“Victimizing America”: Tax Loophole Benefiting Romney’s Estate Costs U.S. $1 Billion Over Ten Years
According to Bloomberg News, Mitt Romney is taking advantage of a tax loophole to pass off a fortune to his children without paying taxes on it. According to administration figures, this loophole costs the government $1 billion over a ten-year budget window:
In January 1999, a trust set up by Mitt Romney for his children and grandchildren reaped a 1,000 percent return on the sale of shares in Internet advertising firm DoubleClick Inc.
If Romney had given the cash directly, he could have owed a gift tax at a rate as high as 55 percent. He avoided gift and estate taxes by using a type of generation-skipping trust known to tax planners by the nickname: “I Dig It.” […]
While Romney’s tax avoidance is both legal and common among high-net-worth individuals, it has become increasingly awkward for his candidacy since the disclosure of his remarks at a May fundraiser. He said that the nearly one-half of Americans who pay no income taxes are “dependent upon government” and “believe that they are victims.” […]
The Obama administration estimates that closing the loophole Romney used would bring the federal government almost $1 billion in the coming decade.
One analyst said that $1 billion is a “laughable” under-estimate of the loophole’s effect, as “a single billionaire could pay $500 million more in estate taxes if these trusts are shut down.”
It’s unclear whether Romney would close this particular loophole, since he refuses to divulge details about his tax plan. However, he has been upfront about his desire to eliminate the estate tax, which only affects the richest Americans. That tax cut would save the heirs of the Koch and Adelson fortunes billions of dollars. As ThinkProgress detailed, the lion’s share of tax breaks doled out in the U.S. go to the very rich.
By: Pat Garofalo, Think Progress, September 27, 2012
“Tax-Payer Financed Capitalism”: The Great American Tax Debate Misses The Point
Casting the tax debate as an argument in which liberals want to use the tax system to reduce income inequality after the fact by taxing the wealthy at higher rates than middle and lower income classes, while conservatives favor flat taxes that tax rich and poor at the same rate, misses the main point. Deregulation of the financial system over the last 35 years and tax preferences that benefit corporations and wealthy individuals have done much to increase the before-tax incomes of the top 1 percent. An army of tax accountants, many of them recruited from the IRS, has figured out how to push the envelope on tax avoidance for the big businesses and wealthy individuals that can afford their high-priced services. For these folks, tax accounting has been transformed from a service that makes sure that required taxes are paid to a profit center that manipulates the tax code to generate huge returns at the expense of the tax-paying public. Increasingly what we see in the United States is the growing importance of tax-payer financed capitalism.
There is no economic reason that the debt taken on by corporations should be treated differently in the tax code from the equity invested by shareholders, but it is. Corporations get to deduct the interest paid on debt from their earnings, thus reducing the corporate income tax they have to pay. The tax code also provides an incentive for private equity firms, which plan to hold companies they acquire for their portfolios for just a few years, to load these companies with debt. In good times, this greatly increases the returns to investors. In poor economic conditions, this greatly increases the risk of financial distress and even bankruptcy, and imposes great costs on workers, creditors and communities. For investors with a time horizon measured in years and not decades, this is a risk worth taking for the promise of higher returns.
Tax preferences mean that income from owning stock is taxed at a far lower rate than income from working—a point made by Warren Buffet who famously pointed out that his secretary pays a higher tax rate than he does. The fiction that bonuses earned by partners in private equity and hedge fund firms is ‘carried interest’ that should be taxed at the lower rate on earnings from owning stock, rather than at the higher rate on ordinary income that ordinary workers and managers pay on their bonuses, boosts the income and wealth of these already wealthy economic players.
The use of aggressive tax avoidance schemes is rampant among big businesses and wealthy individuals. Setting up a subsidiary that lives in a file drawer in a tax haven and owns the company’s intellectual property and collects the royalties on it, or that owns the loans the company has made and collects the interest, allows financial institutions, pharmaceutical companies, and IT companies to park their profits outside the United States and defer taxes on this income indefinitely while waiting for a tax holiday to bring their profits home. Setting up so-called blocker corporations in offshore tax havens to launder taxable income for foreigners and pension funds, and turn it into nontaxable income is another favorite scheme.
Tax preferences and tax loop holes enrich the already wealthy and increase their incomes while starving the country of much needed tax revenue. The meaning of this rise in tax-payer financed capitalism is that the rest of us must either pay higher taxes or do without necessary services.
By: Eileen Appelbaum, U. S. News and World Report, September 19, 2012
“Phony Hawkery”: Paul Ryan Is A Conservative Ideologue Who Couches “Right Wing Social Engineering”
This is something that other people have mentioned, and Jamelle brings up in his extremely helpful post about Paul Ryan, but it really needs to be emphasized: Paul Ryan is not a “deficit hawk.” No matter how many times the news media tell us, it doesn’t make it true. As I’ve said before, you can’t call yourself a deficit hawk if the only programs you want to cut are the ones you don’t like anyway. Show me someone who’s willing to cut programs he favors (Ryan isn’t), and would actually take potentially painful measures to balance the budget (Ryan wouldn’t), and that’s a deficit hawk. Ryan, on the other hand, is a conservative ideologue who couches what Newt Gingrich appropriately called “right-wing social engineering” in a lot of talk about making tough choices. But I’ve never actually seen Paul Ryan make a “tough” choice, at least one that was tough for him. There’s nothing “tough” about a conservative Republican who tells you he wants to slash Medicare and Medicaid, increase defense spending, and cut taxes for the wealthy. That’s like Homer Simpson telling you he’s making the tough choice to skip the salad and eat three dozen donuts instead.
But oh boy, have the media ever bought into the idea of Ryan as the courageous budget-cutter. “A Beltway Budget Hawk Gets a Chance to Sell Vision” says The Wall Street Journal. “Paul Ryan: Hawk on Budget and Tea Party Darling” says the Philadelphia Inquirer. “We know Paul Ryan is a budget hawk. But what about other issues?” says the Christian Science Monitor. And that’s just a few headlines; there are hundreds of stories referring to Ryan as a “fiscal hawk,” a “budget hawk,” and a “deficit hawk.”
So why does he get described this way so often? I think it’s because the establishment media have become devoted to a particular narrative, which says that the country is deeply threatened by the future growth of Social Security and Medicare, and anyone who has the “courage” to propose cuts to those programs is a hero (Time‘s Michael Grunwald did an excellent examination last year of all kinds of people weirdly praising Ryan’s courage). And even if, like Ryan, you also want to slash taxes and increase the deficit, you’re still a hero.
It’s strange how you never see the members of the congressional Progressive Caucus, who want to cut defense spending and bring in more tax revenues than Ryan does, described as “deficit hawks,” or, heaven forbid, “courageous.” Representative Jan Schakowsky, for instance, put out a plan that balances the budget in a much shorter amount of time than Paul Ryan’s plan, but does so primarily through a combination of tax increases and defense cuts. Nobody calls Schakowsky a “deficit hawk” or praises her “courage” on fiscal issues, even though her proposal is far more realistic and less cruel than Ryan’s. Could it have something to do with the fact that your average Washington 1 percenter actually thinks slashing programs for the poor and cutting taxes for the wealthy is a smashing idea?
By: Paul Waldman, Contributing Editor, The American Prospect, August 13, 2012
“A-Dynamic Scoring”: Republicans Don’t Like The CBO, Except For When They Do
Rep. Tom Price (R-Ga.) has no shortage of charts, bullet points and studies to back up the GOP’s tax strategy, all of which he laid out Tuesday afternoon before a room of reporters. But, perhaps most prominently, Price wielded numbers from the Congressional Budget Office to make the case for extending all the Bush tax cuts permanently, as the House is poised to vote on this week.
“As the Congressional Budget Office has said, the growth rate if these [tax hikes] go into effect is 0.5 percent,” Price told reporters. “If we’re able to keep the rates the same, the growth rate is 4.4 percent.”
It’s not surprising that a legislator would rely on numbers from the CBO, given the office’s long-standing reputation as a non-partisan, independent scorekeeper. But in the next breath, Price dismissed another major finding from the very same number crunchers.
When asked how the GOP would make up for the huge increase in the deficit that would result from making the Bush tax cuts permanent—which the CBO estimates will reduce revenues by $4.6 trillion—Price flatly denied that the numbers were valid. “We don’t believe that keeping tax rates as they are right now costs money,” he said. Instead, he explained, preserving all of the Bush tax cuts would spur tremendous economic growth that would quickly fill the deficit gap. “What happens when the economy grows, is the federal government actually gets more tax revenue.”
So how is it possible to tell which CBO numbers to trust? I asked Price, pointing out the discrepancy. “The CBO is constrained by rules, in some instances,” he explained. “Sometimes the rules allow them to have more accurate information, in others they don’t.” When it comes to analyzing tax revenue, the CBO must follow the guidance of the 1974 Budget Act, which Republicans like Price believe is flawed. Instead, they’ve long advocated for what’s known as “dynamic scoring” to account for the revenue impact of the economic growth they believe that tax cuts will accelerate.
Why, then, were the 1974 rules for scoring taxes imposed in the first place? Were people just misinformed? Price shrugged, pointing out that Republicans on the Budget committee have tried to change the rules 10 separate times.
In fact, the Bush administration tried using the GOP’s preferred dynamic scoring method to look at the very same Bush tax cuts in 2006. But the results disappointed conservatives: There wasn’t the strong correlation between growth and tax cuts they had expected, and there were far lower levels of growth attributed to the tax cuts than Republicans had claimed, particularly when they weren’t offset by other budget cuts. Even Doug Holtz-Eakin, then a GOP-appointed CBO director, didn’t clamor for more dynamic scoring thereafter.
But that hasn’t stopped Republicans from using the logic of dynamic scoring to make the case for tax cuts that aren’t offset by anything else, as they’re proposing once more. It’s a position that everyone from Tom Price to Mitt Romney has embraced, whatever CBO says to the contrary.
By: Suzy Khimm, The Washington Post, August 1, 2012
“Implausible Assumptions”: Mitt Romney’s Tax Promises Are Mathematically Impossible
The sub-campaign to define Mitt Romney’s tenure at Bain Capital, as I never tire of pointing out, is merely about softening up the Republican nominee for the major fight of the campaign: Obama’s charge that his economic program is merely a retread of the Bush-era program of tax cuts for the rich. Over several months, Romney has laid the groundwork for his own defense. He has promised that his tax plan will not cut taxes for the rich (below the levels established under Bush). Recall that Romney’s old campaign line about how he wasn’t concerned about the very poor was also packaged with a supposedly parallel line about not being concerned about the very rich — neither group would receive any particular targeted benefit from his program.
Romney’s plan has been to hold together these promises by shrouding his tax and budget plans in a veil of secrecy. Romney has promised to reduce tax rates across the board by 20 percent, which would offer huge tax cuts for the rich. But he has promised to close unspecified deductions in the tax code so as to offset the cost, and leave the rich paying the same effective tax rate. Indeed, Romney has boasted about his strategy, noting that its lack of detail means it “can’t be scored,” and thus Obama can’t prove that his plan really would cut taxes for the rich.
But oh yes, he can.
The Brookings Institution and the Tax Policy Center today released a study of Romney’s proposals, insofar as they are known. The finding was simple. Romney’s promises, it found, are mathematically impossible. The amount of revenue available from tax deductions for the rich is smaller than the amount of revenue lost by cutting tax rates for the rich. Even if Romney sincerely scoured the tax code and wiped out every last tax break for the rich that he hasn’t promised to preserve (he has promised to keep in place tax incentives for saving, like the capital gains tax break), the rich will pay lower rates and a lower share of the tax burden.
It’s worth noting that the study embraces implausibly friendly assumptions as to how Romney would go about this. It assumes he would ruthlessly purge the tax code of breaks for the rich, even highly popular ones like the charitable deduction. It further assumes that, in order to wring every last penny out of the rich, Romney would cut off all deductions immediately for every dollar in income over $200,000 a year. (In reality, nobody would create a tax code that meant going from $200,000 a year to $200,001 would jack up your taxes by thousands of dollars — you would ramp up the tax deduction phase-in, which would reduce taxes for the rich even more. But the paper bends over backwards to grant Romney this implausible assumption.)
What’s more, the paper assumes that Romney’s plan would increase economic growth, meaning it wouldn’t have to find dollar-for-dollar replacements for all its lost income. To measure this cheerful scenario, the paper adopts a model created by Greg Mankiw — who is, of course, a Bush administration veteran and one of Romney’s main economic advisers.
Piling implausibly optimistic assumption upon implausibly optimistic assumption, the paper nonetheless concludes that Romney will cut taxes for the rich. That means it would result in some combination of higher taxes for the middle class or higher deficits. If you take Romney at his word that he would hold tax revenue steady at its current levels, then he would be implementing a significant shift in the tax burden from the rich to the middle class. 95% of all taxpayers would pay more taxes, in order to finance a tax cut for the most affluent.
And remember, this is assuming the most favorable possible case for Romney. Under more realistic assumptions — that he won’t close every single penny in tax deductions benefitting the rich, and that his plan won’t spur economic growth to the degree a Republican like Mankiw hopes it would — then the transfer from the non-rich to the rich would be even higher. All of which shows why, despite the constant drumbeat of conservative pleas for him to unveil more policy specifics, Romney is going to keep his proposals as vague as possible.
By: Jonathan Chait, Daily Intel, August 1, 2012
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