Showing posts with label tax code. Show all posts
Showing posts with label tax code. Show all posts
Friday, December 7, 2012
Monday, October 24, 2011
The 99% Declaration
"Educate and inform the whole mass of the people.They are the only sure reliance for the preservation of our liberty." Thomas Jefferson
"Fascism should more appropriately be called Corporatism because it is a merger of state and corporate power." Benito Mussolini
WHEREAS THE FIRST AMENDMENT TO THE UNITED STATES CONSTITUTION PROVIDES THAT:
Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.
BE IT RESOLVED THAT:
WE, THE NINETY-NINE PERCENT OF THE PEOPLE of the UNITED STATES OF AMERICA, in order to form a more perfect Union, by, for and of the PEOPLE, shall elect and convene a NATIONAL GENERAL ASSEMBLY beginning on July 4, 2012 in the City Of Philadelphia.
I. Election of Delegates:
The People, consisting of all United States citizens who have reached the age of 18, regardless of party affiliation and voter registration status, shall elect Two Delegates, one male and one female, by direct vote, from each of the existing 435 Congressional Districts to represent the People at the NATIONAL GENERAL ASSEMBLY in Philadelphia. Said Assembly shall convene on July 4, 2012 in the city of Philadelphia. The office of Delegate shall be open to all United States citizens who have reached the age of 18. Election Committees, elected by local General Assemblies or Working Groups from all over the United States, shall coordinate with the Working Group on the 99% Declaration to organize, coordinate and fund this national election by direct democratic voting. The Election Committees, Working Groups and local General Assemblies shall operate as the original Committees of Correspondence once did.
II. Meeting of the National General Assembly and Approval of a Petition for a Redress of Grievances:
In addition to ensuring a free and fair election of the Delegates to the NATIONAL GENERAL ASSEMBLY, the Working Group on the 99% Declaration shall be responsible for raising sufficient funds to secure a venue wherein the the 870 Delegates may convene, deliberate, consider, vote and ratify a PETITION OF GRIEVANCES to be presented to all 535 members of Congress, the 9 members of the Supreme Court, the President of the United States and each of the political candidates seeking to be elected to federal public office in November 2012. Subject to the voting procedure for the final vote of ratification of the PETITION OF GRIEVANCES as set forth in section III, the Delegates of the National General Assembly shall vote upon and implement their own rules, procedures, agenda, code of conduct, elections or appointments of committee members to efficiently and expeditiously accomplish the People's mandate to present a PETITION OF GRIEVANCES before the 2012 elections.
III. Content of the Petition for a Redress of Grievances:
The PETITION OF GRIEVANCES shall be non-partisan and specifically address the critical issues now confronting the People of the United States of America. The Delegates shall deliberate and vote upon proposals for the PETITION OF GRIEVANCES and if necessary adjourn for further consultation with the People of the United States of America as our founding fathers conferred during the first two Continental Congresses. The final vote ratifying the PETITION OF GRIEVANCES shall be by simple majority vote. A duly elected chairperson of the National General Assembly shall determine the outcome of the vote on ratification in the event of a tie.
IV. Suggested Content of the Petition for a Redress of Grievances:
In order to facilitate the timely election of the 870 Delegates to the National General Assembly by July 4, 2012 and petition the government for a redress of grievances before the 2012 elections, the Working Group on the 99% Declaration, founded and duly announced to the New York City General Assembly on October 15, 2011, shall draft a suggested list of grievances to be respectfully submitted to the Delegates of the National General Assembly no later than June 30, 2012. The final version of the PETITION OF GRIEVANCES ratified by the National General Assembly, MAY or MAY NOT include the following issues suggested by the Working Group on the 99% Declaration:
1. Implementing an immediate ban on all private contributions of money and gifts, to all politicians in federal office, from individuals, corporations, "political action committees," "super political action committees," lobbyists, unions and all other private sources of money or thing of value to be replaced by the fair, equal and total public financing of all federal political campaigns. We categorically REJECT the concepts that corporations are persons or that money is equal to free speech because if that were so, then only the wealthiest people and corporations would have a voice. The complete elimination of private contributions must be enacted by law or Constitutional amendment because it has become clear that politicians in the United States cannot regulate themselves and have become the exclusive representatives of corporations, unions and the very wealthy who indirectly and directly spend vast sums of money on political campaigns to influence the candidates’ decisions when they attain office and ensure their reelection year after year. Our elected representatives spend far too much of their time fundraising for the next election rather than doing the People's business. The current system's propagation of legalized bribery and perpetual conflicts of interests has reduced our once great republican democracy to a greed driven corporatocracy run by boardroom oligarchs who represent .05% of the population but own 38% of the wealth.
2. The immediate abrogation, even if it requires a Constitutional Amendment, of the outrageous and anti-democratic holding in the "Citizens United" case proclaimed by the United States Supreme Court. This heinous decision equates the payment of money by corporations, wealthy individuals and unions to politicians with the exercise of protected free speech. We, the People, demand that this institutional bribery and corruption never again be deemed protected free speech.
3. Prohibiting all federal public employees, officers, officials or their immediate family members from ever being employed by any corporation, individual or business that they specifically regulated while in office; nor may any public employee, officer, official or their immediate family members own or hold any stock or shares in any corporation they regulated while in office until a full 5 years after their term is completed; a complete lifetime ban on the acceptance of all gifts, services, money or thing of value, directly or indirectly, by any elected or appointed federal official or their immediate family members, from any person, corporation, union or other entity that the public official was charged to specifically regulate while in office. In sum, elected politicians and public employees in regulatory roles may only collect their salary, generous healthcare benefits and pension. Any person, including corporate employees, found guilty and convicted of violating these rules in a court of law by proof beyond a reasonable doubt, shall be sentenced to a term of mandatory imprisonment of no less than one year and not more than ten years.
4. Term Limits. Members of the United States House of Representatives shall be limited to serving no more than four two-year terms in their lifetime. Members of the United States Senate shall be limited to serving no more than two six-year terms in their lifetime. The two-term limit for President shall remain unchanged. Serving as a member of Congress or as the President of the United States is one of the highest honors and privileges our culture can bestow. These positions of prominence in our society should be sought to serve one's country and not provide a lifetime career designed to increase personal wealth and accumulate power for the sake of vanity.
5. A complete reformation of the United States Tax Code to require ALL citizens to pay a fair share of a progressive, graduated income tax by eliminating loopholes, unfair tax breaks, exemptions and deductions, subsidies (e.g. oil, gas and farm) and ending all other methods of evading taxes. The current system of taxation favors the wealthiest Americans, many of whom pay fewer taxes to the United States Treasury than citizens who earn much less and pay a much higher percentage of income in taxes to the United States Treasury. We, like Warren Buffet, find this income tax disparity to be fundamentally unjust.
6. Medicare for all American citizens or adoption of a single-payer healthcare system. The Medicaid program, fraught with corruption and fraud, will be eliminated except for the purpose of providing emergency room care to indigent non-citizens who will not be covered by the single-payer healthcare system.
7. New comprehensive regulations to give the Environmental Protection Agency expanded powers to shut down corporations, businesses or any entities that intentionally or recklessly damage the environment, and to criminally prosecute individuals who intentionally or recklessly damage the environment. We also demand the immediate adoption of the most recent international protocols, including the "Washington Declaration" to cap carbon emissions and implement new and existing programs to transition away from fossil fuels to reusable or carbon neutral sources of energy.
8. Adoption of an immediate plan to reduce the national debt to a sustainable percentage of GDP by 2020. Reduction of the national debt to be achieved by BOTH fair taxation and cuts in spending to corporations engaged in perpetual war for profit, the "healthcare" industry, the pharmaceutical industry, the communications industry, the oil and gas industry, and all other sectors that use the federal budget as their income stream. We agree that spending cuts are necessary but those cuts must be made to facilitate what is best for the People of the United States of America, not multinational and domestic corporations who currently have a stranglehold on all politicians in Washington, D.C. in both parties.
9. Passage of a comprehensive job and job-training act like the American Jobs Act to employ our citizens in jobs that are available with specialized training and by putting People to work now by repairing America's crumbling infrastructure. We also recommend the establishment of an online international job exchange to match employers with skilled workers or employers willing to train workers in 21st century skills. In conjunction with a new jobs act, reinstitution of the Works Progress Administration and Civilian Conservation Corps or a similar emergency governmental agency tasked with creating new public works projects to provide jobs to the 46 million People living in poverty, the 9.1% unemployed and 10% underemployed.
10. Implementation of a student loan debt relief forgiveness program. Our young students are more than $830 billion in debt from education loans alone with few employment prospects due to financial collapse directly caused by the unbridled and unregulated greed of Wall Street. Interest on these debts should be reduced and deferred for periods of unemployment and the principal on these loans reduced or forgiven by using a Wall Street corporate tax surcharge as reparations for their conduct leading to the economic collapse of 2007-2008 and current worldwide recession. The tax code must also be amended so that employers will receive a student loan repayment tax deduction for paying off the loans of their employees.
11. Immediate passage of the Dream Act and comprehensive immigration and border security reform including offering visas, lawful permanent resident status and citizenship to the world’s brightest People to stay and work in our industries and schools after they obtain their education and training in the United States.
12. Recalling all military personnel at all non-essential bases and refocusing national defense goals to address threats posed by the geopolitics of the 21st century, including terrorism and limiting the large scale deployment of military forces to instances where Congressional approval has been granted to counter the Military Industrial Complex's goal of perpetual war for profit. The annual estimated savings of one trillion dollars per year saved by updating our military posture will be applied to the social programs outlined herein to improve the quality of life for human beings rather than assisting corporations to make ever-increasing profits distributed to the top 1% of wealth owners.
13. Mandating new educational goals to train the American public to perform jobs in a 21st century economy, particularly in the areas of technology and green energy, taking into consideration the redundancy caused by technology and the inexpensive cost of labor in China, India and other countries. Eliminating tenure and paying our teachers a competitive salary commensurate with the salaries of employees in the private sector with similar skills because without highly-skilled teachers, there will never be a highly-skilled workforce.
14. Subject to the elimination of corporate tax loopholes and exploited exemptions and deductions stated above, offering tax incentives to businesses to remain in the United States and hire our citizens rather than outsource jobs. An "outsourcing tax" should be introduced to discourage businesses from sending jobs overseas. Providing tax breaks to companies that invest in reconstructing the manufacturing capacity of the United States so that we again make everyday products in the United States rather than importing them from countries like China and India.
15. Implementing immediate legislation and WTO intervention if need be, to encourage China and our other trading partners to end currency manipulation and reduce the trade deficit.
16. Immediate reenactment of the Glass-Steagall Act and increased regulation of Wall Street and the financial industry by the SEC, FINRA and the other financial regulators. The immediate commencement of Justice Department criminal investigations into the Securities and Banking industry practices that led to the collapse of markets, $700 billion bail-out, and financial firm failures in 2007-2008. Introduction of a small financial transaction fee to collect a tax on each and every stock trade and all other forms of financial transactions. Uniform regulations limiting what banks may charge consumers for ATM fees, the use of debit cards and other miscellaneous "fees." Ending the $4 billion a year "hedge fund loophole" which permits certain individuals engaged in financial transactions to evade graduated income tax rates by treating their income as capital gains which are taxed at a much lower tax rate (approximately 15%).
17. Adoption of a plan similar to President Clinton’s proposal to end the mortgage crisis. The privately owned Federal Reserve Bank shall not continue to lower interest rates for loans to banks that are refusing to loan to small businesses and consumers, but instead shall buy all underwater or foreclosed mortgages. It will refinance these debts at an interest rate of 1% or less, because that is the interest rate it charges the banks that hoard the cash rather than loan it to the People and small businesses. These debts will be managed by the newly established Consumer Financial Protection Bureau (and foreclosure task force described below). The immediate formation of a non-partisan commission, overseen by Congress, to audit and investigate the economic risks and possibility of eliminating the privately-owned Federal Reserve Bank and transferring its functions to the United States Treasury Department.
18. An immediate one-year freeze on all foreclosures and their review by an independent foreclosure task force appointed and overseen by Congress and the Executive Branch (in conjunction with the Consumer Financial Protection Bureau ) to determine, on a case-by-case basis, whether foreclosure proceedings should continue based on the circumstances of each homeowner and the propriety of the financial institution's conduct when originating the loan.
19. Subject to the above ban on all private money and gifts in politics, to enact additional campaign finance reform requiring new FCC regulations granting free air time to all candidates; total public campaign financing to all candidates who obtain sufficient petition signatures and/or votes to get on the ballot and participate in the primaries and/or electoral process; shortening the campaign season to three months; and allowing voting on weekends and holidays; issuance of free voter registration cards to all citizens who are eligible to vote so that they cannot be turned away at a polling station because they do not have a driver's license or other form of identification; and expanding the option of mail-in ballots to all elections, especially for elderly and disabled voters.
20. An immediate withdrawal of all combat troops from Iraq and Afghanistan and a substantial increase in the amount of funding for veteran job training and placement. New programs dedicated to the treatment of injuries sustained by veterans. Our veterans are committing suicide at an unprecedented rate and we must help now.
BE IT FURTHER RESOLVED that IF the PETITION OF GRIEVANCES approved by the 870 Delegates of the NATIONAL GENERAL ASSEMBLY in consultation with the PEOPLE, is not acted upon within a reasonable time and to the satisfaction of the Delegates of the NATIONAL GENERAL ASSEMBLY, said Delegates shall organize a new NON-PARTISAN INDEPENDENT POLITICAL PARTY to run candidates for every available Congressional seat in the mid-term election of 2014 and again in 2016 until all vestiges of the existing corrupt corporatocracy have been removed by the power of the ballot box.
★THE NINETY-NINE PERCENT★
Sunday, July 24, 2011
The Tax Burden of the Very Rich
Saturday, July 23, 2011 by CommonDreams.org
In a little noted speech the Senator said that the poor need to “share some of the responsibility” for lowering the deficit and observed that the rich are paying too much in taxes.” In his remarks he observed that “The top 1 per-cent of the so-called wealthy pay 38% of all income tax, the top 10 percent pay 70 percent of all income tax and the top 50 percent pay almost 98 percent of all income tax.”
Those were facts of which many, including this writer, were unaware and it immediately created feelings of compassion for those paying that much. Of course, compassion is slightly tempered when one learns that in 2007 the top 1 percent received between 21 and 23 percent of all U.S. income depending on what studies you read. It is also slightly tempered when one realizes that the bottom 50 percent earned only 12.3 percent of all U.S. income. Nonetheless, the rich are obviously paying too much and that explains why Republicans don’t want them to pay more.
IRS statistics released in May of this year reflect that in 2008, the most recent year for which statistics are available, the average income among the top 400 Americans was $270.5 million.
In 2008 someone with that income would have paid about $50 million in taxes. (The effective rate on that income is about 18.1%.) Of course, if you are someone who has net taxable income of $60,000, after deductions and exemptions, and are, therefore, in the 25% tax bracket on all your income in excess of $34,500, you may wonder why you are in a much higher bracket than someone who earns $270.5 million. There is a perfectly logical explanation for this seeming (but not actual) inequity.
The main reason that the tax rate in the United States for the rich is low is that being rich, many of the rich do not need to work. It has long been accepted by Republicans in Congress, among others, that unearned income should receive more favorable treatment than earned income.
According to the IRS, in 2008 only 8 percent of the income of the top 400 earners in the country came from salary and wages. Close to 10% came from dividends and about 56% came from capital gains. Happy to help those who have prospered, either through their own efforts or through a wise choice of ancestors, Congress decided that people who receive dividends should only pay 15% tax on those dividends. Similarly, Congress thinks that capital gains, subject to a few non-onerous rules, should only be taxed at 15%. There is another group with very large incomes that also pays tax at the 15% rate. Those are hedge fund managers.
Like the VERY RICH, among whom many hedge fund managers find themselves, money that hedge fund managers get from investors for managing their money is treated like capital gains and is taxed at only 15% even though to the unsophisticated observer money paid to them looks for all the world like the sort of money that the typical wage earner gets, except for its considerably larger amount than what most wage earners receive. (One commentator pointed out that if hedge fund managers paid taxes like the people earning $50,000 or even $100,000, the national deficit would be reduced by $44 billion in the next 10 years. In 2008 the top 25 hedge fund managers “averaged”: $1.01 billion in annual income. )
In 2011, the only worker who will pay as low a rate as the folks described above is the worker whose taxable income is less than $34,500. Workers with taxable income between that and $69,675 will find themselves in the 25% tax bracket and from there the rates go up to 35% which is more than twice as much as the rate at which the person with $1.1 billion in dividends and capital gains is taxed. There are, of course, many adjustments made in calculating taxable income and the actual percentages vary taxpayer by taxpayer. But the long and the short of it is that the taxpayer who wants the satisfaction of paying taxes at the same rate as the really rich should keep his or her taxable income under $34,500. For many, that will not be difficult.
It is possible that readers of this column will not understand why Mr. Hatch thinks the poor should do more. It is even possible that they will not find the foregoing an adequate explanation for why Republicans do not think taxes on the wealthy should be raised. They are not the only ones who are puzzled.
When there is an income tax, the just man will pay more and the unjust less on the same amount of income.The purpose of this piece is to identify for readers how an unjust tax system treats the very wealthy. Once that is understood it is easy to understand Senator Orin Hatch’s recent comments.
— Plato, The Republic
In a little noted speech the Senator said that the poor need to “share some of the responsibility” for lowering the deficit and observed that the rich are paying too much in taxes.” In his remarks he observed that “The top 1 per-cent of the so-called wealthy pay 38% of all income tax, the top 10 percent pay 70 percent of all income tax and the top 50 percent pay almost 98 percent of all income tax.”
Those were facts of which many, including this writer, were unaware and it immediately created feelings of compassion for those paying that much. Of course, compassion is slightly tempered when one learns that in 2007 the top 1 percent received between 21 and 23 percent of all U.S. income depending on what studies you read. It is also slightly tempered when one realizes that the bottom 50 percent earned only 12.3 percent of all U.S. income. Nonetheless, the rich are obviously paying too much and that explains why Republicans don’t want them to pay more.
IRS statistics released in May of this year reflect that in 2008, the most recent year for which statistics are available, the average income among the top 400 Americans was $270.5 million.
In 2008 someone with that income would have paid about $50 million in taxes. (The effective rate on that income is about 18.1%.) Of course, if you are someone who has net taxable income of $60,000, after deductions and exemptions, and are, therefore, in the 25% tax bracket on all your income in excess of $34,500, you may wonder why you are in a much higher bracket than someone who earns $270.5 million. There is a perfectly logical explanation for this seeming (but not actual) inequity.
The main reason that the tax rate in the United States for the rich is low is that being rich, many of the rich do not need to work. It has long been accepted by Republicans in Congress, among others, that unearned income should receive more favorable treatment than earned income.
According to the IRS, in 2008 only 8 percent of the income of the top 400 earners in the country came from salary and wages. Close to 10% came from dividends and about 56% came from capital gains. Happy to help those who have prospered, either through their own efforts or through a wise choice of ancestors, Congress decided that people who receive dividends should only pay 15% tax on those dividends. Similarly, Congress thinks that capital gains, subject to a few non-onerous rules, should only be taxed at 15%. There is another group with very large incomes that also pays tax at the 15% rate. Those are hedge fund managers.
Like the VERY RICH, among whom many hedge fund managers find themselves, money that hedge fund managers get from investors for managing their money is treated like capital gains and is taxed at only 15% even though to the unsophisticated observer money paid to them looks for all the world like the sort of money that the typical wage earner gets, except for its considerably larger amount than what most wage earners receive. (One commentator pointed out that if hedge fund managers paid taxes like the people earning $50,000 or even $100,000, the national deficit would be reduced by $44 billion in the next 10 years. In 2008 the top 25 hedge fund managers “averaged”: $1.01 billion in annual income. )
In 2011, the only worker who will pay as low a rate as the folks described above is the worker whose taxable income is less than $34,500. Workers with taxable income between that and $69,675 will find themselves in the 25% tax bracket and from there the rates go up to 35% which is more than twice as much as the rate at which the person with $1.1 billion in dividends and capital gains is taxed. There are, of course, many adjustments made in calculating taxable income and the actual percentages vary taxpayer by taxpayer. But the long and the short of it is that the taxpayer who wants the satisfaction of paying taxes at the same rate as the really rich should keep his or her taxable income under $34,500. For many, that will not be difficult.
It is possible that readers of this column will not understand why Mr. Hatch thinks the poor should do more. It is even possible that they will not find the foregoing an adequate explanation for why Republicans do not think taxes on the wealthy should be raised. They are not the only ones who are puzzled.
Monday, April 18, 2011
Super Rich See Federal Taxes Drop Dramatically
Sunday, April 17, 2011 by Associated Press
by Stephen Ohlemacher
WASHINGTON – As millions of procrastinators scramble to meet Monday's tax filing deadline, ponder this: The super rich pay a lot less taxes than they did a couple of decades ago, and nearly half of U.S. households pay no income taxes at all.
The Internal Revenue Service tracks the tax returns with the 400 highest adjusted gross incomes each year. The average income on those returns in 2007, the latest year for IRS data, was nearly $345 million. Their average federal income tax rate was 17 percent, down from 26 percent in 1992.
Over the same period, the average federal income tax rate for all taxpayers declined to 9.3 percent from 9.9 percent.
The top income tax rate is 35 percent, so how can people who make so much pay so little in taxes? The nation's tax laws are packed with breaks for people at every income level. There are breaks for having children, paying a mortgage, going to college, and even for paying other taxes. Plus, the top rate on capital gains is only 15 percent.
There are so many breaks that 45 percent of U.S. households will pay no federal income tax for 2010, according to estimates by the Tax Policy Center, a Washington think tank.
"It's the fact that we are using the tax code both to collect revenue, which is its primary purpose, and to deliver these spending benefits that we run into the situation where so many people are paying no taxes," said Roberton Williams, a senior fellow at the center, which generated the estimate of people who pay no income taxes.
The sheer volume of credits, deductions and exemptions has both Democrats and Republicans calling for tax laws to be overhauled. House Republicans want to eliminate breaks to pay for lower overall rates, reducing the top tax rate from 35 percent to 25 percent. Republicans oppose raising taxes, but they argue that a more efficient tax code would increase economic activity, generating additional tax revenue.
President Barack Obama said last week he wants to do away with tax breaks to lower the rates and to reduce government borrowing. Obama's proposal would result in $1 trillion in tax increases over the next 12 years. Neither proposal included many details, putting off hard choices about which tax breaks to eliminate.
In all, the tax code is filled with a total of $1.1 trillion in credits, deductions and exemptions, an average of about $8,000 per taxpayer, according to an analysis by the National Taxpayer Advocate, an independent watchdog within the IRS.
More than half of the nation's tax revenue came from the top 10 percent of earners in 2007. More than 44 percent came from the top 5 percent. Still, the wealthy have access to much more lucrative tax breaks than people with lower incomes.
Obama wants the wealthy to pay so "the amount of taxes you pay isn't determined by what kind of accountant you can afford."
Eric Schoenberg says to sign him up for paying higher taxes. Schoenberg, who inherited money and has a healthy portfolio from his days as an investment banker, has joined a group of other wealthy Americans called United for a Fair Economy. Their goal: Raise taxes on rich people like themselves.
Shoenberg, who now teaches a business class at Columbia University, said his income is usually "north of half a million a year." But 2009 was a bad year for investments, so his income dropped to a little over $200,000. His federal income tax bill was a little more than $2,000.
"I simply point out to people, `Do you think this is reasonable, that somebody in my circumstances should only be paying 1 percent of their income in tax?'" Schoenberg said.
Sen. Orrin Hatch of Utah, the top Republican on the Senate Finance Committee, said he has a solution for rich people who want to pay more in taxes: Write a check to the IRS. There's nothing stopping you.
"There's still time before the filing deadline for them to give Uncle Sam some more money," Hatch said.
Schoenberg said Hatch's suggestion misses the point.
"This voluntary idea clearly represents a mindset that basically pretends there's no such things as collective goods that we produce," Schoenberg said. "Are you going to let people volunteer to build the road system? Are you going to let them volunteer to pay for education?"
The law is packed with tax breaks that help narrow special interests. But many of the biggest tax breaks benefit millions of American families at just about every income level, making them difficult for politicians to touch.
The vast majority of those who escape federal income taxes have low and medium incomes, and most of them pay other taxes, including Social Security and Medicare taxes, property taxes and retail sales taxes.
The share of people paying no federal income tax has dropped slightly the past two years. It was 47 percent for 2009. The main difference for 2010 was the expiration of a tax break that exempted the first $2,400 of unemployment benefits from taxation, Williams said.
In 2009, nearly 35 million taxpayers got a tax break for paying interest on their home mortgages, and nearly 36 million taxpayers took the $1,000-per-child tax credit. About 41 million households reduced their federal income taxes by deducting state and local income and sales taxes from their taxable income.
About 36 million families cut their taxes by nearly $35 billion by deducting charitable donations, and 28 million taxpayers saved a total of $24 billion because their income from Social Security and railroad pensions was untaxed.
"As a matter of policy, there would be a lot of ways to save money and actually make these things work better," said Leonard Burman, a public affairs professor at Syracuse University. "As a matter of politics, it's really, really difficult."
by Stephen Ohlemacher
WASHINGTON – As millions of procrastinators scramble to meet Monday's tax filing deadline, ponder this: The super rich pay a lot less taxes than they did a couple of decades ago, and nearly half of U.S. households pay no income taxes at all.
The Internal Revenue Service tracks the tax returns with the 400 highest adjusted gross incomes each year. The average income on those returns in 2007, the latest year for IRS data, was nearly $345 million. Their average federal income tax rate was 17 percent, down from 26 percent in 1992.
Over the same period, the average federal income tax rate for all taxpayers declined to 9.3 percent from 9.9 percent.
The top income tax rate is 35 percent, so how can people who make so much pay so little in taxes? The nation's tax laws are packed with breaks for people at every income level. There are breaks for having children, paying a mortgage, going to college, and even for paying other taxes. Plus, the top rate on capital gains is only 15 percent.
There are so many breaks that 45 percent of U.S. households will pay no federal income tax for 2010, according to estimates by the Tax Policy Center, a Washington think tank.
"It's the fact that we are using the tax code both to collect revenue, which is its primary purpose, and to deliver these spending benefits that we run into the situation where so many people are paying no taxes," said Roberton Williams, a senior fellow at the center, which generated the estimate of people who pay no income taxes.
The sheer volume of credits, deductions and exemptions has both Democrats and Republicans calling for tax laws to be overhauled. House Republicans want to eliminate breaks to pay for lower overall rates, reducing the top tax rate from 35 percent to 25 percent. Republicans oppose raising taxes, but they argue that a more efficient tax code would increase economic activity, generating additional tax revenue.
President Barack Obama said last week he wants to do away with tax breaks to lower the rates and to reduce government borrowing. Obama's proposal would result in $1 trillion in tax increases over the next 12 years. Neither proposal included many details, putting off hard choices about which tax breaks to eliminate.
In all, the tax code is filled with a total of $1.1 trillion in credits, deductions and exemptions, an average of about $8,000 per taxpayer, according to an analysis by the National Taxpayer Advocate, an independent watchdog within the IRS.
More than half of the nation's tax revenue came from the top 10 percent of earners in 2007. More than 44 percent came from the top 5 percent. Still, the wealthy have access to much more lucrative tax breaks than people with lower incomes.
Obama wants the wealthy to pay so "the amount of taxes you pay isn't determined by what kind of accountant you can afford."
Eric Schoenberg says to sign him up for paying higher taxes. Schoenberg, who inherited money and has a healthy portfolio from his days as an investment banker, has joined a group of other wealthy Americans called United for a Fair Economy. Their goal: Raise taxes on rich people like themselves.
Shoenberg, who now teaches a business class at Columbia University, said his income is usually "north of half a million a year." But 2009 was a bad year for investments, so his income dropped to a little over $200,000. His federal income tax bill was a little more than $2,000.
"I simply point out to people, `Do you think this is reasonable, that somebody in my circumstances should only be paying 1 percent of their income in tax?'" Schoenberg said.
Sen. Orrin Hatch of Utah, the top Republican on the Senate Finance Committee, said he has a solution for rich people who want to pay more in taxes: Write a check to the IRS. There's nothing stopping you.
"There's still time before the filing deadline for them to give Uncle Sam some more money," Hatch said.
Schoenberg said Hatch's suggestion misses the point.
"This voluntary idea clearly represents a mindset that basically pretends there's no such things as collective goods that we produce," Schoenberg said. "Are you going to let people volunteer to build the road system? Are you going to let them volunteer to pay for education?"
The law is packed with tax breaks that help narrow special interests. But many of the biggest tax breaks benefit millions of American families at just about every income level, making them difficult for politicians to touch.
The vast majority of those who escape federal income taxes have low and medium incomes, and most of them pay other taxes, including Social Security and Medicare taxes, property taxes and retail sales taxes.
The share of people paying no federal income tax has dropped slightly the past two years. It was 47 percent for 2009. The main difference for 2010 was the expiration of a tax break that exempted the first $2,400 of unemployment benefits from taxation, Williams said.
In 2009, nearly 35 million taxpayers got a tax break for paying interest on their home mortgages, and nearly 36 million taxpayers took the $1,000-per-child tax credit. About 41 million households reduced their federal income taxes by deducting state and local income and sales taxes from their taxable income.
About 36 million families cut their taxes by nearly $35 billion by deducting charitable donations, and 28 million taxpayers saved a total of $24 billion because their income from Social Security and railroad pensions was untaxed.
"As a matter of policy, there would be a lot of ways to save money and actually make these things work better," said Leonard Burman, a public affairs professor at Syracuse University. "As a matter of politics, it's really, really difficult."
Tuesday, April 5, 2011
Rigging the Tax Code to Profit From Disasters
GO-Zones and Rep. Jim McCrery
By DARWIN BOND-GRAHAM
Piles of words have been written about disaster capitalism. This brand of capitalism involves two kinds of assaults on communities: severe budget cuts and extensive privatization, both imposed during periods of psycho-social shock resulting from an economic crash, war, or a "natural disaster." In 2005 Hurricane Katrina became a case study to trace these twin prongs of disaster capitalism as one of the world's great cities and a stretch of the Gulf Coast were decimated by a post-hurricane flurry of budget cuts and privatization.
However, there's a third leg of the violent imposition of neoliberalism in the wake of disaster that has been subject to much less scrutiny. This aspect has been as effective as privatization in opportunistically transferring huge sums of wealth into the hands of a few corporations and the rich. It has also laid much of the groundwork for further budget cutting in the wake of catastrophe. What is it?
Two words: tax policy. Disaster tax policy.
In December of 2005 Congress responded to Hurricane Katrina by passing an unprecedented economic recovery package in the form of a tellingly named bill, the Gulf Opportunity Zone Act of 2005 (or "GO-Zone"). For those familiar with corporate globalization-speak, an "opportunity zone" is a synonym for "enterprise zone," and also closely related to the various other "zones" of special exploitation carved out by states for the benefit of capital. In these sorts of zones the normal rules of state regulation (to protect the environment, workers, etc.) are suspended, creating a laissez faire atmosphere. The GO-Zone essentially amended sections of the Internal Revenue Code, sections that normally apply to corporations and financial entities operating in a region of opportunity that included the southern counties of Mississippi and Alabama, and southern parishes of Louisiana.
The GO-Zone, the central economic policy response to Hurricane Katrina, was quite simply a massive tax break for corporations and the wealthy. It has resulted in the transfer of billions of dollars from the federal government and public sector to mostly large transnational corporations and investment banks, but also to the top 5 per cent of wealth holders in Louisiana, Mississippi and Alabama. Because this raid on the federal budget was designed to occur through somewhat arcane tax expenditures its effect of upwardly redistributing wealth and reducing federal revenues have been subtle and difficult to discern. Its absence of positive economic impacts for the hardest hit communities are conspicuous, however.
As a policy the GO-Zone has its origins in another recent disaster, 9-11. A virtually identical package of tax breaks for corporate wealth was written into a section of the Job Creation and Worker Assistance Act of 2002 shortly after blocks of New York City were reduced to rubble on September 11, 2001. Buried not too deeply in this bill was the provision for creating a "New York Liberty Zone."
This uber-patriotic idea (conveniently designed to aid already fabulously wealthy real estate and financial companies owning real estate and operating in lower Manhattan) was thought up right in between the two most important Bush-era tax laws, the Economic Growth and Tax Relief Reconciliation Act of 2001, and Jobs and Growth Tax Relief Reconciliation Act of 2003. All three of these bills reduced corporate taxes and taxes on personal wealth to nearly record levels, and set the federal government on its path to where it is today - massive deficit spending and a budget crisis due to shrinking revenues.
One of the Republican Party's key players in drafting all of this pro-corporate tax legislation was a relatively unassuming and little known House member from Louisiana's 4th District, Jim McCrery.
McCrery's Congressional career began in 1988 and lasted just over two decades. In that time he became one of the Congress's most knowledgeable members with respect to tax issues, and therefore a key contributor to the Bush administration's rollback of progressive taxes. McCrery co-sponsored the Bush tax cut bills and helped work out some of their finer points as a powerful member of the Ways and Means Committee.
In December of 2005 McCrery introduced the GO-Zone act to Congress and shepherded it through the House, Senate, and to the President's desk in a swift sixteen days with strong bi-partisan support. On the floor of the House McCrery implored, "I cannot overemphasize the importance of putting into law as quickly as possible incentives to give businesses, individuals, people with capital to invest, the urge to go to these devastated areas and invest that capital." His colleagues on both sides of the isle concurred that government's role should be to lavish the wealthy and powerful with lucrative tax incentives. During the perfunctory floor debate no Democrat or Republican asked why similarly targeted economic assistance was not being proposed for workers, small businesses, and others who lacked "capital to invest."
At the center of the GO-Zone are two key provisions that require a corporation or individual already be wealthy and powerful to take advantage of. The first is a $14.9 billion in bonding authority given to Louisiana, Mississippi, and Alabama. These "GO-Zone bonds" allow private financial institutions to lend billions to private companies to build all manner of private, for-profit industrial and commercial projects, with profits on these bonds subject to zero federal tax. The Congressional Research Service notes that this provision alone will reduce federal revenues by at least $1 billion over the eleven-year span of the program.
The second key provision was establishment of a bonus depreciation allowance which let businesses drastically reduce their tax burdens by claiming a deduction related to the expected wear-and-tear and therefore decline in the value of property and capital invested in after the storm. Depreciation is a standard tax deduction used by businesses, but the "bonus" aspect allowed for larger immediate deductions. The GO-Zone included billions more in other tax credits, tax exemptions, tax write offs, and tax loopholes to be claimed by corporations and other owners of large real estate and capital holdings, all predicated on the notion that the best disaster recovery policy is aimed at helping those who already have the most.
After more than five years the GO-Zone has proven a resounding failure with respect to economic recovery along the Gulf Coast. Although local chamber of commerce boosters have pointed to a lower unemployment rate than the national average, the reality is that the region's economy has shrunk, especially in locales like New Orleans and coastal parishes where the GO-Zone's promised benefits never materialized and never will. New Orleans and many of the hardest hit Louisiana parishes and counties in Mississippi and Alabama have seen little to no benefit from the promised infusions of cash via corporate investments in their backyards. This has meant relatively poor levels of job creation, few if any local construction contracts or subcontracts, few new sources of local tax revenues, actual reductions in housing stocks, and closures of unfunded public schools, public housing, public libraries, and other public goods. Because disaster tax policies are expressly written to benefit large wealth holders, these policies have no positive impact for working families. The majority who possess no vast real estate holdings and who own none of the corporate capital are at the mercy of the wealthy few to make decisions about the future. Democratic control over economic development is made impossible.
The hard truth is that most communities inside the GO-Zone's boundaries were never meant to reap benefits from these tax incentives. The intended benefactors from the very beginning were large corporations, the big financial companies that loan to them, and the elite law firms that serve both.
The Gulf Opportunity Zone Act was written by and for corporate capital. Representative McCrery sponsored the bill to respond to his most important constituents: major corporations and financial institutions with stakes in Louisiana, Mississippi and Alabama. These parties were not interested in rebuilding the region's economy to benefit disaster stricken communities. They were keen on obtaining huge tax breaks and cheap bond money to expand the already harmful economy of extraction: refineries, pipelines, and chemical plants.
This opportunistic imposition of disaster tax policy was a fitting capstone to McCrery's Congressional career which was characterized by a nearly perfect record of supporting regressive taxation and budget cutting. McCrery began his professional life as a lawyer in the small city of Leesville, Louisiana. After a stint as an assistant attorney for the city of Shreveport, in 1981 he joined the staff of Rep. Charles Roemer, III. McCrery's boss would eventually become a tax-hating, budget slashing Governor of Louisiana, one who also ushered in gambling via floating casinos and the now ubiquitous video poker machines placed in seemingly every bayou bar and truck stop. McCrery inherited Roemer's Congressional seat in 1988.
In the interim, however, McCrery spent four years working as a lawyer for the Georgia Pacific Corporation, one of the largest timber, pulp, and chemicals companies in the world with operations in Louisiana and nearby Arkansas. Perhaps it was during his four years at Georgia Pacific that McCrery's pro-corporate ideology was finally and fully cemented, or maybe it was earlier. Whenever it was, freshman McCrery entered the Congress ready to rewrite the tax code in favor of further concentrating wealth to the benefit of companies like G-P.
Candidate McCrery's elections were bankrolled by the usual powerhouse corporations that spend heavily on Republicans and Democrats alike, many of them big insurance, healthcare, and financial concerns. Oil and chemical companies with operations in Louisiana were also among the Congressman's biggest sources of campaign cash. He received virtually nothing from unions, environmental funds, women's organizations, and African American owned businesses.
McCrery's former employer Georgia Pacific was one of his top donors throughout his career. Between 1998 and 2004 Georgia Pacific gave McCrery more than $21,000. After Georgia Pacific was bought out by Koch Industries in 2005 (just around the same time Hurricane Katrina struck) Koch continued to donate to McCrery, giving him $10,000 in 2006. Another major funder of McCrery was Harrah's Entertainment. The Casino giant with two hotels, two casinos, and a horse-racing track in his district, gave McCrery $17,500 between 2002 and 2006. These corporations were largely investing in McCrery for his deft knowledge of tax policy, and his effectiveness in crafting tax legislation redistribute wealth from the public sector to private. These were shrewd investments.
To build support for this neoliberal economic agenda, Rep. McCrery created a very successful political action committee in 1996, the Committee for the Preservation of Capitalism (CPC). In addition to spending tens of thousands of dollars on ritzy fund raising events at various California wine country attractions like the Lodge at Sonoma, and Benziger Winery, McCrery's CPC doled out $5000 and $10,000 contributions to Republican candidates who would help pass extremely corporate friendly laws. A list of the CPC's biggest cash cows correlates almost perfectly with high scorers on the Americans for Tax Reform scorecard (Grover Norquist's austerity-obsessed organization). McCrery himself routinely scored above the 95th percentile. Some of the CPC's favored candidates have become stars of the Tea Party.
Having helped stack the House with Republican allies, when Hurricane Katrina hit it was almost a foregone conclusion that the economic policy response would center on tax cuts. Democrats voted with equal enthusiasm for the GO-Zone Act though, their own party's leadership having been been infected by the same neoliberal policy doctrines during the Clinton years.
Most aspects of the GO-Zone Act were set to expire at the end of 2010, but late last year the Congress extended many provisions, including the tax-exempt bond program which had failed to dole out its entire lending cap. Nevertheless, after a half-decade of implementation the GO-Zone's record speaks loud and clear. The primary beneficiaries of GO-Zone bonds have been the large oil and chemical companies. Areas that have seen the largest GO-Zone bond investments are uniformly outside of the hardest hit parishes and counties. Any economic stimulus and jobs created therefore have been at a distance from the most crippled areas. A mere ten mega-projects financed with GO-Zone bonds involving expansion of oil refineries, chemical plants, pipelines, and petroleum tanks have consumed more than half of all the program's funds in Louisiana. (In the upcoming May/June issue of Dollars and Sense magazine, http://www.dollarsandsense.org/, I will present a more complete picture of the GO-Zone's failure as a disaster reconstruction policy in Louisiana.)
One of the biggest GO-Zone bond recipients in Louisiana will be McCrery's former employer and major campaign donor, Koch subsidiary Georgia Pacific. The Atlanta based company is expected to receive $250 million to expand a pulp and paper plant in East Baton Rouge Parish. It's an exemplary disaster tax policy-enabled project; the plant will be built in a Parish that experienced relatively little damage from Katrina; it reinforces and further enriches the heavily polluting industries that already dominate Louisiana's chemical corridor; it will generate huge profits for Koch Industries; and it's all being done in the name of disaster reconstruction.
When McCrery retired from the House in 2008 he wasted no time stepping through the revolving door and into a job with the lobbying firm Capitol Counsel. It was a perfect fit for the ex-Congressman. Started in 2007 Capitol Counsel was described by The Hill's Alexander Bolton as a lobbying firm focused on helping shape tax policy for its clients. According to Bolton:
For example, in 2010 McCrery lobbied his former House colleagues and the Senate for passage of a bill that would have amended the Internal Revenue Code to allow a credit against income tax for corporations using energy derived from biomass to power domestic paper, pulp and paperboard factories. Parsons& Whittemore, McCrery's client, would have profited nicely if the bill had passed, but it did not. Coincidentally, earlier in 2010 McCrery's former employer Georgia Pacific reached an agreement to purchase several Alabama pulp and paper mills from Parsons & Whittemore.
Another example of McCrery's continuing influence over tax policy involves Harrah's Casino. Having been one of his biggest fundraisers while a Congressman, Harrah's is now a client. McCrery spent the Summer of 2010 lobbying on Harrah's behalf to amend portions of the tax code to allow the company to expand into Internet gaming and reduce the company's tax burden. While the GO-Zone specifically barred casinos from utilizing its tax provisions, Harrah's nevertheless profited from Hurricane Katrina in its own way by successfully pressuring Mississippi politicians to finally allow casinos such as its Grand Casino Biloxi to be built on dry land.
Before McCrery exited the House for his substantially more lucrative lobbying gig the Congress attempted to implement disaster tax policies after several other storms. Most notable was the introduction of the Midwestern Disaster Tax Relief Act of 2008 by Senator Charles Grassley (with Senator Barack Obama co-sponsoring). This bill would have duplicated the GO-Zone's two key provisions with tax-exempt bond financing and bonus depreciation deductions made available to businesses within the geographic region flooded by the storms of that year.
The bill never became law. The Heartland Disaster Tax Relief Act of 2008 was passed instead. The "Heartland" bill included many tax benefits for individuals and some for businesses, but these two key disaster tax policies were nixed. Nevertheless, the concept of using tax deductions as the central policy tool to rebuild after disasters remains popular in Congress, due in part to the continuing influence of corporations and large wealth holders through lobby shops like Capitol Counsel.
Ironically a senior lawyer at the elite New Orleans law firm of Adams & Reese who helped write portions of the GO-Zone Act, and whose clients have included big companies that have utilized tax-free GO-Zone bonds, sums up the harmful corporate bias inherent in disaster tax policy:
Thus, more than five years after Katrina, the Gulf Opportunity Zone has become a zone of spotty recovery, with some communities still suffering from economic damages that will never be repaired by policies that were never designed to do so, and other areas seeing huge investments by polluting industries, wealth all the while being concentrated in the hands of a few. Ultimately this episode is about much more than one member of Congress, or one set of industries that gamed the tax code after a natural disaster; it's about the ascendancy of an ideology among government leadership, on both side of the aisle. The problem is that those who adhere to disaster tax policy not only believe the best response to calamity is to further enrich and empower the wealthy few: they also lack the ability to imagine that government could respond any differently, that it could directly empower and enrich the people, from the bottom up.
By DARWIN BOND-GRAHAM
Piles of words have been written about disaster capitalism. This brand of capitalism involves two kinds of assaults on communities: severe budget cuts and extensive privatization, both imposed during periods of psycho-social shock resulting from an economic crash, war, or a "natural disaster." In 2005 Hurricane Katrina became a case study to trace these twin prongs of disaster capitalism as one of the world's great cities and a stretch of the Gulf Coast were decimated by a post-hurricane flurry of budget cuts and privatization.
However, there's a third leg of the violent imposition of neoliberalism in the wake of disaster that has been subject to much less scrutiny. This aspect has been as effective as privatization in opportunistically transferring huge sums of wealth into the hands of a few corporations and the rich. It has also laid much of the groundwork for further budget cutting in the wake of catastrophe. What is it?
Two words: tax policy. Disaster tax policy.
In December of 2005 Congress responded to Hurricane Katrina by passing an unprecedented economic recovery package in the form of a tellingly named bill, the Gulf Opportunity Zone Act of 2005 (or "GO-Zone"). For those familiar with corporate globalization-speak, an "opportunity zone" is a synonym for "enterprise zone," and also closely related to the various other "zones" of special exploitation carved out by states for the benefit of capital. In these sorts of zones the normal rules of state regulation (to protect the environment, workers, etc.) are suspended, creating a laissez faire atmosphere. The GO-Zone essentially amended sections of the Internal Revenue Code, sections that normally apply to corporations and financial entities operating in a region of opportunity that included the southern counties of Mississippi and Alabama, and southern parishes of Louisiana.
The GO-Zone, the central economic policy response to Hurricane Katrina, was quite simply a massive tax break for corporations and the wealthy. It has resulted in the transfer of billions of dollars from the federal government and public sector to mostly large transnational corporations and investment banks, but also to the top 5 per cent of wealth holders in Louisiana, Mississippi and Alabama. Because this raid on the federal budget was designed to occur through somewhat arcane tax expenditures its effect of upwardly redistributing wealth and reducing federal revenues have been subtle and difficult to discern. Its absence of positive economic impacts for the hardest hit communities are conspicuous, however.
As a policy the GO-Zone has its origins in another recent disaster, 9-11. A virtually identical package of tax breaks for corporate wealth was written into a section of the Job Creation and Worker Assistance Act of 2002 shortly after blocks of New York City were reduced to rubble on September 11, 2001. Buried not too deeply in this bill was the provision for creating a "New York Liberty Zone."
This uber-patriotic idea (conveniently designed to aid already fabulously wealthy real estate and financial companies owning real estate and operating in lower Manhattan) was thought up right in between the two most important Bush-era tax laws, the Economic Growth and Tax Relief Reconciliation Act of 2001, and Jobs and Growth Tax Relief Reconciliation Act of 2003. All three of these bills reduced corporate taxes and taxes on personal wealth to nearly record levels, and set the federal government on its path to where it is today - massive deficit spending and a budget crisis due to shrinking revenues.
One of the Republican Party's key players in drafting all of this pro-corporate tax legislation was a relatively unassuming and little known House member from Louisiana's 4th District, Jim McCrery.
McCrery's Congressional career began in 1988 and lasted just over two decades. In that time he became one of the Congress's most knowledgeable members with respect to tax issues, and therefore a key contributor to the Bush administration's rollback of progressive taxes. McCrery co-sponsored the Bush tax cut bills and helped work out some of their finer points as a powerful member of the Ways and Means Committee.
In December of 2005 McCrery introduced the GO-Zone act to Congress and shepherded it through the House, Senate, and to the President's desk in a swift sixteen days with strong bi-partisan support. On the floor of the House McCrery implored, "I cannot overemphasize the importance of putting into law as quickly as possible incentives to give businesses, individuals, people with capital to invest, the urge to go to these devastated areas and invest that capital." His colleagues on both sides of the isle concurred that government's role should be to lavish the wealthy and powerful with lucrative tax incentives. During the perfunctory floor debate no Democrat or Republican asked why similarly targeted economic assistance was not being proposed for workers, small businesses, and others who lacked "capital to invest."
At the center of the GO-Zone are two key provisions that require a corporation or individual already be wealthy and powerful to take advantage of. The first is a $14.9 billion in bonding authority given to Louisiana, Mississippi, and Alabama. These "GO-Zone bonds" allow private financial institutions to lend billions to private companies to build all manner of private, for-profit industrial and commercial projects, with profits on these bonds subject to zero federal tax. The Congressional Research Service notes that this provision alone will reduce federal revenues by at least $1 billion over the eleven-year span of the program.
The second key provision was establishment of a bonus depreciation allowance which let businesses drastically reduce their tax burdens by claiming a deduction related to the expected wear-and-tear and therefore decline in the value of property and capital invested in after the storm. Depreciation is a standard tax deduction used by businesses, but the "bonus" aspect allowed for larger immediate deductions. The GO-Zone included billions more in other tax credits, tax exemptions, tax write offs, and tax loopholes to be claimed by corporations and other owners of large real estate and capital holdings, all predicated on the notion that the best disaster recovery policy is aimed at helping those who already have the most.
After more than five years the GO-Zone has proven a resounding failure with respect to economic recovery along the Gulf Coast. Although local chamber of commerce boosters have pointed to a lower unemployment rate than the national average, the reality is that the region's economy has shrunk, especially in locales like New Orleans and coastal parishes where the GO-Zone's promised benefits never materialized and never will. New Orleans and many of the hardest hit Louisiana parishes and counties in Mississippi and Alabama have seen little to no benefit from the promised infusions of cash via corporate investments in their backyards. This has meant relatively poor levels of job creation, few if any local construction contracts or subcontracts, few new sources of local tax revenues, actual reductions in housing stocks, and closures of unfunded public schools, public housing, public libraries, and other public goods. Because disaster tax policies are expressly written to benefit large wealth holders, these policies have no positive impact for working families. The majority who possess no vast real estate holdings and who own none of the corporate capital are at the mercy of the wealthy few to make decisions about the future. Democratic control over economic development is made impossible.
The hard truth is that most communities inside the GO-Zone's boundaries were never meant to reap benefits from these tax incentives. The intended benefactors from the very beginning were large corporations, the big financial companies that loan to them, and the elite law firms that serve both.
The Gulf Opportunity Zone Act was written by and for corporate capital. Representative McCrery sponsored the bill to respond to his most important constituents: major corporations and financial institutions with stakes in Louisiana, Mississippi and Alabama. These parties were not interested in rebuilding the region's economy to benefit disaster stricken communities. They were keen on obtaining huge tax breaks and cheap bond money to expand the already harmful economy of extraction: refineries, pipelines, and chemical plants.
This opportunistic imposition of disaster tax policy was a fitting capstone to McCrery's Congressional career which was characterized by a nearly perfect record of supporting regressive taxation and budget cutting. McCrery began his professional life as a lawyer in the small city of Leesville, Louisiana. After a stint as an assistant attorney for the city of Shreveport, in 1981 he joined the staff of Rep. Charles Roemer, III. McCrery's boss would eventually become a tax-hating, budget slashing Governor of Louisiana, one who also ushered in gambling via floating casinos and the now ubiquitous video poker machines placed in seemingly every bayou bar and truck stop. McCrery inherited Roemer's Congressional seat in 1988.
In the interim, however, McCrery spent four years working as a lawyer for the Georgia Pacific Corporation, one of the largest timber, pulp, and chemicals companies in the world with operations in Louisiana and nearby Arkansas. Perhaps it was during his four years at Georgia Pacific that McCrery's pro-corporate ideology was finally and fully cemented, or maybe it was earlier. Whenever it was, freshman McCrery entered the Congress ready to rewrite the tax code in favor of further concentrating wealth to the benefit of companies like G-P.
Candidate McCrery's elections were bankrolled by the usual powerhouse corporations that spend heavily on Republicans and Democrats alike, many of them big insurance, healthcare, and financial concerns. Oil and chemical companies with operations in Louisiana were also among the Congressman's biggest sources of campaign cash. He received virtually nothing from unions, environmental funds, women's organizations, and African American owned businesses.
McCrery's former employer Georgia Pacific was one of his top donors throughout his career. Between 1998 and 2004 Georgia Pacific gave McCrery more than $21,000. After Georgia Pacific was bought out by Koch Industries in 2005 (just around the same time Hurricane Katrina struck) Koch continued to donate to McCrery, giving him $10,000 in 2006. Another major funder of McCrery was Harrah's Entertainment. The Casino giant with two hotels, two casinos, and a horse-racing track in his district, gave McCrery $17,500 between 2002 and 2006. These corporations were largely investing in McCrery for his deft knowledge of tax policy, and his effectiveness in crafting tax legislation redistribute wealth from the public sector to private. These were shrewd investments.
To build support for this neoliberal economic agenda, Rep. McCrery created a very successful political action committee in 1996, the Committee for the Preservation of Capitalism (CPC). In addition to spending tens of thousands of dollars on ritzy fund raising events at various California wine country attractions like the Lodge at Sonoma, and Benziger Winery, McCrery's CPC doled out $5000 and $10,000 contributions to Republican candidates who would help pass extremely corporate friendly laws. A list of the CPC's biggest cash cows correlates almost perfectly with high scorers on the Americans for Tax Reform scorecard (Grover Norquist's austerity-obsessed organization). McCrery himself routinely scored above the 95th percentile. Some of the CPC's favored candidates have become stars of the Tea Party.
Having helped stack the House with Republican allies, when Hurricane Katrina hit it was almost a foregone conclusion that the economic policy response would center on tax cuts. Democrats voted with equal enthusiasm for the GO-Zone Act though, their own party's leadership having been been infected by the same neoliberal policy doctrines during the Clinton years.
Most aspects of the GO-Zone Act were set to expire at the end of 2010, but late last year the Congress extended many provisions, including the tax-exempt bond program which had failed to dole out its entire lending cap. Nevertheless, after a half-decade of implementation the GO-Zone's record speaks loud and clear. The primary beneficiaries of GO-Zone bonds have been the large oil and chemical companies. Areas that have seen the largest GO-Zone bond investments are uniformly outside of the hardest hit parishes and counties. Any economic stimulus and jobs created therefore have been at a distance from the most crippled areas. A mere ten mega-projects financed with GO-Zone bonds involving expansion of oil refineries, chemical plants, pipelines, and petroleum tanks have consumed more than half of all the program's funds in Louisiana. (In the upcoming May/June issue of Dollars and Sense magazine, http://www.dollarsandsense.org/, I will present a more complete picture of the GO-Zone's failure as a disaster reconstruction policy in Louisiana.)
One of the biggest GO-Zone bond recipients in Louisiana will be McCrery's former employer and major campaign donor, Koch subsidiary Georgia Pacific. The Atlanta based company is expected to receive $250 million to expand a pulp and paper plant in East Baton Rouge Parish. It's an exemplary disaster tax policy-enabled project; the plant will be built in a Parish that experienced relatively little damage from Katrina; it reinforces and further enriches the heavily polluting industries that already dominate Louisiana's chemical corridor; it will generate huge profits for Koch Industries; and it's all being done in the name of disaster reconstruction.
When McCrery retired from the House in 2008 he wasted no time stepping through the revolving door and into a job with the lobbying firm Capitol Counsel. It was a perfect fit for the ex-Congressman. Started in 2007 Capitol Counsel was described by The Hill's Alexander Bolton as a lobbying firm focused on helping shape tax policy for its clients. According to Bolton:
"Two of the most experienced Democratic tax lobbyists in Washington have joined forces with a team of Democratic fundraisers and operatives to form what likely will emerge as one of Washington’s premier boutique lobbying shops. The firm, Capitol Counsel LLC, will focus almost exclusively on two of the most powerful committees in Congress: the House Ways and Means and the Senate Finance panels."When McCrery joined Capitol Counsel he was leaving the Congress as the highly influential ranking member of the House Ways and Means Committee. Reaching back into this Committee, and the Senate's tax policy panel, McCrery has worked to reduce taxes for companies like General Electric, provide tax breaks for oil firms like Bass Enterprises Production, and tax credits for manufacturers like Parsons& Whittemore.
For example, in 2010 McCrery lobbied his former House colleagues and the Senate for passage of a bill that would have amended the Internal Revenue Code to allow a credit against income tax for corporations using energy derived from biomass to power domestic paper, pulp and paperboard factories. Parsons& Whittemore, McCrery's client, would have profited nicely if the bill had passed, but it did not. Coincidentally, earlier in 2010 McCrery's former employer Georgia Pacific reached an agreement to purchase several Alabama pulp and paper mills from Parsons & Whittemore.
Another example of McCrery's continuing influence over tax policy involves Harrah's Casino. Having been one of his biggest fundraisers while a Congressman, Harrah's is now a client. McCrery spent the Summer of 2010 lobbying on Harrah's behalf to amend portions of the tax code to allow the company to expand into Internet gaming and reduce the company's tax burden. While the GO-Zone specifically barred casinos from utilizing its tax provisions, Harrah's nevertheless profited from Hurricane Katrina in its own way by successfully pressuring Mississippi politicians to finally allow casinos such as its Grand Casino Biloxi to be built on dry land.
Before McCrery exited the House for his substantially more lucrative lobbying gig the Congress attempted to implement disaster tax policies after several other storms. Most notable was the introduction of the Midwestern Disaster Tax Relief Act of 2008 by Senator Charles Grassley (with Senator Barack Obama co-sponsoring). This bill would have duplicated the GO-Zone's two key provisions with tax-exempt bond financing and bonus depreciation deductions made available to businesses within the geographic region flooded by the storms of that year.
The bill never became law. The Heartland Disaster Tax Relief Act of 2008 was passed instead. The "Heartland" bill included many tax benefits for individuals and some for businesses, but these two key disaster tax policies were nixed. Nevertheless, the concept of using tax deductions as the central policy tool to rebuild after disasters remains popular in Congress, due in part to the continuing influence of corporations and large wealth holders through lobby shops like Capitol Counsel.
Ironically a senior lawyer at the elite New Orleans law firm of Adams & Reese who helped write portions of the GO-Zone Act, and whose clients have included big companies that have utilized tax-free GO-Zone bonds, sums up the harmful corporate bias inherent in disaster tax policy:
"the single greatest deficiency in the [GO-Zone] Act is the lack of sufficient assistance for small businesses. Smaller businesses typically do not need bonus depreciation because it is only beneficial if you have or expect substantial federal tax liability.”In other words, bonus depreciation was explicitly designed to help only very large corporations, particularly those like oil and chemical companies —think Exxon or Georgia Pacific— who routinely reinvest in machinery and their physical plants. This lawyer continued:
"Without allowing the GO Zone bonds to be bank qualified, banks cannot generally justify the purchase of tax-exempt bonds for small borrowers."Bank qualification was only one of the many reasons why tax-exempt GO-Zone bonds went un-utilized by 99 per cent of businesses, mostly medium and small firms, in the disaster-stricken region. Again, it was an opportunistic policy that only large corporations and large financial companies could possibly gain from.
Thus, more than five years after Katrina, the Gulf Opportunity Zone has become a zone of spotty recovery, with some communities still suffering from economic damages that will never be repaired by policies that were never designed to do so, and other areas seeing huge investments by polluting industries, wealth all the while being concentrated in the hands of a few. Ultimately this episode is about much more than one member of Congress, or one set of industries that gamed the tax code after a natural disaster; it's about the ascendancy of an ideology among government leadership, on both side of the aisle. The problem is that those who adhere to disaster tax policy not only believe the best response to calamity is to further enrich and empower the wealthy few: they also lack the ability to imagine that government could respond any differently, that it could directly empower and enrich the people, from the bottom up.
Saturday, October 9, 2010
Tax System Favors Wealth Over Work
The Golden Fruit
By GERALD E. SCORSE
Tea Partiers rage against taxes and say they’re too high. Wrong, says billionaire Warren Buffett, on the rich they’re too low.
The Tax Code holds the answer to this standoff, and the Code backs Buffett. Taxes may be the bane of the Tea Party, but they’re a relative boon for the wealthy. Let’s look at some of the ways America’s tax system keeps Warren Buffett’s fortune in Warren Buffet’s hands.
The major vehicle is George W. Bush’s 15 percent levy on long-term capital gains—the lowest since FDR’s first term—and on corporate dividends. The top 1 percent of U.S. households owns nearly 40 percent of all privately-held stock, from which the dividends flow. Similarly, the super rich get more than half their income from capital gains. In the meantime, for the working middle-class, the tax rate on wages is 25 percent.
Taxing income from wealth at little more than half the rate of income from work: it’s the perfect recipe to make sure that Warren Buffett (and all the Buffett wannabes) pay effective tax rates far below what their incomes suggest.
How far below? In 2006, Buffett told an interviewer that his tax bill was “far, far less as a fraction of his income than the secretaries or the clerks or anyone else in his office” (and he repeated the statement only recently). His shame in 2006 hits home still: “How can this by fair? How can this be right?”
The Tax Code sets marginal rates too, and these were gutted by President Reagan in 1981 and again in 1986. He slashed the top rate from 70 to 28 percent, and made the Code even less progressive by cutting the number of brackets from 15 to four. The yearning for tax simplification (fewer brackets) trumped the case for progressivity (more brackets).
There are six today, with the top four at 25, 28, 33 and 35 percent—a narrow spread, easily offset by provisions like the capital gains rate. The top rate kicks in at about $400,000 of taxable income, which author and tax expert David Cay Johnston calls “bizarre.” It’s a long way, he argues, from $400,000 to $1 million, $5 million, $100 million and hedge-fund billions: “Why don’t we have higher rates for those incomes?”
Even the bottom marginal rates help top earners. A millionaire, filing singly, pays the same 10 percent on the first $8,375 of taxable income as the working poor—and so on, up the income scale. As the Center on Budget and Policy Priorities notes, the real winners from extending Bush’s middle-class tax cuts wouldn’t be middle class: “In fact, a family making more than $1 million will receive more than five times the tax cut benefit, in dollar terms, as a middle-class family making $50,000 to $75,000…”
The Tax Code is also loaded with deductions that effectively rain dollars down on the rich. The Code doesn’t overtly discriminate, but it’s hardwired to make every tax break worth more at the top. All deductions get written off at 35 percent, starting with personal exemptions and standard deductions. This alone trims $7,315 off the tax bill of a post-65 couple. The serious money goes to itemizers, with Uncle Sam handing out five-figure amounts to help pay mortgages on pricy real estate.
President Obama once proposed capping the mortgage interest deduction at 25 percent, the middle class rate. His idea quickly died, attacked as class warfare. This summer, in a piece titled The Class War We Need, conservative columnist Ross Douthat was aghast to learn that the owners of McMansions were defaulting at twice the usual rate. “The rich are different from you and me,” he wrote. “They know how to game the system.”
They also know that Congress always stands ready to tilt the tax laws their way. When the market crashed in 2008, lawmakers rushed to pass a one-year suspension of required distributions from retirement accounts. Only the "haves" stood to gain. Those who actually needed the distributions had to take them and pay taxes. The "haves" took a pass and saved thousands. Back to Douthat: “In case after case, Washington’s web of subsidies and tax breaks effectively takes money from the middle class and hands it out to speculators and 'have-mores'.”
It’s taken a fortune in lobbying, but America’s tax system is bearing golden fruit. As even a conservative can see, it’s shifting income to the wealthy.
By GERALD E. SCORSE
Tea Partiers rage against taxes and say they’re too high. Wrong, says billionaire Warren Buffett, on the rich they’re too low.
The Tax Code holds the answer to this standoff, and the Code backs Buffett. Taxes may be the bane of the Tea Party, but they’re a relative boon for the wealthy. Let’s look at some of the ways America’s tax system keeps Warren Buffett’s fortune in Warren Buffet’s hands.
The major vehicle is George W. Bush’s 15 percent levy on long-term capital gains—the lowest since FDR’s first term—and on corporate dividends. The top 1 percent of U.S. households owns nearly 40 percent of all privately-held stock, from which the dividends flow. Similarly, the super rich get more than half their income from capital gains. In the meantime, for the working middle-class, the tax rate on wages is 25 percent.
Taxing income from wealth at little more than half the rate of income from work: it’s the perfect recipe to make sure that Warren Buffett (and all the Buffett wannabes) pay effective tax rates far below what their incomes suggest.
How far below? In 2006, Buffett told an interviewer that his tax bill was “far, far less as a fraction of his income than the secretaries or the clerks or anyone else in his office” (and he repeated the statement only recently). His shame in 2006 hits home still: “How can this by fair? How can this be right?”
The Tax Code sets marginal rates too, and these were gutted by President Reagan in 1981 and again in 1986. He slashed the top rate from 70 to 28 percent, and made the Code even less progressive by cutting the number of brackets from 15 to four. The yearning for tax simplification (fewer brackets) trumped the case for progressivity (more brackets).
There are six today, with the top four at 25, 28, 33 and 35 percent—a narrow spread, easily offset by provisions like the capital gains rate. The top rate kicks in at about $400,000 of taxable income, which author and tax expert David Cay Johnston calls “bizarre.” It’s a long way, he argues, from $400,000 to $1 million, $5 million, $100 million and hedge-fund billions: “Why don’t we have higher rates for those incomes?”
Even the bottom marginal rates help top earners. A millionaire, filing singly, pays the same 10 percent on the first $8,375 of taxable income as the working poor—and so on, up the income scale. As the Center on Budget and Policy Priorities notes, the real winners from extending Bush’s middle-class tax cuts wouldn’t be middle class: “In fact, a family making more than $1 million will receive more than five times the tax cut benefit, in dollar terms, as a middle-class family making $50,000 to $75,000…”
The Tax Code is also loaded with deductions that effectively rain dollars down on the rich. The Code doesn’t overtly discriminate, but it’s hardwired to make every tax break worth more at the top. All deductions get written off at 35 percent, starting with personal exemptions and standard deductions. This alone trims $7,315 off the tax bill of a post-65 couple. The serious money goes to itemizers, with Uncle Sam handing out five-figure amounts to help pay mortgages on pricy real estate.
President Obama once proposed capping the mortgage interest deduction at 25 percent, the middle class rate. His idea quickly died, attacked as class warfare. This summer, in a piece titled The Class War We Need, conservative columnist Ross Douthat was aghast to learn that the owners of McMansions were defaulting at twice the usual rate. “The rich are different from you and me,” he wrote. “They know how to game the system.”
They also know that Congress always stands ready to tilt the tax laws their way. When the market crashed in 2008, lawmakers rushed to pass a one-year suspension of required distributions from retirement accounts. Only the "haves" stood to gain. Those who actually needed the distributions had to take them and pay taxes. The "haves" took a pass and saved thousands. Back to Douthat: “In case after case, Washington’s web of subsidies and tax breaks effectively takes money from the middle class and hands it out to speculators and 'have-mores'.”
It’s taken a fortune in lobbying, but America’s tax system is bearing golden fruit. As even a conservative can see, it’s shifting income to the wealthy.
Monday, August 9, 2010
U.S. tax code encourages companies to rack up huge debt
Look at Macy's
By David Cho | Sunday, August 8, 2010; G01
Washington Post Staff Writer
Macy's has become the great American department store, with 850 locations scattered across all but four states. And it has gotten there the great American way, by running up huge debts and flirting with default, or worse.
Like other U.S. corporations, it also has had a uniquely American incentive for its borrowing habits: the nation's tax laws.
These rules offer extensive tax breaks to companies that borrow money and penalize those that raise cash in safer ways, such as issuing stock. Yet despite the recent financial crash, which exposed the perils of excessive borrowing, the rules are likely to persist in federal law because nearly all businesses in America would oppose eliminating these tax deductions, lawmakers say.
U.S. companies have had a long love affair with debt, and Washington has tacitly approved. Although the tax benefits are not the only driver of corporate America's preference for loans -- cheap rates and corporate strategy, as in Macy's case, are other major factors -- the tax code often tips the scales toward using debt for deals or for expanding a business.
Over the past generation, debt in America has exploded, becoming a way of life in nearly every sphere of society. And the tax code has been its handmaiden. Home buyers, towns and corporations all enjoy tax breaks that grow as they borrow more. Indeed, federal officials have found that the deductions for business debt are so generous that the government is, in many cases, essentially paying companies to borrow.
The surge in borrowing has opened new markets and financial industries. It has also at times powered economic growth -- for instance, the boom preceding the housing bust -- and activities that wouldn't have been possible under other conditions. Commercial developers build projects they otherwise wouldn't. Private equity firms are able to buy out companies with huge sums of borrowed money. Big banks that lend out all this borrowed money have come to play an outsize role in the economy.
Debt in itself is not harmful, financial analysts say. But they also question whether the government should be prodding companies to borrow and favoring businesses that heavily rely on debt.
"The tax code is interfering dramatically with the choice of how you finance and how you deliver returns in the corporate sector," said Douglas Holtz-Eakin, an economist who heads the American Action Forum. "Why would you build into the tax code a permanent bailout for corporate debt-financed investments?"
The lineage of Macy's runs back to a retailing powerhouse named Federated Department Stores, which once wielded so much influence that it persuaded President Franklin D. Roosevelt to extend the Christmas shopping season by moving Thanksgiving forward a week. During the following decades, Federated swallowed up nearly every other big name in the business, including Marshall Field, Filene's and Macy's -- and then took the Macy's name.
But along the way, Federated accumulated so much corporate debt that in the early 1990s the storied retailer ended up in bankruptcy. After it reemerged and took on billions of dollars more in debt to buy out a major rival, the company fell into trouble again and had to renegotiate its agreements with its lenders in 2008.
Federated was among dozens of companies in the 1980s that had a AAA credit rating -- the highest given by credit rating agencies -- and lost it after drowning their books in debt. Now there are only four.
"We've seen a complete transformation of corporate America," said Nick Riccio, a former managing director at Standard & Poor's who retired after more than 30 years of evaluating the health of companies. In the early 1980s, chief executives "were debt averse," he said. "All of them were aspiring to the top ratings we could give them. By the time I left, it was a completely different picture."
A heavy debt burden can also come with severe consequences, some more obvious than others.
It makes companies far more vulnerable to shocks -- for instance, a severe recession. It also can be more expensive than other ways of raising money because failing to return the loan, or even missing a few repayments, can force a company into a costly bankruptcy.
In the wake of the financial crash, corporations, including Macy's, have been urgently paying down debt and hoarding cash. Non-financial companies have saved up to $1.8 trillion in cash, about one-quarter more than when the recession began in early 2007. But without correcting the imbalance in the tax code, according to a wide range of tax analysts, the government will continue to encourage new cycles of debt-fueled booms and busts.
So far, there has been no effort by the federal government to curb the role of the tax code in inflating the economy's debt levels. A bipartisan bill in the Senate that would do so has stalled. The financial regulatory overhaul approved by Congress last month does not address the matter.
Macy's executives acknowledged that the company became overly indebted in the late 1980s. They said more recent borrowing levels have been manageable, even after the firm's debt rose to $10 billion as part of the mammoth acquisition of its competitor May Department Stores five years ago.
But several retailing analysts said that deal left Macy's on shaky ground when the recession began in late 2007. After the takeover, Macy's "had big slugs of debt the next couple of years," said Ken Stumphauzer, an analyst at Stern Agee. "They will be able to refinance now because credit markets have opened up . . . but it was scary for a little bit."
Debt no longer taboo
For decades, the memory of the Great Depression, with its devastating toll of defaults and bankruptcies, made executives wary of piling up debt anew. High credit ratings from Moody's and Standard & Poor's were viewed as a badge of success.
That changed radically in the 1980s. The rise of the junk-bond market offered companies the chance to borrow enormous sums of money, often for taking over other firms, in return for paying exceptionally high interest rates.
Federated Department Stores was a poster child of this era. Hailed as one of the most stable companies in the nation in the early 1980s, Federated was bought out by Canadian real estate magnate Robert Campeau in 1988 for $6.6 billion. Campeau borrowed most of that money and then put it on the company to pay it back. After the buyout, for every dollar in cash that Federated held, it had $32 in high-interest loans.
From Campeau's point of view, all this leverage came with a big benefit, compliments of the federal government. Under the tax code, the company he took over could deduct its high interest payments from the taxes it paid on its income.
If Campeau had used the borrowed money to build, say, a new warehouse, rather than take over an entire company, he could have won yet another kind of tax benefit. Many firms use borrowed money to pay for buildings and equipment and are entitled to a second tax deduction under an accounting principle known as "accelerated depreciation." As the value of buildings or equipment declines over time, a company can use this depreciation to reduce its tax liability.
The combined impact of those two deductions can be tremendous, according to the Congressional Budget Office. Together, they can free a company from paying tax on any income produced by projects financed with debt. But that's not all. The combined deduction can be so large that a company may also be able to apply some of it to its other income, reducing the overall tax bill even further.
The CBO calculated the effect and found that across corporate America companies on average face an effective tax rate of negative 6.4 percent on investments financed with debt. That means, in essence, that Washington is actually paying firms for borrowing money. (By contrast, if a company raises money by issuing stock, it faces the standard corporate tax rate of 35 percent.)
"The government is writing you a check to buy that greasy machinery," said Ed Kleinbard, a law professor at the University of Southern California.
Still, Federated's massive debt would prove costly. The rating agencies deemed the company to be a risky investment and downgraded it several notches, making it very expensive for the firm to borrow any more in a crunch. Its existing loans were expensive -- some had interest rates of 17 percent or higher -- and the retailer was counting on spectacular sales of clothes, purses and shoes to keep pace with the payments.
That didn't happen. In the early 1990s, the savings and loan crisis triggered a recession, and Federated wasn't ready for it. Just 21 months after the Campeau buyout, Federated filed for the biggest bankruptcy in retailing history. More than 5,000 employees lost their jobs. Shareholders were wiped out.
A company that virtually no one had thought could fail had collapsed.
Warnings about perverse incentives for corporate borrowing have long sounded in Washington.
"The tax at the corporate level provides a strong incentive for debt rather than equity finance," said Congress's Joint Committee on Taxation, adding that this increases "the possibility of financial distress."
That statement was issued more than 20 years ago. During the 1990s, corporate debt went on to grow by 60 percent. Then, over the next decade, it nearly doubled. Wall Street found new ways of making it easier to borrow while the Federal Reserve kept interest rates exceptionally low. By the end of last year, corporate America had nearly $11 trillion to pay off, according to the Fed.
Senior advisers to both presidential nominees in 2008 called for change. Holtz Eakin, who was John McCain's chief economist, warned that the tax code was "subsidizing leverage." Barack Obama adviser Jason Furman, now an economist at the White House's National Economic Council, similarly wrote that the debt bias "encourages corporations to finance themselves more heavily through borrowing. This leverage in turn increases the financial fragility of the economy, an effect we are seeing quite dramatically today."
Sens. Judd Gregg (R-N.H.) and Ron Wyden (D-Ore.) have drafted a bill to address how the tax code treats corporate debt. But the legislation is stalled, caught up in a much wider dispute over the taxes Americans pay.
After Federated emerged from bankruptcy in 1992, the company bought Macy's -- which had also gone bankrupt after borrowing too much. The combined retailer committed to keeping its debt levels low, winning an upgrade from ratings agencies.
But Federated's diet from big debts lasted only so long. Facing competition from big-box retailers, Federated decided in 2005 to pull off one of the largest deals in retailing history by buying May Department Stores for $11 billion, combining the biggest players in the business. The name of the company was changed to Macy's. At the time, company executives talked of making the red Macy's star as well known as Target's bull's-eye or Wal-Mart's smiley face.
To complete the deal, Federated agreed to absorb $6 billion of May's debt. While Macy's benefited from the interest deduction on those loans, the company's executives said that was not the reason the deal was made.
Some retailing analysts questioned whether the move would actually brighten Macy's outlook, with one writing the company had become "a bigger dinosaur." Wall Street, however, cheered the move, and Macy's stock rose steadily for the next two years.
Then, another recession struck. Macy's was vulnerable to the economic shock caused by the financial crisis.
The downturn in sales forced Macy's to acknowledge in 2008 that the May deal was worth less than it had paid. The write-down was so large -- totaling $5.4 billion -- that it significantly reduced the overall value of the company below a level that was allowed by its banks. That, in turn, forced Macy's to renegotiate the agreements it had with its lenders.
Macy's Chief Financial Officer Karen Hoguet said in an interview that the company was never in danger because it began those talks in advance of the write-down.
"We are always conscious of the balance between debt and equity," Hoguet said. "Life is about balance, so you try to develop your capital structure so you can withstand the downturn. We have not had any issues. We've had significant amounts of cash."
Macy's has cut its debt to $8 billion -- still about double the level before the deal for May -- and the company continues to focus on shedding even more, executives say.
But the costs have been significant.
In 2009, executives announced that 7,000 jobs would be cut. Macy's also saw its borrowing costs soar. And the ratings agencies again stripped the firm of the investment-grade rating it had worked for years to restore.
By David Cho | Sunday, August 8, 2010; G01
Washington Post Staff Writer
Macy's has become the great American department store, with 850 locations scattered across all but four states. And it has gotten there the great American way, by running up huge debts and flirting with default, or worse.
Like other U.S. corporations, it also has had a uniquely American incentive for its borrowing habits: the nation's tax laws.
These rules offer extensive tax breaks to companies that borrow money and penalize those that raise cash in safer ways, such as issuing stock. Yet despite the recent financial crash, which exposed the perils of excessive borrowing, the rules are likely to persist in federal law because nearly all businesses in America would oppose eliminating these tax deductions, lawmakers say.
U.S. companies have had a long love affair with debt, and Washington has tacitly approved. Although the tax benefits are not the only driver of corporate America's preference for loans -- cheap rates and corporate strategy, as in Macy's case, are other major factors -- the tax code often tips the scales toward using debt for deals or for expanding a business.
Over the past generation, debt in America has exploded, becoming a way of life in nearly every sphere of society. And the tax code has been its handmaiden. Home buyers, towns and corporations all enjoy tax breaks that grow as they borrow more. Indeed, federal officials have found that the deductions for business debt are so generous that the government is, in many cases, essentially paying companies to borrow.
The surge in borrowing has opened new markets and financial industries. It has also at times powered economic growth -- for instance, the boom preceding the housing bust -- and activities that wouldn't have been possible under other conditions. Commercial developers build projects they otherwise wouldn't. Private equity firms are able to buy out companies with huge sums of borrowed money. Big banks that lend out all this borrowed money have come to play an outsize role in the economy.
Debt in itself is not harmful, financial analysts say. But they also question whether the government should be prodding companies to borrow and favoring businesses that heavily rely on debt.
"The tax code is interfering dramatically with the choice of how you finance and how you deliver returns in the corporate sector," said Douglas Holtz-Eakin, an economist who heads the American Action Forum. "Why would you build into the tax code a permanent bailout for corporate debt-financed investments?"
The lineage of Macy's runs back to a retailing powerhouse named Federated Department Stores, which once wielded so much influence that it persuaded President Franklin D. Roosevelt to extend the Christmas shopping season by moving Thanksgiving forward a week. During the following decades, Federated swallowed up nearly every other big name in the business, including Marshall Field, Filene's and Macy's -- and then took the Macy's name.
But along the way, Federated accumulated so much corporate debt that in the early 1990s the storied retailer ended up in bankruptcy. After it reemerged and took on billions of dollars more in debt to buy out a major rival, the company fell into trouble again and had to renegotiate its agreements with its lenders in 2008.
Federated was among dozens of companies in the 1980s that had a AAA credit rating -- the highest given by credit rating agencies -- and lost it after drowning their books in debt. Now there are only four.
"We've seen a complete transformation of corporate America," said Nick Riccio, a former managing director at Standard & Poor's who retired after more than 30 years of evaluating the health of companies. In the early 1980s, chief executives "were debt averse," he said. "All of them were aspiring to the top ratings we could give them. By the time I left, it was a completely different picture."
A heavy debt burden can also come with severe consequences, some more obvious than others.
It makes companies far more vulnerable to shocks -- for instance, a severe recession. It also can be more expensive than other ways of raising money because failing to return the loan, or even missing a few repayments, can force a company into a costly bankruptcy.
In the wake of the financial crash, corporations, including Macy's, have been urgently paying down debt and hoarding cash. Non-financial companies have saved up to $1.8 trillion in cash, about one-quarter more than when the recession began in early 2007. But without correcting the imbalance in the tax code, according to a wide range of tax analysts, the government will continue to encourage new cycles of debt-fueled booms and busts.
So far, there has been no effort by the federal government to curb the role of the tax code in inflating the economy's debt levels. A bipartisan bill in the Senate that would do so has stalled. The financial regulatory overhaul approved by Congress last month does not address the matter.
Macy's executives acknowledged that the company became overly indebted in the late 1980s. They said more recent borrowing levels have been manageable, even after the firm's debt rose to $10 billion as part of the mammoth acquisition of its competitor May Department Stores five years ago.
But several retailing analysts said that deal left Macy's on shaky ground when the recession began in late 2007. After the takeover, Macy's "had big slugs of debt the next couple of years," said Ken Stumphauzer, an analyst at Stern Agee. "They will be able to refinance now because credit markets have opened up . . . but it was scary for a little bit."
Debt no longer taboo
For decades, the memory of the Great Depression, with its devastating toll of defaults and bankruptcies, made executives wary of piling up debt anew. High credit ratings from Moody's and Standard & Poor's were viewed as a badge of success.
That changed radically in the 1980s. The rise of the junk-bond market offered companies the chance to borrow enormous sums of money, often for taking over other firms, in return for paying exceptionally high interest rates.
Federated Department Stores was a poster child of this era. Hailed as one of the most stable companies in the nation in the early 1980s, Federated was bought out by Canadian real estate magnate Robert Campeau in 1988 for $6.6 billion. Campeau borrowed most of that money and then put it on the company to pay it back. After the buyout, for every dollar in cash that Federated held, it had $32 in high-interest loans.
From Campeau's point of view, all this leverage came with a big benefit, compliments of the federal government. Under the tax code, the company he took over could deduct its high interest payments from the taxes it paid on its income.
If Campeau had used the borrowed money to build, say, a new warehouse, rather than take over an entire company, he could have won yet another kind of tax benefit. Many firms use borrowed money to pay for buildings and equipment and are entitled to a second tax deduction under an accounting principle known as "accelerated depreciation." As the value of buildings or equipment declines over time, a company can use this depreciation to reduce its tax liability.
The combined impact of those two deductions can be tremendous, according to the Congressional Budget Office. Together, they can free a company from paying tax on any income produced by projects financed with debt. But that's not all. The combined deduction can be so large that a company may also be able to apply some of it to its other income, reducing the overall tax bill even further.
The CBO calculated the effect and found that across corporate America companies on average face an effective tax rate of negative 6.4 percent on investments financed with debt. That means, in essence, that Washington is actually paying firms for borrowing money. (By contrast, if a company raises money by issuing stock, it faces the standard corporate tax rate of 35 percent.)
"The government is writing you a check to buy that greasy machinery," said Ed Kleinbard, a law professor at the University of Southern California.
Still, Federated's massive debt would prove costly. The rating agencies deemed the company to be a risky investment and downgraded it several notches, making it very expensive for the firm to borrow any more in a crunch. Its existing loans were expensive -- some had interest rates of 17 percent or higher -- and the retailer was counting on spectacular sales of clothes, purses and shoes to keep pace with the payments.
That didn't happen. In the early 1990s, the savings and loan crisis triggered a recession, and Federated wasn't ready for it. Just 21 months after the Campeau buyout, Federated filed for the biggest bankruptcy in retailing history. More than 5,000 employees lost their jobs. Shareholders were wiped out.
A company that virtually no one had thought could fail had collapsed.
Warnings about perverse incentives for corporate borrowing have long sounded in Washington.
"The tax at the corporate level provides a strong incentive for debt rather than equity finance," said Congress's Joint Committee on Taxation, adding that this increases "the possibility of financial distress."
That statement was issued more than 20 years ago. During the 1990s, corporate debt went on to grow by 60 percent. Then, over the next decade, it nearly doubled. Wall Street found new ways of making it easier to borrow while the Federal Reserve kept interest rates exceptionally low. By the end of last year, corporate America had nearly $11 trillion to pay off, according to the Fed.
Senior advisers to both presidential nominees in 2008 called for change. Holtz Eakin, who was John McCain's chief economist, warned that the tax code was "subsidizing leverage." Barack Obama adviser Jason Furman, now an economist at the White House's National Economic Council, similarly wrote that the debt bias "encourages corporations to finance themselves more heavily through borrowing. This leverage in turn increases the financial fragility of the economy, an effect we are seeing quite dramatically today."
Sens. Judd Gregg (R-N.H.) and Ron Wyden (D-Ore.) have drafted a bill to address how the tax code treats corporate debt. But the legislation is stalled, caught up in a much wider dispute over the taxes Americans pay.
After Federated emerged from bankruptcy in 1992, the company bought Macy's -- which had also gone bankrupt after borrowing too much. The combined retailer committed to keeping its debt levels low, winning an upgrade from ratings agencies.
But Federated's diet from big debts lasted only so long. Facing competition from big-box retailers, Federated decided in 2005 to pull off one of the largest deals in retailing history by buying May Department Stores for $11 billion, combining the biggest players in the business. The name of the company was changed to Macy's. At the time, company executives talked of making the red Macy's star as well known as Target's bull's-eye or Wal-Mart's smiley face.
To complete the deal, Federated agreed to absorb $6 billion of May's debt. While Macy's benefited from the interest deduction on those loans, the company's executives said that was not the reason the deal was made.
Some retailing analysts questioned whether the move would actually brighten Macy's outlook, with one writing the company had become "a bigger dinosaur." Wall Street, however, cheered the move, and Macy's stock rose steadily for the next two years.
Then, another recession struck. Macy's was vulnerable to the economic shock caused by the financial crisis.
The downturn in sales forced Macy's to acknowledge in 2008 that the May deal was worth less than it had paid. The write-down was so large -- totaling $5.4 billion -- that it significantly reduced the overall value of the company below a level that was allowed by its banks. That, in turn, forced Macy's to renegotiate the agreements it had with its lenders.
Macy's Chief Financial Officer Karen Hoguet said in an interview that the company was never in danger because it began those talks in advance of the write-down.
"We are always conscious of the balance between debt and equity," Hoguet said. "Life is about balance, so you try to develop your capital structure so you can withstand the downturn. We have not had any issues. We've had significant amounts of cash."
Macy's has cut its debt to $8 billion -- still about double the level before the deal for May -- and the company continues to focus on shedding even more, executives say.
But the costs have been significant.
In 2009, executives announced that 7,000 jobs would be cut. Macy's also saw its borrowing costs soar. And the ratings agencies again stripped the firm of the investment-grade rating it had worked for years to restore.
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