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“Me, Pay Taxes?”: How Wall Street Avoids Paying Its Fair Share in Taxes

Like many Americans, you’ve probably just spent a good bit of time figuring out how much you owe in taxes. Most of us fill in the forms and follow the rules. But the rules are a lot more flexible for the largest U.S. corporations, and especially for the major Wall Street financial institutions and their top executives and owners. Banks and financial companies capture more than 30 percent of the nation’s corporate profits, but manage to pay only about 18 percent of corporate taxes while contributing less than 2 percent of total tax revenues, according to the Bureau of Economic Analysis and the International Monetary Fund.

What’s more, the owners and senior managers of our major financial institutions can exploit the loopholes in our individual income tax on a far greater scale than the rest of us. Below is a short guide to a few of the major ways that Wall Street avoids paying its fair share.

But I earned it in the Cayman Islands!: American corporations have developed a panoply of ways to route income through low-tax foreign subsidiaries. This practice goes well beyond the financial sector. Indeed, the latest publicized example involves a manufacturing firm, Caterpillar. Because of the inherently “placeless” nature of many financial transactions, however, financial institutions and their investors are among those in the best position to move income around in this fashion. The major Wall Street banks have thousands of subsidiaries in dozens of countries, all capable of engaging in transactions that enjoy the full guarantee of the U.S. parent company even as they take advantage of the tax or legal advantages of their foreign incorporation. Transactions in the multi-trillion dollar global derivatives market, for example, can pretty much be relocated anywhere in the world with the touch of a computer keyboard.

A way to crack down on the massive potential for tax avoidance this creates would be to simply rule that financial transactions backed up by a U.S. firm are in effect U.S. transactions and subject to U.S. tax law. Whatever international tax rules are designed to protect real manufacturing activity in other jurisdictions from inappropriate taxation should not apply to the passive income gained from financial activities that can easily be transacted from anywhere in the world. For some years U.S. tax law attempted to follow this principle, but starting in 1997 an “active financing” loophole made it much easier for multinationals to avoid taxation on financial transactions by moving profits to low-tax foreign subsidiaries. Combined with so-called “look through” provisions, these international tax loopholes mean that U.S. multinationals get to look around the world for the cheapest places to locate their earnings.

It’s not work, it’s investment!: The U.S. taxes capital gains on investments much more lightly than it taxes ordinary income. The details get complicated, but in general the profit on investments is only taxed at a maximum 15 to 20 percent rate, as opposed to a rate of almost 40 percent for high levels of ordinary income. Though its stated goal is to encourage investment and saving, a tax differential of this size can be seen as a subsidy to financial speculation, since it penalizes wage work compared to trading profits, and accrues to any investment held longer than a year, whether or not it can be shown to actually create jobs. In addition to the broad impact of the tax differential, the gap in rates creates a windfall for wealthy Wall Street executives in a position to maximize its benefits. Those who work for big hedge and private equity funds are in the very best position to do that, as they take much of their work income from the investment returns of the fund. Since they are legally permitted to classify this “carried interest” income as capital gains, they can cut their tax rates effectively in half – a windfall that costs the federal government billions of dollars a year, and means that some of the wealthiest individuals in America pay a lower tax rate on their earnings than an upper-middle-class family might.

Who, me, sales tax?: It’s easy to forget at this time of year when we’re all working on our income tax, but the sales tax is also one of the major taxes you pay each year. State and local governments take in more than $460 billion a year through sales taxes charged on everything from cars to candy bars. But Wall Street speculation isn’t charged a sales tax at all. Indeed, you’ll pay more sales tax for your next pack of gum than all the traders on Wall Street will pay for the billions of transactions they undertake every year. The non-partisan Joint Tax Committee of the U.S. Congress estimates that a Wall Street speculation tax of just three basis points – three pennies per $100 of financial instruments bought and sold in the financial markets – would raise almost $400 billion over the next decade. What’s more, such a fee would significantly discourage the kind of predatory trading strategies recently highlighted by author Michael Lewis, strategies that depend on trading thousands of times in a second in order to manipulate stock markets and extract tiny profits from each trade.

This only starts the list of ways Wall Street financial institutions and the people who run them manipulate the system and avoid paying their fair share; there are plenty more, including the use of complex financial derivatives to shelter individual income, the variety of techniques used by hedge and private equity fund partners to avoid effective IRS enforcement, and the continuing tax deductibility of corporate pay above $1 million, as long as it is sheltered under a so-called “performance incentive.” Tax time would be a good time for our elected representatives to get to work closing some of these gaps and loopholes, and leveling the playing field.

 

By: Marcus Stanley, Economic Intelligence, U. S.News and World Report, April 16, 2014

April 18, 2014 Posted by | Corporate Welfare, Tax Loopholes, Tax Revenue | , , , , , , | Leave a comment

“The Sentiment Is Swinging”: Unanimous Senate Vote Bolsters Movement To Break Up Big Banks

It’s nearly impossible to get 99 U.S. senators to agree on anything.

But this past weekend, 99 senators agreed to send a non-binding message that the $83 billion subsidy “too big to fail” banks get from the government needs to end. The measure was co-sponsored by senators Sherrod Brown (D-OH) and David Vitter (R-LA).

The implicit subsidy first came to light in February when a Bloomberg News report found that “recurrent bailouts of the largest financial institutions have given [big banks] a unique advantage: They get a break on their borrowing costs, because creditors expect taxpayers to support them whenever they get into trouble.”

Shortly thereafter, Attorney General Eric Holder made the shocking admission that the Justice Department exercises restraint in prosecuting big banks for fear of shocking the global financial system.

“I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy,” Holder said, during testimony to the Senate Banking Committee.

Now all of the Senate’s Republicans have joined with senators Brown and Elizabeth Warren (D-MA) — who have long warned of the big banks’ continued ability to wreck havoc on the economy — to call for an end to the implicit subsidy.

“I’m glad that Republicans and Democrats can agree: ‘Too big to fail’ needs to end, and these big-bank subsidies make no sense,” Senator Warren said.

Bank lobbyists have denied that the subsidy exists. But as a Bloomberg editorial notes, they’ve rejected any steps that would prevent the government from having to serve as their backstop in case of a crisis.

“If big banks don’t get a subsidy on their debt, it’s hard to understand why they’re so adamantly opposed to measures, such as increased capital requirements, that would put a limit on their borrowing,” the editors noted. “Large banks commonly borrow $25 or more for each $1 in equity — or capital — they get from their shareholders, compared with less than 50 cents per $1 of equity for the average U.S. corporation.”

Financial reform following the financial crisis was weakened by bank lobbying. As Senator Dick Durbin (D-IL) noted at the time, the “banks own the place.” And by “the place,” he meant Congress.

This vote shows the sentiment is swinging against the banks. Whether senators are willing to vote against them when actual legislation is on the line still remains to be seen.

 

By: Jason Sattler, The National Memo, March 25, 2013

March 26, 2013 Posted by | Banks, Financial Reform | , , , , , , , | 1 Comment

“Exceptions, Exemptions And Loopholes”: How J.P. Morgan Chase Has Made The Case For Breaking Up The Big Banks

J.P. Morgan Chase & Co., the nation’s largest bank, whose chief executive, Jamie Dimon, has lead Wall Street’s war against regulation, announced Thursday it had lost $2 billion in trades over the past six weeks and could face an additional $1 billion of losses, due to excessively risky bets.

The bets were “poorly executed” and “poorly monitored,” said Dimon, a result of “many errors, “sloppiness,” and “bad judgment.” But not to worry. “We will admit it, we will fix it and move on.”

Move on? Word on the Street is that J.P. Morgan’s exposure is so large that it can’t dump these bad bets without affecting the market and losing even more money. And given its mammoth size and interlinked connections with every other financial institution, anything that shakes J.P. Morgan is likely to rock the rest of the Street.

Ever since the start of the banking crisis in 2008, Dimon has been arguing that more government regulation of Wall Street is unnecessary. Last year he vehemently and loudly opposed the so-called Volcker rule, itself a watered-down version of the old Glass-Steagall Act that used to separate commercial from investment banking before it was repealed in 1999, saying it would unnecessarily impinge on derivative trading (the lucrative practice of making bets on bets) and hedging (using some bets to offset the risks of other bets).

Dimon argued that the financial system could be trusted; that the near-meltdown of 2008 was a perfect storm that would never happen again.

Since then, J.P. Morgan’s lobbyists and lawyers have done everything in their power to eviscerate the Volcker rule — creating exceptions, exemptions, and loopholes that effectively allow any big bank to go on doing most of the derivative trading it was doing before the near-meltdown.

And now — only a few years after the banking crisis that forced American taxpayers to bail out the Street, caused home values to plunge by more than 30 percent and pushed millions of homeowners underwater, threaten or diminish the savings of millions more, and send the entire American economy hurtling into the worst downturn since the Great Depression — J.P. Morgan Chase recapitulates the whole debacle with the same kind of errors, sloppiness, bad judgment, excessively risky trades poorly-executed and poorly-monitored, that caused the crisis in the first place.

In light of all this, Jamie Dimon’s promise that J.P. Morgan will “fix it and move on” is not reassuring.

The losses here had been mounting for at least six weeks, according to Morgan. Where was the new transparency that’s supposed to allow regulators to catch these things before they get out of hand?

Several weeks ago there were rumors about a London-based Morgan trader making huge high-stakes bets, causing excessive volatility in derivatives markets. When asked about it then, Dimon called it “a complete tempest in a teapot.” Using the same argument he has used to fend off regulation of derivatives, he told investors that “every bank has a major portfolio” and “in those portfolios you make investments that you think are wise to offset your exposures.”

Let’s hope Morgan’s losses don’t turn into another crisis of confidence and they don’t spread to the rest of the financial sector.

But let’s also stop hoping Wall Street will mend itself. What just happened at J.P. Morgan – along with its leader’s cavalier dismissal followed by lame reassurance – reveals how fragile and opaque the banking system continues to be, why Glass-Steagall must be resurrected, and why the Dallas Fed’s recent recommendation that Wall Street’s giant banks be broken up should be heeded.

 

By: Robert Reich, Robert Reich Blog, May 10, 2012

May 11, 2012 Posted by | Banks | , , , , , , , , | Leave a comment

Soaring Inequality: “It’s Time To Take The Crony Out Of Capitalism”

Whenever I write about Occupy Wall Street, some readers ask me if the protesters really are half-naked Communists aiming to bring down the American economic system when they’re not doing drugs or having sex in public.

The answer is no. That alarmist view of the movement is a credit to the (prurient) imagination of its critics, and voyeurs of Occupy Wall Street will be disappointed. More important, while alarmists seem to think that the movement is a “mob” trying to overthrow capitalism, one can make a case that, on the contrary, it highlights the need to restore basic capitalist principles like accountability.

To put it another way, this is a chance to save capitalism from crony capitalists.

I’m as passionate a believer in capitalism as anyone. My Krzysztofowicz cousins (who didn’t shorten the family name) lived in Poland, and their experience with Communism taught me that the way to raise living standards is capitalism.

But, in recent years, some financiers have chosen to live in a government-backed featherbed. Their platform seems to be socialism for tycoons and capitalism for the rest of us. They’re not evil at all. But when the system allows you more than your fair share, it’s human to grab. That’s what explains featherbedding by both unions and tycoons, and both are impediments to a well-functioning market economy.

When I lived in Asia and covered the financial crisis there in the late 1990s, American government officials spoke scathingly about “crony capitalism” in the region. As Lawrence Summers, then a deputy Treasury secretary, put it in a speech in August 1998: “In Asia, the problems related to ‘crony capitalism’ are at the heart of this crisis, and that is why structural reforms must be a major part” of the International Monetary Fund’s solution.

The American critique of the Asian crisis was correct. The countries involved were nominally capitalist but needed major reforms to create accountability and competitive markets.

Something similar is true today of the United States.

So I’d like to invite the finance ministers of Thailand, South Korea and Indonesia — whom I and other Americans deemed emblems of crony capitalism in the 1990s — to stand up and denounce American crony capitalism today.

Capitalism is so successful an economic system partly because of an internal discipline that allows for loss and even bankruptcy. It’s the possibility of failure that creates the opportunity for triumph. Yet many of America’s major banks are too big to fail, so they can privatize profits while socializing risk.

The upshot is that financial institutions boost leverage in search of supersize profits and bonuses. Banks pretend that risk is eliminated because it’s securitized. Rating agencies accept money to issue an imprimatur that turns out to be meaningless. The system teeters, and then the taxpayer rushes in to bail bankers out. Where’s the accountability?

It’s not just rabble-rousers at Occupy Wall Street who are seeking to put America’s capitalists on a more capitalist footing. “Structural change is necessary,” Paul Volcker, the former chairman of the Federal Reserve, said in an important speech last month that discussed many of these themes. He called for more curbs on big banks, possibly including trimming their size, and he warned that otherwise we’re on a path of “increasingly frequent, complex and dangerous financial breakdowns.”

Likewise, Mohamed El-Erian, another pillar of the financial world who is the chief executive of Pimco, one of the world’s largest money managers, is sympathetic to aspects of the Occupy movement. He told me that the economic system needs to move toward “inclusive capitalism” and embrace broad-based job creation while curbing excessive inequality.

“You cannot be a good house in a rapidly deteriorating neighborhood,” he told me. “The credibility and the fair functioning of the neighborhood matter a great deal. Without that, the integrity of the capitalist system will weaken further.”

Lawrence Katz, a Harvard economist, adds that some inequality is necessary to create incentives in a capitalist economy but that “too much inequality can harm the efficient operation of the economy.” In particular, he says, excessive inequality can have two perverse consequences: first, the very wealthy lobby for favors, contracts and bailouts that distort markets; and, second, growing inequality undermines the ability of the poorest to invest in their own education.

“These factors mean that high inequality can generate further high inequality and eventually poor economic growth,” Professor Katz said.

Does that ring a bell?

So, yes, we face a threat to our capitalist system. But it’s not coming from half-naked anarchists manning the barricades at Occupy Wall Street protests. Rather, it comes from pinstriped apologists for a financial system that glides along without enough of the discipline of failure and that produces soaring inequality, socialist bank bailouts and unaccountable executives.

It’s time to take the crony out of capitalism, right here at home.

By: Nicholas D. Kristof, Op-Ed Columnist, The New York Times, October 26, 2011

October 27, 2011 Posted by | Banks, Class Warfare, Conservatives, Consumers, Corporations, Economic Recovery, Financial Reform, GOP, GOP Presidential Candidates, Government, Income Gap, Lawmakers, Middle Class, Mortgages, Republicans, Unions | , , , , , , , , , | Leave a comment

Standard And Poor’s Should Be Embarrassed

The United States is simply not at risk of default. Default is impossible for a sovereign currency issuer.

The Standard & Poor’s rating firm should be embarrassed. If there is any political judgment at work here, it is S&P. falling for politically motivated scare mongering. But given its track record with mortgage securities and collateralized debt obligations, why should we be surprised to see a rating agency relying on conventional wisdom rather than analysis?

The whole premise of the rating is incorrect. The U.S. may eventually experience unacceptable levels of inflation, but the experience of Japan shows that stop-and-start fiscal stimulus is more likely to result in protracted near-term deflation.

Every time Japan tried to lower its public-debt-to-gross-domestic-product ratio by cutting spending, the resulting drop in economic activity actually made that ratio worse. We are seeing the same results in Ireland and Latvia. The United Kingdom tried the same experiment 10 times in the last 100 years, and every time it got the same results: cutting spending to reduce budget deficits results in a fall in G.D.P. that makes the debt burden worse, not better.

The remedy should be to get private sector debt loads down via encouraging debt restructuring and write-offs, and using well targeted fiscal stimulus to offset the impact of those efforts. But S&P instead would have us do the economic equivalent of trying to cure an infection by using leeches.

Misguided cures killed a lot of patients and are killing a lot of economies.

By: Yves Smith, Writer for Naked Capitalism. Original article appeared in The New York Times, April 18, 2011

April 19, 2011 Posted by | Capitalism, Congress, Conservatives, Corporations, Debt Ceiling, Debt Crisis, Economic Recovery, Economy, Federal Budget, Financial Institutions, Financial Reform, Government, Government Shut Down, Ideology, Lawmakers, Lobbyists, Media, Mortgages, Politics, Pundits, Standard and Poor's | , , , , , , , , , , | Leave a comment

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