainder UniTrust. Not only is the trust tax exempt, but when Romney set it up 16 years ago, he got a tax deduction for making a charitable donation. Though the money in the trust is eventually supposed to go to charity, Romney can receive income from the trust for a number of years—quite possibly for the rest of his life.
5. Give to charity—your own
In 2010 Romney made a tax-deductible, $1.5 million donation to the Tyler Charitable Foundation, which he controls. Commanding your own foundation allows you to curry favor with political and business allies by donating money to their pet organizations and causes. For instance, in 2010 the Tyler Charitable Foundation donated $100,000 to to the George W. Bush Library.
6. Do not invest in America
Certain foreign investment vehicles allow you to avoid certain taxes. For example, Romney’s Individual Retirement Account could bypass the Unrelated Business Income Tax by investing through a foreign corporation. Though it’s hard to know whether Romney availed himself of those kinds of savings, he has invested substantially in foreign entities, including ones based in offshore tax havens such as Bermuda, the Cayman Islands, and Luxembourg.
7. Invest in sexy financial instruments
Romney earned $415,000 from an investment that gets special tax treatment: Through an accounting loophole, 60 percent of the profits from the investment are treated as long-term capital gains, a designation that has tax benefits, no matter how long the investment is held.
8. Borrow money to invest
While you can’t deduct interest from car loans or credit cards, you can write off interest on the money you borrow to make certain types of investments—for instance, if you borrow from a broker to buy stock (a “margin loan”). Portfolio management fees are also write-offs. A fellow like Romney, who makes his millions mainly from investments, could probably deduct a fair sum.
9. Push the limits of the law
When you engage in a type of transaction that the IRS views as potentially abusive, you must disclose it in a separate form. In 2010, Romney filed six such forms.
10. Be part of the 1 percent
When it comes to taxes, it costs money to save money. You’ll need to hire lawyers to help you set up tax-exempt charities and trusts or exploit offshore tax havens—and a professional money manager if you plan to invest in sexy financial instruments. It probably won’t be cost effective if you aren’t already rich, but any hard-working son of a governor can land a job at a private-equity firm and start getting paid in carried interest. Bonus: You might make enough money to one day run for president.
By: Josh Harkinson, Mother Jones, April 17, 2012
“Influence-Peddlers”: How Bain’s Lobbying Saved Mitt Romney Millions
Private equity titans like Bain Capital used K Street to preserve the GOP front-runner’s favorite—and most lucrative—tax loophole.
With the sting of defeat in the South Carolina primary still fresh at last week’s Republican presidential debate in Tampa, Mitt Romney slammed Newt Gingrich for his record as a consultant—or “historian,” in Newt-speak—for government mortgage-backer Freddie Mac.
But perhaps Romney should think twice before setting his sights on the former speaker’s lobbying-related past. That’s because the ex-governor has benefited handsomely from the influence-peddling of Bain Capital, the private equity firm he cofounded in 1983. Though he’s been gone from Bain for over a decade, Romney continues to rake in millions from accounts with the firm—and in 2007, he took Bain’s side in a key lobbying battle with Washington—one that saved him millions of dollars.
2007, as it turns out, was something of a watershed for private equity lobbying: In that year, lobbying expenditures for the industry practically tripled. The spike was the result of an industry-wide effort to preserve a number of tax giveaways for the finance industry and its CEOs—including the carried interest rule, a tax loophole that allows Romney and other private equity mavens to reduce their taxes by millions of dollars. Carried interest refers to the commission that private equity and hedge fund executives receive for managing investors’ money. Although commissions may seem like ordinary income to the rest of us, the carried interest loophole allows some money managers to claim this income as long-term capital gains, which are taxed at a rate much lower (15 percent) than the top tax rate for normal income (35 percent).
After Democrats won control of both the House and the Senate in the 2006 midterm elections, they advanced several pieces of legislation that threatened to end this lucrative quirk of the tax code and other tax policies that favor the rich. Mitt Romney, who made just over $20 million in investment income in 2010, wasn’t having any of it. During an August 2007 appearance on Kudlow & Company, Romney was asked what he thought of the effort to close the loophole. He wasn’t happy. “I want people to be able to save their money and invest in America’s economy tax-free,” Romney said. “I want to lower taxes. I want to lower marginal rates across the board. I want to lower taxes for corporations,” he told Kudlow.
Bain was doing its part to make Romney’s vision a reality. The firm spent $300,000 between August of 2007 and April of 2008 lobbying the House and Senate on bills that threatened the carried interest loophole. Along with other private equity titans like Kohlberg Kravis Roberts and Apollo Management, Bain and its ilk paid lobbying shops, public relations firms, and trade groups like Ogilvy and the Private Equity Growth Capital Council an estimated $15 million between January 2009 and April 2010 to convince lawmakers to keep the loophole alive. The force of those combined lobbying efforts kept the carried interest loophole wedged open, denying the federal government some $10 billion in revenues in the process. “Everyone who has looked at this boondoggle [of carried interest] thinks it’s an egregious giveaway,” Jacob Hacker, the co-author (with Paul Pierson) of Winner-Take-All Politics, says. “It still lives because of the lobbying of the industry, and in particular the PEGCC.”
From 1998 to 2006, private equity and investment firms spent $3 million a year lobbying Congress, according to the Center for Responsive Politics. Bain got into the game in 2007, registering with prominent Washington lobbying firms Public Strategies, Inc. and Akin Gump Strauss Hauer & Feld. To date, Bain has paid some $3 million to these firms to make sure corporate taxes stay low and CEOs remain fat and happy.
As the New York Times reported several weeks ago, Bain was a member of the Private Equity Growth Capital Council up until last year, when it abruptly ended its $1-million-a-year membership with the powerful trade group. Its reasons for doing so remain unclear. (PEGCC did not respond to a request for comment.)
Investment fund managers and former CEOs like Mitt Romney suggest that taxing their carried interest as income would crimp investments, and, ultimately, kill jobs. But as Howard Gleckman, a tax policy expert at the Urban Institute, has found, there is little evidence to support that claim. “Losing a couple percentage points off your returns isn’t going to change things very much,” Gleckman says. “Taxing carried interest as if it were wages…wouldn’t really affect these deals very much.”
Now that a small sample of Romney’s tax returns is out in the open, voters may be asking more questions about how policies like the carried interest rule work. Josh Kosman, author of The Buyout of America: How Private Equity Is Destroying Jobs and Killing the American Economy, says that’s terrifying for the private equity world. “The private equity industry exists because of tax gimmicks,” Kosman argues. “They want to convince people they create value because if anyone started looking at it, the tax rates don’t make any sense, and they cost the government a lot of money.”
As Hacker explains, today’s favorable tax treatment towards capital gains dates back to the late 1970s, when the lobbying might of business groups like the US Chamber of Commerce successfully sliced the tax on capital gains in half. The Tax Reform Act of 1986 brought the rate back into line with the rate on ordinary income, but business lobbies spent the next decade knocking it back down. “For an industry that’s held up as a paragon of individual entrepreneurship, private equity is strikingly dependent on favorable tax policies,” Hacker said.
Of course, private equity isn’t the exclusive terrain of one party or the other. As Hacker and Pierson outlined in their book, Sen. Charles Schumer (D-N.Y.) has been one of the carried interest loophole’s most ardent defenders. And as Kosman points out, four of the past eight Treasury secretaries have direct ties to the private equity industry.
All of this, of course, could pose a huge a problem for Romney—so much so that his campaign recently suggested that he might be open to reconsidering the carried interest loophole if he were to be elected president. Although Bain did not start lobbying until some eight years after Romney left, his just-released tax records indicate that he still collects significant investment income from the firm. Bain’s gain, then, has clearly been Romney’s as well—and the candidate has publicly endorsed the same policies the company has backed.
So when Bain’s lobbyists have tried to sway the political system in Washington, Romney has gained. Maybe he ought to be careful when denigrating the influence peddlers in the nation’s capital.
By: Siddhartha Mahanta, Editorial Fellow, Mother Jones, January 30, 2012
In Cantor, Hedge Funds And Private Equity Firms Have Voice At Debt Ceiling Negotiations
As the debt-ceiling talks tick down to the Aug. 2 deadline, leading the opposition to any deal that includes higher taxes is the new tribune of rank-and-file House Republicans: Majority Leader Eric Cantor of Virginia.
Cantor’s pivotal role marks a rapid rise for the 48-year-old from the Richmond suburbs. It also represents a major coup for sectors of the investment community that Cantor has been striving to assist for years — on the same tax issues that have been at stake this month. And so far, he has prevailed on those issues.
Among the White House’s top demands for new revenue are changes in the tax code affecting hedge funds, private equity firms and real estate partnerships, which would raise an estimated $20 billion over 10 years.
For the past four years, Cantor has taken the lead in the House on fighting the same changes. He also has been one of the top recipients of contributions from those industries — last year, his two fundraising committees took in nearly $2 million from securities and investment firms and real estate companies, more than double the figure for Boehner (R-Ohio).
The hedge fund and private equity proposals were at the center of Cantor’s decision to exit talks with Vice President Biden this month. Since then, the prospect for any immediate tax increases has declined, with the focus turning to spending cuts and broader tax reform postponed.
This dismays Democrats, in part because Cantor has cast his defense of the investment tax treatment as part of the broader tea party-fueled anti-tax orthodoxy. To Democrats, Cantor embodies the convergence of tea party and business interests, which is often obscured by the movement’s anti-Wall Street rhetoric.
“This [anti-tax stance] isn’t all coming up from the grass roots,” said Rep. Chris Van Hollen (D-Md.). “This goes to some longtime cozy relationships between House Republicans and hedge fund managers in the financial sector.”
A spokesman for Cantor noted that he always has opposed raising the investment taxes in question but declined to comment further.
Cantor has said repeatedly that Obama and other Democrats are exaggerating the value of closing tax loopholes for financiers. Although Cantor opposes closing them to raise revenue, he says he is open to doing so as part of broader tax reform that lowers overall rates.
“So I know it makes for good politics to throw the shiny ball out there . . . that somehow Republicans are wed to that kind of policy to sustain these preferences, when all along, in our budget and in our plan, we have said we’re for tax reform, we have said we’re for bringing down rates on everybody,” he said on the House floor last week.
Jennifer Thompson, a political science professor at Virginia Commonwealth University and former Republican campaign operative, said Cantor’s longtime opposition to the investment tax provisions is a sincere reflection of his conservatively inclined district.
“Eric Cantor is a Virginian and you can’t separate too much from that fact,” she said. “His constituents are very much aligned with the no taxes and being back in the black and that’s what Eric Cantor represents.”
Lawmakers from both parties have cultivated the investment community, but Cantor, whose wife is a former Goldman Sachs vice president, has had particularly strong connections. In 2006, his campaign committee and his leadership PAC, established to support other Republicans, collected $682,500 from securities and investment and real estate firms, far more than any other Republican on the Ways and Means Committee and nearly double the take of then-Chairman Charles B. Rangel (D-N.Y.).
Cantor sprang into action in 2007, when Democrats proposed the two major tax code changes that have been at the center of the debt talks. He formed the Coalition for the Freedom of American Investors and Retirees and invited several dozen industry groups to the opening meeting.
One of the changes revolves around “carried interest” — the pay managers receive for gains they produce for investors — which is taxed at the long-term capital gains rate of 15 percent. Many tax experts argue that it should be taxed at the 35 percent rate for ordinary income because it is the managers’ compensation for services performed, not the result of their own capital investment.
Another proposal would tax profits from the sale of hedge funds as ordinary income.
Since 2007, Cantor has railed against the proposals, saying that the carried interest proposal would “raise taxes on innovation and opportunity in America” and harm “mom and pop” businesses.
Democrats dismiss that argument. “There is virtually no evidence that having these people pay ordinary income would inhibit business development,” said Rep. Sander M. Levin (Mich.).
The proposals passed the House, which was then under Democratic control, but fell short of a filibuster-proof majority in the Senate last year.
Cantor’s support from the industries soared. Contributions to his two campaign committees from the real estate and securities and investment sectors jumped to $916,307 in 2008 and doubled to $1.85 million in 2010, according to the Center for Responsive Politics.
The top 10 contributors to Cantor’s two committees in 2010 included three investment firms: employees at SAC Capitol Advisers, the hedge fund founded by Steven Cohen, gave $64,964; those at the private equity firm KKR gave $52,600; and those at Elliott Management, the hedge fund founded by Paul Singer, gave $44,198. The Blackstone Group, the hedge fund run by Steve Schwarzman, and its employees gave $26,100.
The main private equity and hedge fund trade groups have ramped up their lobbying amid the debt talks, spending $4.2 million this year.
By: Alec MacGillis, The Washington Post, July 25, 2011
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
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