Social Security as a National Pension, Part 2

First, a satirical take on the disparity between how wealthy people (business and financial executives) see their compensation versus what their employees and public service employees should receive:

The Daily Show
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Back in 2007, I proposed that Social Security should become a full pension system. Interestingly, policies are now proposed to allow states to disregard their promised deferred compensation contracts because they are allegedly cost prohibitive. Here is a snippet from the linked Forbes article:

The pension plan is the direct result of deferred compensation- money that employees would have been paid as cash salary but choose, instead, to have placed in the state operated pension fund where the money can be professionally invested (at a lower cost of management) for the future.

Many of us are familiar with the concept of deferred compensation from reading about the latest multi-million dollar deal with some professional athlete. As a means of allowing their ball club to have enough money to operate, lowering their own tax obligations and for other benefits, ball players often defer payment of money they are to be paid to a later date. In the meantime, that money is invested for the ball player’s benefit and then paid over at the time and in the manner agreed to in the contract between the parties.

Does anyone believe that, in the case of the ball player, the deferred money belongs to the club owner rather than the ball player? Is the owner simply providing this money to the athlete as some sort of gift? Of course not. The money is salary to be paid to the ball player, deferred for receipt at a later date.

A review of the state’s collective bargaining agreements – many of which are available for review at the Wisconsin Office of State Employees web site - bears out that it is no different for state employees. The numbers are just lower.

As has been the case for some time, there are two rules in the United States when it comes to compensation: one rule for executives at the top of the income scale, and another for those who work for them.

Many years ago, it was common for workers to live in the same place their whole lives and they would also work for the same employer substantially that entire time. However, mobility is now a premium as workers now need to move -- across country, at times -- if they want to stay employed or advance in their careers. Our country's retirement system should reflect this reality. As such, Social Security best meets that goal. It is already set up as a portable -- albeit supplemental -- pension system, designed to prevent "destitute poverty" in old age. However, because Congress "borrowed" from the Social Security Trust Fund in the 1980s -- when it allegedly was "over-funded," the Trust Fund is now supposed to be "in crisis."

It is interesting that workers who borrow from their 401Ks are required to pay back what they borrowed with interest, but Congress is supposed to skate when it does the same thing with the Social Security Trust Fund? That borrowing "financed" tax cuts for the top tax brackets.

It is time that that "borrowed" money be paid back. People who paid into the system by working substantially all of their lives deserve to receive what they paid in. That is why Social Security is called an entitlement program; and the U.S. Government has a contractual obligation to make good on its promises. This is also true of the states. In all of this, actuarial calculations were made (admittedly, with unrealistic calculations in order to bring down required expected contributions) wherein workers changed their positions on their then present salary and wage increase demands. Now thirty years later, we have seen the result of these sacrifices by working men and women. Here is graph from Mother Jones magazine that creates a visual depiction of the changes:

The other reason why Social Security should be a national pension is that both private employers and states have shown that they cannot be trusted to contribute to their pensions like they are required to, and both have sought to shirk their obligations through bankruptcy protections. Furthermore, it is an outrage that corporate executives should be allowed to divvy up the company's contributions to those plans through what is known as a "bleedout."

As I said in the previous post, I am not opposed to the Trust Fund being allowed to invest in the stock market based on the worker's age, as long as the investment is made directly from the market and not through Wall Street. There are plenty of talented Wall Street traders who are hungry enough (especially now) who would be willing to accept a government salary for security. I realize there is a danger of a "revolving door" just like there is now with regulatory agencies such as the SEC. But with the right regulation, those problems could be minimized.

The time has come to create a guaranteed retirement system for all Americans that cannot be taken away at the whims of corporate executives or the pressure of political interest groups. And as Ronald Brownstein has opined: the problem isn’t that public-sector workers have too much retirement security. It’s that everyone else has too little.

How To Spot A Scam, Part 5: Tax Scam Update

There is a new phishing e-mail scam going around involving tax "refunds."

The letter says this:

Internal Revenue Service
United States Department of the Treasury

After the last annual calculations of your fiscal activity we have
determined that you are eligible to receive a tax refund of $496.23.
Please submit the tax refund request and allow us 3-9 days in order to
process it.

A refund can be delayed for a variety of reasons.
For example submitting invalid records or applying after the deadline.

To access your tax refund, please click here

Best Regards,
Tax Refund Deparment
Internal Revenue Service
---------------------------------------------------

If you get this message, delete it. It is not from the IRS. More information can be obtained at the IRS website.

How To Spot A Scam, Part 5: Tax Scams

Bankrate.com has a list of the "dirty dozen" tax scams and how to spot them. Here are the list of tax scams covered:

1. Telephone tax refund abuses
2. Abusive Roth IRAs
3. Tax-related identity theft phishing
4. Disguised corporate ownership
5. Zero wage claims
6. Return preparer fraud
7. American Indian employment credit
8. Illegitimate trusts
9. Structured entity credits
10. Improper charitable deductions
11. Form 843 tax abatement
12. Frivolous arguments

Number 12 is the most common one that I am aware of. Here is the entry from Bankrate.com:

12. Frivolous arguments

This is probably the most notorious of scams. Promoters have advocated numerous false claims over the years, including that the 16th Amendment concerning congressional power to lay and collect income taxes was never ratified, wages are not income, filing a return and paying taxes are merely voluntary and being required to file Form 1040 violates the Fifth Amendment right against self-incrimination or the Fourth Amendment right to privacy. The IRS and courts have consistently held that such arguments are frivolous. Taxpayers have the right to contest their tax liabilities in court, says the IRS, but no one has the right to disobey the law that allows the government to collect the taxes.

...

The absence of a particular scheme from the annual dirty dozen rankings should not be taken as an indication that the IRS is unaware of it or not taking steps to counter it. While some schemes might not be as active this tax season, the IRS says taxpayers should remain wary because old scams often resurface or evolve.

If you encounter any of these schemes, or are approached with a new one, the IRS wants to know. Report suspected tax fraud by calling toll-free (800) 829-3676.

Turn in tax cheats and con artists

You also can report suspected tax fraud by sending in Form 3949-A, Information Referral. The completed form or a letter detailing the alleged fraudulent activity should be addressed to the Internal Revenue Service, Fresno, CA 93888. Include as much information as you can, including who is being reported, the activity being reported, how the activity became known, when the alleged violation took place, the amount of money involved and any other information that might be helpful in an investigation. You don't have to give the IRS your name or address, although it is helpful to do so. The agency says it will keep your information confidential. And if the IRS recovers any tax revenue based on your tip, you might be entitled to a reward. In that case, tax officials will need to know how to get in touch with you.

And remember: If you are ever offered a "surefire" tax-saving opportunity, it never hurts to be a little skeptical.

"When it comes to taxes, everyone has to pay their fair share," says IRS Commissioner Everson. "I urge taxpayers not to be taken in by hucksters who promise to lower or eliminate taxes. Getting caught up in the dirty dozen or similar schemes can lead to big headaches."

And remember the old adage: "If it seems too good to be true, it probably is." If you have any legitimate tax questions or need help with them, only use a certified state-licensed professional or Certified Public Accountant (CPA). If you feel you cannot afford a professional, there are many tax programs (TaxCut, TurboTax, etc.) available at many retail outlets that are easy to use and they will go through any potential tax credits or breaks you might be entitled to. There are also different versions of each of these products to match your specific need. For instance, the cheapest version can be used if you are merely a wage earner and don't have that many deductions and the more expensive version is for those who may have a business for which they need to use Schedule C. For your convenience (and, potentially, a small monetary gain on my part) I have provided a link to Amazon.com for each of the products I have mentioned.

If you do think you want to do it yourself, give yourself plenty of time (set aside at least a full day; even better: plan an entire weekend to prepare your tax returns, if necessary). You only have to do it once per year; and once it's done, it's done.

Warren Buffett: Raise My Heir's Taxes

From CNN Money: Buffett: Tax my kin, please:

"Without the estate tax, you in effect will have an aristocracy of wealth, which means you pass down the ability to command the resources of the nation based on heredity rather than merit," Buffett told the New York Times in 2001. "[Repeal would be like] choosing the 2020 Olympic team by picking the eldest sons of the gold-medal winners in the 2000 Olympics."

Buffett also joined a campaign in 2001 to preserve the estate tax alongside 119 other wealthy Americans, including George Soros and Bill Gates' father, William H. Gates, Sr..

...

Typically, fewer than 2 percent of deaths result in estates sizeable enough to be subject to the estate tax. In 2006, for example, less than 1 percent resulted in taxable estates.

For more see my previous post: Estate Tax Reasoning.

Inflating the Beast

One of the things I have been thinking about is the reason for the inflating of the money supply. Conservatives have been arguing that cutting taxes increases tax revenues using the Laffer Curve argument. How could this sleight-of-hand be accomplished? Inflate the money supply. With the combination of nominally more money in the economy and the effect of the AMT tax hitting the middle class, there would be an increase (nominally) in the amount of tax revenues. Combine this with social security payments kept virtually the same (and doing the most harm to low income retirees) and you end up effectively starving the beast.

It's dishonest, of course. But I expect conservatives to tout this come next year.

Relief Bill for Homeowners Passes House

Relief Bill for Homeowners Advance

WASHINGTON (AP) -- Financial relief for homeowners facing foreclosure or in bankruptcy advanced in the House Thursday when the House approved legislation to help financially strapped homeowners.

The bill, passed by a 386-to-27 vote, would give a tax break to homeowners who have mortgage debt forgiven as part of a foreclosure or renegotiation of a loan. No taxes would be owed on the value of any debt forgiven or written off. Currently such debt forgiveness is taxable income.

While the measure is anticipated to reduce taxes of some strapped homeowners by $650 million, the cost to the government would be offset in part by limiting a tax break available on the sale of second homes.

...

The House vote was the latest congressional reaction to a mortgage crisis touched off this spring by a blowup in high-priced home loans for risky borrowers, throwing a pall over the economy. Foreclosures are at record highs and late payments are spiking. Lenders have been forced out of business and investors have taken huge financial hits.

An estimated 2 million to 2.5 million adjustable-rate mortgages - worth some $600 billion - will jump from low initial "teaser" rates to higher rates this year and next. Steep prepayment penalties have made it difficult for some to get out of their mortgages, and some overstretched homeowners can't afford to refinance or sell their homes.

To help offset the $650 million in tax revenue, the legislation makes it harder to get breaks on capital gains taxes for the sale of second homes. The White House supports the measure but wants mortgage relief to be in effect three years, not permanent as approved in the House. Bush also is opposed to limiting tax breaks on the sale of second homes.

The Mortgage Bankers Association expressed strong support for the bipartisan tax-relief bill but fiercely criticized another measure, opposed by Republicans on a House Judiciary subcommittee that narrowly approved passing it to the full committee.

That measure, which faces a contentious future in Congress, would revise the bankruptcy code to aid homeowners facing default and foreclosure. If enacted, it would further trim profits at hard-hit mortgage lenders.

The bill would allow judges to order mortgage lenders to ease terms for homeowners in bankruptcy proceedings. Currently, mortgage lenders can foreclose against a homeowner in default 90 days after a bankruptcy filing.

Mortgage lenders would be "terrified" of getting wrapped up in bankruptcy proceedings, said Brian Gardner, a research analyst with investment firm Keefe, Bruyette & Woods.

The MBA said in a statement: "Lenders will have no choice but to move to foreclosure right away to ensure that they are not covered by the onerous provisions of this bill. In the longer term, investors and speculators who overpaid for homes at the height of the housing bubble will have an incentive to file for bankruptcy, walk away from the loan and property, and reap an undeserved windfall."

The tax-relief bill is H.R. 3648.

The bankruptcy-related bill is H.R. 3609.

In response to the MBA, so the MBA should reap a windfall for engaging in what they knew -- or, at least, should have known -- was an overheated market (that they helped create)? Secondly, if you are in bankruptcy, where is the "windfall?" After all, isn't that a risk that lenders take when they make loans?

Rising Inequality

I found a statement made by Alan Greenspan recently quite disturbing. Greenspan Book Criticizes Bush And Republicans:

Greenspan worries that rising income inequality could undo “the cultural ties that bind our society” and even lead to “large-scale violence.”

His solution to remedy this situation is “not higher taxes on the rich but improved education”, which, he claims, “can be helped by paying math teachers more.”

It might help, though, if rich people paid at least comparable rates as working class people do.

A Response to Alex Taylor III

Today, Alex Taylor III wrote an article posted at CNN Money wherein he criticized Thomas Friedman of the New York Times in his article Debunking auto industry myths. That all fine and good; but in the process he made (I feel) an unfair statement:

It has been argued here before that if the government wants to be serious about improving fuel economy, all it has to do is boost the tax on gasoline. The revenue generated could be rebated to lower-income drivers who are truly disadvantaged or invested in mass transit. The auto companies aren't going to argue for such a tax because it would give them a black eye with consumers. And the government won't do it either, because of its anti-tax bias.

But Friedman, using his column as a bully pulpit, could argue for such a tax with impunity. And it would be a whole lot more effective than perpetuating the old myth about the ignorant luddites in Detroit who are withholding the small, fuel-sipping cars that Americans really want to buy.

But he has argued for a tax on gasoline. Here is a quote from his column back in February:

But at the same time, we have to impose a tax that creates a floor price of $3.50 a gallon for gasoline — forever. This is also about leverage. It says to all the parties: we are going to conserve enough gasoline and spur enough clean alternatives to fossil fuels that no matter what you all do in the Middle East, we will not depend on you for energy.

Another thing I take issue with is his statement that U.S. automakers and Americans don't need to change their habits:

That's wrong...and wrong. Forcing people to buy more efficient cars by ordering car companies to make them is like forcing people to lose weight by banning food companies from selling Big Macs and pizzas. The reason Americans consume so much gasoline is that they like their big pickup trucks, SUVs, and V-8 engines. The reason the automakers make them is because people want to buy them.



He also tries to defend them by saying:

American manufacturers DO build fuel-efficient cars but Americans don't buy them. Ford (Charts, Fortune 500) is currently offering cut-rate financing on the 2008 Escape Hybrid, while GM (Charts, Fortune 500) is subsidizing the smallest car in its lineup, the Chevy Aveo. And GM can brag all it wants about having more models - 30 of them - than any other manufacturer that get more than 30 miles per gallon on the highway, but it gets precious little credit for it in the marketplace.

The reason people (like me) don't buy them is because the quality is not as good as a Honda or Toyota -- even if it is cheaper. Furthermore, the Aveo's fuel economy is not as good as the Honda Civic or Fit or Toyota Echo or Yaris. (I know, I checked.)

Don't believe me? Here is the fuel economy for the Chevy Aveo:

City 26
Highway 35

And the Honda Civic:

City 30
Highway 38

You need only look at Consumer Reports or a similar opinion poll by consumers on what kind of car they want to buy to know that GM's economy cars have a ways to go in terms of quality. And as for the Escape Hybrid? It's hybrid engine is designed not to increase its gas mileage but instead to increase its power. That misses the point of hybrid technology.

Whose Entitlement Mentality?

David Brooks in his column last Friday in the New York Times, wrote a column entitled The Entitlements People. I am going to respond to some of his statements (and the general underlying presumptions of his argument). Let's start with an alarmist statement:

The U.S. government has $43 trillion in unfunded liabilities, or $350,000 for every taxpayer. Standard & Poor’s projects that in 2012, the U.S. will lose its AAA bond rating.

The current Gross Domestic Product of the U.S. is about $13 trillion. How these unfunded liabilities are supposed to equal over three times the entire annual U.S. economy is beyond me. Total tax revenues in 2006 equaled $2.4 trillion. The unfunded liabilities are supposed to equal almost 20 times annual tax revenues? Somehow that doesn't compute, either.

In a web post by a group called The Social Security Network entitled The "Unfunded Liabilities" Ruse who was responding to a USA Today article claiming that the U.S. Government would have a $53 trillion unfunded liability in the next four years in October 2004:

All of the grotesquely huge unfunded liability numbers spouted by scare mongers depend on forecasts that go out many decades, often hundreds of years. Such forecasts routinely go beyond the point where we could have any firm knowledge of what to expect. Of course, it is technically very easy to trace the implications of assumptions about future productivity, birth and immigration rates, labor force participation levels, and various costs over the next 20, 50, or even 1,000 years. These assumptions have implications for the age structure of the population, the rate of economic growth, and the cost of various government programs. Plugging those assumptions into a spreadsheet can tell us precisely how much Social Security or Medicare will cost us, extrapolated to eternity, if we like.

The problem is that over such long time horizons, small differences in those assumptions compound to huge variations in forecasts. If something (say health care costs) is growing faster than something else (say incomes) and we assume that this continues indefinitely, then eventually, what is growing fast will swamp what is growing slowly. That's arithmetic, not policy analysis.

Here it is in 2007 and now that number has shrunk to $43 trillion in Brook's column. Another assumption is that taxes will not be raised and/or inflation will not cause revenues to increase to meet those obligations. Again, from The "Unfunded Liabilities" Ruse post linked above:

The notion of "unfunded liabilities" in certain programs is based on the arbitrary assumption that certain designated revenue sources should pay for certain classes of government expenditures. The story that Social Security and Medicare should be paid for out of payroll taxes and their trust funds is not a recent creation of critics of those systems. It has been around for decades. But why? Revenues and expenditures are "fungible," meaning that a dollar is a dollar is a dollar. In fact, today's Social Security surplus flows right into the pot with other revenues, while a significant portion of Medicare costs already are paid for out of general revenue. The real question is not "will the designated revenues be enough to pay for the designated programs" but "will we have enough income to afford to keep the promises we have made?"

There is no question that the nation's gross domestic product will be sufficient to meet all of our Social Security promises forever, leaving lots of income for increasing the prosperity of the young. In general, the outlook for economic growth is good. Our average income per person in 100 years is likely to be much, much higher than it is today (more than four times as high). Social Security benefits are predicted to rise from about 4.5 percent of our GDP to about 6.6 percent over the next century. Even though such long predictions are very uncertain, this one should leave us sanguine: if incomes in 100 years are only twice their present level, and incomes of the old rise from 4.5 to 6.6 percent of income, that still leaves us with $1.96 for every dollar we have today, after Social Security obligations are taken care of. We can continue to keep our modest Social Security promises, and young families still will be much better off than families are today.

I agree with the conclusion The "Unfunded Liabilities" Ruse makes when they say:

Imagine if in 1950, someone had calculated the costs of educating the baby boomers in public institutions through their college years. What an immense, unmanageable burden! And nothing-not a penny-had been set aside by 1950 to cover the costs of public universities in the 1960s and 1970s! Using the logic of unfunded liabilities that has fueled alarmist media stories, public universities should have been closed; education should have been left to the private sector.

Yet nobody ever claimed in the 1950s and 1960s that the education of the Baby Boomers was an excessive burden our society, or that our public institutions could not afford to accept the challenge. When we needed more schools, we built them. Why should the Boomers' retirement be unmanageable? We need to strengthen social insurance for old people, and we will be able to afford it.

I hate to beat a dead horse, but I still think that many Americans would take advantage of Social Security as a full pension if they understood how unsecure their current pensions are.

I also want to focus on something else Brooks wrote:

Democrats vow to pay for their grand spending plans by raising taxes on the rich, even though each one percent increase in the top tax rate only produces $6 billion in revenue.

It's nice how he limits the question only to the top tax rate of income taxes. As I have pointed out before, the rich often don't pay income taxes. As Warren Buffett has tried to point out, people in his class almost always pay far lower capital gains taxes (which makes up most of their incomes). I'm curious how much an increase in the capital gains rate to, say, 30% (i.e. doubling the rate) would have on revenues. Tax revenues from capital gains were roughly $80 billion in 2005. Even if we assume that raising the rate would have some adverse effect on tax revenues, I think that $120 billion in revenue per year would not be out of the question. That would be an increase of $40 billion per year.

I think one of the problems is that even as inflation has caused incomes to rise, the payroll tax has not extended beyond $120,000 and taxes on the investor (wealthy) class is too low (even Warren Buffett agrees with this). Instead, it appears that Congress is content to sock it to the middle class through inflation's effect on the Alternative Minimum Tax (AMT).

Another major problem is that we are not paying for the government we know we need. The fact that tax revenues don't pay for the government that our elected representatives allocated ought to be a clue that tax revenues are lacking somewhere. Deficit spending is only supposed to take place during war or economic distress according to Keynesian theory. The debt is then supposed to be paid back when the economy rebounds or when the war is over. But we seem to be in a perpetual cycle of government deficit and ever-increasing government debt obligations.

The fact is that all government is nothing more than a very large service-based industry. Whatever services we deem necessary need to be paid for. With a $9 trillion national debt, we are obviously not paying for the services that we are utilizing.

I guess we all just feel entitled.

AMT May Catch Middle Class Taxpayers in 2008

As reported by CNN Money, many middle class taxpayers might get hit with an unexpected tax bill next year.

David Lifson, president of the New York State Society of CPAs, tells clients who could be candidates to sock away 1 percent to 2 percent of their gross income, so that if it turns out they do have to pay AMT in April, they'll have the extra cash on hand. If they don't, he said, then they'll at least have some enforced savings.

Broadly speaking, you might be at risk of having to pay AMT if more than one of these situations apply:

* You live in a high-tax state. State and local income taxes are not deductible under AMT as they are under the regular federal income tax code.

* You have kids. Personal exemptions are disallowed under the AMT.

* You take a lot of miscellaneous deductions, including unreimbursed business expenses. They, too, are disallowed under the AMT.

* Your household gross income exceeds $100,000.

Jeanguenat and enrolled agent Marc Standig are telling clients to do what small things they can to minimize their tax bite, such as maxing out their contributions to tax-advantaged retirement plans and tax deductible IRAs.

For those who may be AMT candidates, Lifson and Standig also advise boosting tax withholdings on their paychecks if they have a lot of other income - such as dividends or a big bonus - that have few or no withholdings but which they will owe tax on come April 15. That way, they may avoid underpayment penalties.

This is another aspect of inflation that many people may not realize. However, the tax rate on capital gains (which is the kind of tax that Warren Buffet pays) stays at the same low rate.

National Debt Madness

Paulson Asks Congress to Lift Debt Limit

WASHINGTON (AP) -- Treasury Secretary Henry Paulson told Congress on Wednesday the government will hit the current debt ceiling on Oct. 1.

He sought quick action to increase the limit, saying it was essential to protect the "full faith and credit" of the country, especially at a time of financial market turmoil.

The limit is $8.965 trillion. Unless Congress votes to raise it, the country would be unable to borrow more money to keep the government operating and to pay debt obligations coming due.

Actually having tax rates reflect what government services we have decided we need would be such a terrible thing, don't you know. According to the neoconservatives, borrowing and spending (and paying interest on the resulting debt) is far preferable to, you know, actually paying for it responsibly. Now if we could just get the Democrats to get a spine and stand up to the fiscally irresponsible neoconservatives, maybe we could actually have real discussion on what this country can really afford.

The real reason the neoconservative Republicans want to keep raising the national debt is to eliminate social spending through the Starve the Beast plan.

It really comes down to a values question of "guns vs. butter." I am curious if anyone has ever studied the return on investment of foreign entanglements where we try to acquire natural resources through military engagement vs. taking that same money and plowing it into America's infrastructure and alleviation of social ills. I think that we promote too much conflict in this world. There is too much spending on "guns" and not enough on "butter."

Favoritism for the Wealthy

From Jonathan Chait at the TPM Book Club:

Class War and the Big Con

Some of the debate in the blogs last week focused on whether, or to what degree, leading Republicans actually believe the arguments they make on behalf of tax cuts, such as the common claim (made by leading Republicans everywhere, starting with President Bush) that tax cuts have caused revenues to grow. I think many of them do believe it. But the extent to which they believe it is fairly beside the point. The wealthy interests who favor tax cuts, and other pro-rich items, aren’t motivated by supply-side ideology. While they may believe that tax cuts help the economy, their deeper belief is that every dollar they have, including the dollars they inherited, is a reflection of their success and a measure of their virtue. So, in this sense, supply-side ideology simply plays the same role that Social Darwinism did a century ago and that economic orthodoxy did seventy years ago.

Or maybe they are just different justifications for the same mindset. I have argued before that we are starting to see a return of Social Darwinism as an accepted idea. I'm not convinced it has died out. I suspect it is more that Social Darwinism is being downplayed to some extent in favor of a new repackaged argument that rich=moral. Social Darwinism has at its core a belief that those who have attained wealth and status have done so due to their moral or genetic superiority.

It has even taken root in Christianity. If you look at the "Gospel of Wealth" being preached in conservative churches, you can see what I mean. I have seen people in conservative churches told that they are just not rich because they are not right with God.

I don't want to get too far off of the main subject, but certainly wealth does not equate in any way with moral superiority. "All great wealth starts with a crime" as we lawyers would say. In the Christian context, there is this from the Epistle of James:

2:1 My brethren, do not hold your faith in our Lord Jesus Christ, the Lord of glory, with partiality.
2:2 For if there comes into your assembly a man with a gold ring, in fine apparel, and there also comes in a poor man in shabby clothing,
2:3 And you pay special attention to him who wears the fine clothing, and say to him, Sit here in a good place; and say to the poor man, Stand there, or sit here beside my footstool:
2:4 Have you not then discriminated among yourselves, and become judges with evil thoughts?
2:5 Listen, my beloved brethren, Has not God chosen the poor of this world to be rich in faith, and heirs of the kingdom which he has promised to those who love him?
2:6 But you have despised the poor. Is it not the rich who oppress you, and drag you into court?
2:7 Is it not they who blaspheme the noble name by which you have been called?
2:8 If you fulfill the royal law, according to the scripture, You shall love your neighbour as yourself, you do well,
2:9 But if you show partiality, you commit sin, and are convicted by the law as transgressors.
2:10 For whoever shall keep the whole law, and yet stumble at one point, is guilty of breaking it all.

I think too many Christian leaders are skipping over these type of texts in both the Gospels and the other writings in the New Testament.

Anyway, back to the main subject: I found this quote at The New Republic's excerpt from Chait's book.

From 1947 to 1973, the U.S. economy grew at a rate of nearly 4 percent a year--a massive boom, fueling rapid growth in living standards across the board. During most of that period, from 1947 until 1964, the highest tax rate hovered around 91 percent. For the rest of the time, it was still a hefty 70 percent. Yet the economy flourished anyway. None of this is to say that those high tax rates caused the postwar boom. On the contrary, the economy probably expanded despite, rather than because of, those high rates. Almost no contemporary economist would endorse jacking up rates that high again. But the point is that, whatever negative effect such high tax rates have, it's relatively minor.

First, what needs to pointed out was that this referred, I think, to income tax rates. But the super-rich make much of their income from investments (i.e. passive income). Even if these were tax rates on capital gains, this would be taxation 1) only on the highest earners; and 2) on income not drawn from labor. The principle that we once had is that we want to encourage people to produce and contribute to the betterment of society and the economy. We don't want "trust fund babies" who don't have to work because their talents and abilities will have a tendency to go wasted. And as successive generations are born into wealth, they will have less appreciation for the benefits that their ancestor's labors brought to the betterment of their community.

Kids that come from wealthy homes already have lots of assets to draw from. Taking from the wealthy to help provide an equal access in the areas of health care and education -- just to name two services -- is only fair...especially given how beneficial those services are for the advancement of the economy and social well-being. There is a certain point where having too much wealth has a detrimental effect on productivity and social progress (political conservatives certainly never talk about this aspect of the acquisition of wealth). Proper use of the tax code can encourage talented and capable people to keep producing and innovating precisely because they want more.

Now, I'll grant -- for the sake of argument -- Arthur Laffer's central argument that there is a point where tax rates become so confiscatory that tax revenues will start to drop due to the negative effects it has on investment and labor; but we're certainly not there now. Furthermore, deficit spending (read: national government credit card) will crimp investment just as much; as the national debt (and its concomitant interest payments) is simply deferred taxation. Having the federal government file bankruptcy is just unthinkable. And lack of access to health care will lead to less productivity due to untreated illnesses or injuries (and, specifically, illnesses can sometimes spread due to their non-treatment -- leading to further drops in productivity). So exactly how do we benefit from denying access to health care based on ability to pay again?

To sum up, higher tax rates (than what we have currently) and implemented in the right places, can actually have a beneficial effect for society.

Real Class Envy

A new blog has just been started by a woman who left a comment to my post Seven Years of Bad Luck. Her blog is called Classism, Unearned Privilege and the Ruling Class.

Here is a quote from her first entry The Real Class Envy:

... Taking money from those who worked for it to give to others by using the strong arm of government is downright Communist. That's just un-American, right?

Well, not exactly. On the contrary, getting to skate while making others pick up the tab is indeed very American. You see, there was very little outcry back in the 1980's -- the "greed is good" era -- over wealthy owners of corporations who got much bigger hand-outs than any welfare recipient ever got. Wealthy owners of corporations and venture capitalist firms benefited immensely from a little-known IRS loophole that enabled them to use leveraged debt (other people's money) to buy and then liquidate other companies while the tax bill for the profits from such transactions got picked up and paid for by the tax-paying middle class: Leveraged corporate buy-outs, a nice "welfare" hand-out for the rich. But very few people noticed that fig newton folly, much less got angry about it. Isn't taking money from the supporting classes and giving it to the leisured class taking from the producers and giving to the slackers? Why isn't that Communist and un-American? Do I hear the silence of apathy ... or the white noise of hypocrisy?

And what became of the skilled, capable and educated middle-management professionals in such acquired companies? They were downsized out of their jobs. If they fell into poverty because they were unable to get re-employed elsewhere due to age discrimination despite their most ambitious efforts and Pollyanna-ist attitudes, it was all their own fault, according to the wealthy. These folks who did "all the right things" and got educations simply "should have planned better" according to the "haves" and "have-mores." It was the fault of the unemployed for not being educated enough, not having "marketable skills" in order to compete, and not having positive attitudes, thus spoke the ruling class.

Corporate welfare far exceeded any miserly welfare entitlement begrudgingly given to America's least privileged. Apparently, getting a "free ride" and a hand-out for [doing and producing nothing] of any tangible value for society is perfectly acceptable -- when you're rich.

Reich: Financial Vs. Product Entrepreneurship

Robert Reich explains the difference between the traditional product innovation, or as Reich calls it "Product Entrepreneurship" and the new form of investment innovation which he calls "Financial Entrepreneurship." As he explains in his article, unlike product innovation, the new investment innovation does not lead to new product innovation. It doesn't build a better mousetrap; it makes money by charging fees for managing investment pools. Furthermore, as Reich explains, it receives very favorable tax treatment compared to traditional labor through product entrepreneurship or even public corporations.

America is the greatest entrepreneurial nation in the world. But there are really two kinds of entrepreneurs here – product entrepreneurs and financial entrepreneurs –- and only one of them truly builds the economy. Product entrepreneurs find new ways of satisfying customers. Financial entrepreneurs find new ways of ... well, making money off money.

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Often they have to cut long-term investment – research, employee development, and basic innovations – in order to pump up profits so they can dump the company back on the stock market at a big profit.

What’s the answer? At the very least, stop giving tax financial entrepreneurs huge tax advantages over product entrepreneurs. Treat their compensation as income, not capital gains. And tax their partnerships that go public at the same rate public corporations are taxed.

Warren Buffett has warned about this very issue of the tax treatment of hedge fund managers, which I have linked to before.

Mr. Reich's article is well worth a read and it is not very long.

Warren Buffett: Raise My Taxes

NEW YORK (CNNMoney.com) -- Presidential hopeful Hillary Rodham Clinton was all ears at a fundraiser Tuesday evening when famed billionaire investor Warren Buffett suggested ramping up the tax code on big businesses and the super rich.

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Speaking to several hundred supporters of the U.S. Senator from New York, Buffett revealed his puzzlement that he was taxed at a lower rate than many of the lesser-paid individuals working for his company.

Buffett said he makes $46 million a year in income and is only taxed at a 17.7 percent rate on his federal income taxes. By contrast, those who work for him, and make considerably less, pay on average about 32.9 percent in taxes - with the highest rate being 39.7 percent.

To emphasize his point, Buffett offered $1 million to the audience member who could show that one of the nation's wealthiest individuals pays a higher tax rate than one of their subordinates.

"I'm willing to bet anyone in this room $1 million that those rates are less than the secretary has to pay," said Buffett.

To read the entire article, go to CNNmoney.com

Beware Of New Tax Scam Email

In a story at CNN Money, the IRS has warned of a new scam to bilk unsuspecting taxpayers out of their hard-earned dollars.

WASHINGTON (CNN) -- The Internal Revenue Service warned taxpayers and businesses Thursday of two new and potentially devastating e-mail scams that could silently take over their computer hard drives.

The e-mails contain official-looking IRS logos and information, falsely notifying the reader of IRS action against them or their company.

A link for further information would secretly launch an insidious computer program. That program, a type known as a Trojan horse, could cause a variety of paralyzing problems as it directly accesses the hard drive.

One e-mail purports to come from the IRS criminal investigation division, telling the readers they are under tax investigation in connection with the California Tax Franchise Board. The other e-mail falsely notifies the readers that a complaint has been lodged against them.

The agency issued the warning about the e-mail Thursday, saying it learned of the scams a day earlier.

Officials urge that anyone receiving such an e-mail leave it unopened and especially stay away from any hyperlinks contained in the message.

Recipients of such e-mails are encouraged to forward them to the IRS at phishing@IRS.gov.

Pirate Equity?

Robert Reich over on his blog explains how mega millions of dollars are made by private equity partners.

Way back in the 1970s, newly-minted MBAs with dollar-signs in their eyes wanted to be CEOs. Then in the 1980s wanted to go into investment banking, because the money was even better there. In the 1990s, they went into high-tech venture capital and dot coms. Now it’s private equity. Becoming partner in a private equity firm is also the new dream of every CEO in America.

That's because the average big-company CEO has to do with a measly $7 million a year, taxed at 35 percent. But private equity partners are raking in hundreds of millions a year, taxed at 15 percent – less than the tax rate paid by middle-class Americans.

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We’re talking billions of dollars here, folks. And it’s only taxed at 15 percent because even though it’s most of their compensation it’s treated as a capital gain. And courtesy of the Bush tax cuts, capital gains are taxed at 15 percent. Of course, those billions are what these guys pay themselves for their work. It's their compensation.

When capital gains are taxed at less than half the tax rate the rich pay on their incomes, you can expect this sort of gamesmanship.

Now that the tax-writing committees of congress are taking a look at this giant loophole, they’re besieged by private-equity partners who are, of course, screaming: No! You can’t do this to us! If you treat the money we’re making as compensation, you’ll reduce our incentives! We won’t work as hard if we’re taking home only 60 million dollars a year instead of 80 million! And that will cripple the American economy.

Baloney.

A commenter by the screen name "RodgerRafter" referred to it as "Pirate Equity":

I'll add that private equity (aka "pirate equity") often involves laying off large numbers of people, cutting costs to the point quality suffers, burying companies under debt, and other economically damaging tactics.

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Then there's the "inflation tax" that effects everyone. Pirate equity firms borrow new money into existence in order to take these companies private. They inflate the money supply and syphon off huge sums as personal compensation. All the while, the cost of everything goes up as the value of a dollar goes down.

Private equity and hedge fund borrowing are the main things propping up the stock market these days. That won't last forever, but for now it's hiding the real economic damage that is being done.

I am not sophisticated enough to completely understand how this works; but what I cannot understand on the surface is why the company would need to borrow large sums of money if they cut costs and lay off workers. Wouldn't the company borrow money to expand its operations and workforce?

And something is not right when the highest earning members of our country pay a lower tax rate than middle class Americans.

Estate Tax Reasoning

Over at Warren Reports, a new blogger named Tijana Divornic asked what area of taxation the readers would want to know more about. I wrote that I wanted to know more about the estate taxes. All I could remember from my law school studies is that the purpose of the estate tax was to prevent dynasties.

It is often referred to as the "Death Tax" by conservatives for rhetorical reasons, because it makes the tax so unfair. After all, why would it be right, conservatives argue, to tax a person after they are dead.

Anyway, Ms. Divornic complied with my request. Here are some of my favorite quotes from her article and the responses that followed:

The estate was first created to help fund WWI. Besides the revenue need (collected from those who can afford it), the justification for the tax is redistributive. Congress wanted to prevent the rise of a “leisure class” that would control most of the wealth without having to work, hence the estate tax is meant to achieve equality of resources (making wealth a function of work, rather than status).

Besides property owned at death, the estate tax also encompasses property given away during life in which the decedent had retained certain interests. (The IRS has really complex rules for this). The rates have changed over the years - starting at 10% and growing to 70% in 1935. (It's somewhere around 45% now - not quite sure where we are on the phasedown).

The tax only applies to a small percentage of the extremely wealthy (some studies suggest about .5% of the population). The short reach is because of the size of the exclusion; most people’s estates don’t come anywhere near this amount. And as always, there a lot of ways to avoid a substantial portion of the estate tax (for instance making tax-free inter-vivos gifts).

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One of the practical arguments often made for the estate tax is that it ensures that the wealthy are being taxed on capital gains. When appreciated capital assets are left to heirs, under current law they get a basis step up. So because the capital gains are never realized, they are never caught by the income tax. The estate tax, however, taxes the transfer. IRS 1014 and 1022.

A comment from aMike said this:

As far as I know, the idea first received wide distribution in the United States from a most peculiar source, the Robber Baron and Philanthropist Andrew Carnegie. Way back in 1889 he wrote a tract called The Gospel of Wealth.

Carnegie argued against the bestowing of large estates upon the children of the wealthy primarily on two grounds. First, it was harmful to those who received the inheritances (I wonder if we'd call this the Paris Hilton effect today?):

Carnegie said:

Why should men leave great fortunes to their children? If this is done from affection, is it not misguided affection? Observation teaches that, generally speaking, it is not well for the children that they should be so burdened. Neither is it well for the state. Beyond providing for the wife and daughters moderate sources of income, and very moderate allowances indeed, if any, for the sons, men may well hesitate, for it is no longer questionable that great sums bequeathed oftener work more for the injury than for the good of the recipients. Wise men will soon conclude that, for the best interests of the members of their families and of the state, such bequests are an improper use of their means.

Second, he argued that largely taxing inheritances away was beneficial to the state and community as well:

The growing disposition to tax more and more heavily large estates left at death is a cheering indication of the growth of a salutary change in public opinion.... Of all forms of taxation, this seems the wisest. Men who continue hoarding great sums all their lives, the proper use of which for public ends would work good to the community, should be made to feel that the community, in the form of the state, cannot thus be deprived of its proper share. By taxing estates heavily at death, the state marks its condemnation of the selfish millionaire's unworthy life.

Then, in response to the argument that people often lose the "family farm" because of the estate tax, ElaineinIN said this:

The thing that the purveyors of the "death tax" garbage don't like to tell us is that there actually already ARE provisions in the estate tax code that give preferential treatment to farms and small businesses. For example, Section 2032A is called special use valuation... if you have land that is being actively farmed, it is valued as farm land, even if it would be worth more per acre if it could be developed. Also, Section 6166 allows certain estates that have concentrations of stock, like family owned businesses, to pay the tax in installments over 10 years at like 2% interest so that the business doesn't have to be forced into liquidation.

And amusingly enough, Section 2057 had a deduction for qualified family owned business interests, which basically excluded certain interests in businesses that were being run by family members. It was limited in value and the rules were really tight, but it was there. What happened to it?

It was repealed as part of the SAME bill that repealed the estate tax. Because they cared SO much for small businesses....

Basically, if you read through the reasoning, the idea is that we, as a matter of public policy, want to encourage wealth created by work rather than simply because someone was born in the right family. It is also considered better if the money keeps getting reinvested in the economy rather than hoarded.

Oklahoma Rated 6th Lowest Taxed State

Oklahoma was rated by Money.com as the 6th most tax-friendly state in the U.S. For all the whining we hear from the Republicans here about how our taxes are among the highest in the country, this report should put that to rest. It won't, but it should.

For that matter, we keep hearing how Oklahoma is so unfriendly to business, but our corporate laws are almost identical to Delaware, which is supposed to be the Gold Standard for corporate-friendly statutes.

Property taxes here are extremely low. Property itself is cheap compared to the rest of the country. The state is centrally located geographically. We have three major interstate highways that cut through the state.

Would someone remind me why we don't get more industry here?

NY Times: Income Gap Is Widening

In a report last Friday in the NY Times, more references to pre-Depression statistics keep popping up.

Income inequality grew significantly in 2005, with the top 1 percent of Americans — those with incomes that year of more than $348,000 — receiving their largest share of national income since 1928, analysis of newly released tax data shows.

The top 10 percent, roughly those earning more than $100,000, also reached a level of income share not seen since before the Depression.

While total reported income in the United States increased almost 9 percent in 2005, the most recent year for which such data is available, average incomes for those in the bottom 90 percent dipped slightly compared with the year before, dropping $172, or 0.6 percent.

There is another reason why this is significant:

The disparities may be even greater for another reason. The Internal Revenue Service estimates that it is able to accurately tax 99 percent of wage income but that it captures only about 70 percent of business and investment income, most of which flows to upper-income individuals, because not everybody accurately reports such figures.

Hat Tip to Bonddad over at DailyKos for pointing out the article and who said:

People who aren't benefiting from economic growth -- and there are a ton of those people in the current environment -- want a piece of the pie. That's a natural human emotion. But the problem is to benefit, most people have to go into debt which only increases their inability to move up the socio-economic ladder.

I am going to go further than he is, however. It is the debt that the lower 90% are having to incur that is contributing to the income inequality. With credit card interest at an average of 18% (even though borrowing costs are lower for the financial institutions that when rates got that high) and then the fees they add on make them even more profitable than the interest itself, it is no wonder that those who are borrowing are falling even farther behind.

That is not to say that those who are part of the investor class are not immune. I have previously written about how Margin Debt is increasing to dangerous levels. What I am curious about is: is this the result of the super-rich merely trying to use leverage to maximize their returns, or is this the result of wanna-be investors taking on too much risk in order to try to get ahead?