tax reform

Sham tax ‘reform’ proves more than ever that isn’t about reform, it’s about money and influence.

Posted on by j.giglio

The imperfect tax bill President Trump signed into law on Dec. 22 is further evidence of the rot in Washington,. The tax bill isn’t about tax reform, it’s about money and influence.

Consider the giveaway known as the carried interest rule. It’s another outrageous example of the powerful getting what they want, as they always do. This will come as no shock to anyone over the age of five.

The term “carried interest” derives from the share of profits that 12th-century ship owners and captains were given as an interest in the cargo they carried, usually a 20 percent commission to provide an incentive to keep an eye on the cargo.

Today carried interest is the 20 percent of profits from their funds with which private equity firms, venture capitalists, and real estate partnerships compensate themselves. These proceeds are taxed at a capital gains rate of 20 percent, about half the top individual income rate, which will fall to 37 percent under the new tax law. Critics argue that this money is effectively income and should be taxed at individual income tax rates. The constituents for the deduction argue that removing the incentive would reduce entrepreneurial risk taking.

The reason for the loophole’s survival comes down to campaign contributions to key lawmakers and intense lobbying to maintain the favorable tax treatment. As Gary D. Cohn, director of the White House National Economic Council said, “The reality of this town is that constituency has a very large presence in the House and the Senate and they have really strong relationships on both sides of the aisle.”

The American Investment Council, a Washington trade association that represents private equity firms, reported some $970,000 in lobbying expenditures for the first three quarters of 2017. This is in addition to the smart investment made by way of campaign contributions targeted to key lawmakers. For example, employees of the private equity firm The Blackstone Group L.P. contributed $212,000 to Senator Majority Leader Mitch McConnell in 2017 alone. In turn, politicians serve their contributors by protecting the carried interest preference.

Private equity firms have the means and vanity to get what they want. It is further proof that money is the mother’s milk of politics and that big money gets its way in Washington, D.C.

During the presidential campaign both President Trump and Secretary Clinton gave a pitch-perfect populist performance, wanting everyone to know that they were militantly opposed to this loophole, a form of welfare for the wealthy. When a politician says something like that, sports fans, try inserting a negative and you are likely to hit pay dirt. Political rhetoric is as unrelated to the truth as an advertising campaign.

The power of money seems eternal. Politicians love it like a child loves Christmas, and all are working hard to avoid reading their own political obituaries. Knowledge that it has always been this way is no consolation.

They tell pro forma lies to the public and the media, and then begin to believe what they read. Not laying blame, just putting truth into words. So House Ways and Means Committee Chair Kevin Brady (R. Texas), with a truly magnificent smile, said on the Morning Joe talk show “carried interest, we can talk about that for the next hour if you like, but for most Americans they could care less about that.”

In its pursuit of a free lunch, the public is often a bit too eager to accept the things they want to hear at face value, even though they should know that truthfulness is not a long (or short) suit for elected officials, who spin untruths with the same gusto young Abraham Lincoln supposedly split logs.

You can’t bring about change by wishing upon a star. You can run with that.

 Originally Published: January 6, 2019

Next up, entitlement programs

Posted on by j.giglio

With the so-called tax reform bill behind him, House Speaker Paul Ryan wants to reform and modernize the big three entitlement programs: Social Security, Medicare and Medicaid. It’s something that needs to happen, but it won’t be easy – especially in an election year.

The speaker is under pressure from conservative House members and deficit hawks, who supported the tax reform legislation that added a whopping $1.5 trillion to the national debt in exchange for a commitment to address entitlements and deal with debt and deficits.

Entitlement costs are rising as the population grows older and sicker. Even if you assume that cutting the corporate tax rate will unleash economic growth, the tax cuts are highly unlikely to pay for themselves. We cannot grow our way out of the looming entitlement crisis.

But the speaker’s plan to overhaul entitlement programs may run into the harsh political reality that not all Republicans are on board in an election year in which control of Congress is up for grabs.

Looking to preserve the GOP’s narrow Senate margin the Senate, Majority Leader Mitch McConnell has thrown cold water on the idea of entitlement reform. He would prefer to focus on the long-awaited infrastructure funding plan, which is more of a bipartisan exercise.

During his campaign, President Trump repeatedly promised not to cut Medicare, Medicaid, or Social Security. Of course Democrats say the Republicans plan to pay for the tax bill with cuts to entitlements and the social safety net.

There is no strong constituency for the tough budget cuts needed to limit the size of government or reduce the national debt.

Broadly speaking, entitlements are government financial benefits to which beneficiaries have a legal right. The most important examples of federal entitlement programs include Social Security, Medicare, and Medicaid, unemployment compensation and food stamps. And don’t forget agricultural support programs.

You can debate the merit of these programs, but one thing is clear: entitlements are expensive, and for a long time the cost has either been ignored or passed on to future generations.

Nearly half of all U.S. households benefit from at least one federal entitlement program. Entitlement spending today is about a tenth of U.S. gross domestic product, meaning one out of every ten dollars Americans earn goes to pay for Medicaid, Medicare, or Social Security. As the government struggles to pay for these programs, the number of recipients grows as people live longer thanks to advances in medical care.

This means they are drawing more benefits over their lifetimes than the funding systems were ever designed to generate. Since Americans are having fewer children, fewer workers are paying into the system. The Affordable Care Act also increased the number of people eligible for Medicaid.

According to the Center on Budget and Policy Priorities, about half the federal budget is spent on Social Security and health care programs like Medicare.

Another 16 percent goes to national defense and 6 percent to paying interest on the national debt. That does not leave much, especially as entitlement costs rise. If these programs are not fixed, they will consume the entire budget, leaving nothing to clean the environment, repair roads and bridges, and address countless other needs.

Nobody, including Speaker Ryan, is talking about actually cutting entitlement programs. The goal is to restrain increases and make the programs sustainable going forward. On a positive note, there are approaches that enable the U.S. to fix the programs while exempting current beneficiaries.

For example, consider containing health care costs by focusing more on preventative care and improved management of chronic conditions like obesity and diabetes. As for Social Security, consider gradually raising the full retirement age and eliminating the current payroll tax cap.

If these choices don’t seem palatable, it’s important to remember that the biggest threat to the big three programs is to continue down the path of least resistance and do nothing at all.

Originally Published: January 20, 2018

 

Sham tax ‘reform’ proves more than ever that money talks

Posted on by j.giglio

The imperfect tax bill President Trump signed into law on Dec. 22 is further evidence of the rot in Washington,. The tax bill isn’t about tax reform, it’s about money and influence.

Consider the giveaway known as the carried interest rule. It’s another outrageous example of the powerful getting what they want, as they always do. This will come as no shock to anyone over the age of five.

The term “carried interest” derives from the share of profits that 12th-century ship owners and captains were given as an interest in the cargo they carried, usually a 20 percent commission to provide an incentive to keep an eye on the cargo.

Today carried interest is the 20 percent of profits from their funds with which private equity firms, venture capitalists, and real estate partnerships compensate themselves. These proceeds are taxed at a capital gains rate of 20 percent, about half the top individual income rate, which will fall to 37 percent under the new tax law. Critics argue that this money is effectively income and should be taxed at individual income tax rates. The constituents for the deduction argue that removing the incentive would reduce entrepreneurial risk taking.

The reason for the loophole’s survival comes down to campaign contributions to key lawmakers and intense lobbying to maintain the favorable tax treatment. As Gary D. Cohn, director of the White House National Economic Council said, “The reality of this town is that constituency has a very large presence in the House and the Senate and they have really strong relationships on both sides of the aisle.”

The American Investment Council, a Washington trade association that represents private equity firms, reported some $970,000 in lobbying expenditures for the first three quarters of 2017. This is in addition to the smart investment made by way of campaign contributions targeted to key lawmakers. For example, employees of the private equity firm The Blackstone Group L.P. contributed $212,000 to Senator Majority Leader Mitch McConnell in 2017 alone. In turn, politicians serve their contributors by protecting the carried interest preference.

Private equity firms have the means and vanity to get what they want. It is further proof that money is the mother’s milk of politics and that big money gets its way in Washington, D.C.

During the presidential campaign both President Trump and Secretary Clinton gave a pitch-perfect populist performance, wanting everyone to know that they were militantly opposed to this loophole, a form of welfare for the wealthy. When a politician says something like that, sports fans, try inserting a negative and you are likely to hit pay dirt. Political rhetoric is as unrelated to the truth as an advertising campaign.

The power of money seems eternal. Politicians love it like a child loves Christmas, and all are working hard to avoid reading their own political obituaries. Knowledge that it has always been this way is no consolation.

They tell pro forma lies to the public and the media, and then begin to believe what they read. Not laying blame, just putting truth into words. So House Ways and Means Committee Chair Kevin Brady (R. Texas), with a truly magnificent smile, said on the Morning Joe talk show “carried interest, we can talk about that for the next hour if you like, but for most Americans they could care less about that.”

In its pursuit of a free lunch, the public is often a bit too eager to accept the things they want to hear at face value, even though they should know that truthfulness is not a long (or short) suit for elected officials, who spin untruths with the same gusto young Abraham Lincoln supposedly split logs.

You can’t bring about change by wishing upon a star. You can run with that.

Originally Published: January 6, 2018

 

Ugly as it is, pay attention to tax bill

Posted on by j.giglio

Otto Von Bismarck, the Prussian statesman and architect of German unification, was reputed to have said, “Laws are like sausage, it is better not to see them being made.”

This cliché is relevant today as Congress plays politics with tax legislation. The House has passed a $1.4 trillion tax cut package, while the Senate will consider its version after Thanksgiving.

Comparing sausage making to how lawmakers do their work may be insulting to sausage makers, whose process is transparent and predictable. In contrast, when the intricacies of the tax legislation get too sensitive, politicians demure by claiming “it’s all part of the sausage making.” The implication is that the public would be better off not knowing the details of the legislative process.

As tax reform negotiations enter the final stage, the so-called carried interest loophole that provides preferential tax treatment for hedge funds and private equity firms remains largely untouched. When legislators are asked about closing this loophole they change the subject and recount the other loopholes they are ending.

Carried interest represents the share of profits that hedge funds, private equity, and other investment managers collect from clients. At issue is how much investors should be taxed on these profits. The managers typically take a 2 percent fee from investors and claim a share – generally 20 percent – of whatever profits they generate.

The 20 percent in profits these managers pocket, known as carried interest, is currently treated as a long-term capital gain and taxed at 23.8 percent: the capital gains rate of 20 percent plus the Obama health care surcharge of 3.8 percent on their income. That is well below the 39.6 percent rate plus the 3.8 percent surcharge they would pay if the money were treated as ordinary income.

As a candidate, President Trump repeatedly promised to close this loophole. He said, “The hedge fund guys didn’t build this country. These are guys that shift paper around and they get lucky.”

The carried interest provision is worth billions to super-rich Wall Street folks. Congress’s Joint Committee on Taxation has estimated that changing the treatment of carried interest could raise about $16 billion over the next decade. Academics claim the figure is more like $180 billion. Regardless of who is right, this is not chopped liver, so these wealthy financiers have pushed back with an army of lobbyists and sprinkled enough dollars around Washington to preserve their beloved tax break.

They argue that the lower long-term capital gains rate affords them an incentive to take investment risks that benefit the economy. This defies logic, since many of these managers are managing a pool of assets, not putting their own funds at risk.

Regardless of the merits, their efforts have yielded a handsome return. The House bill extends the period over which firms must hold an asset before it is eligible for the long-term capital gains rate from one year to three years. While that might bite some hedge fund managers, it will not touch the vast majority of private equity, venture capital, real estate investment managers.

They would still pay 23.8 percent on their income, roughly the same as someone making between $37,450.00 and $90,750.00 annually. The financiers pay taxes at a rate that is well below those that apply to much of the middle class, once again validating the influence Wall Street and wealthy investors exert in the Congressional sandbox. The strong take what they want and the weak suffer.

Meanwhile, the struggling middle and working-classes could really use the help. After adjusting for inflation, household incomes have not risen since the 1970s.

Instead the discrepancy between rich and poor has widened. Forty years ago, the richest Americans had more than 8 percent of the nation income, today it is about 20 percent. Which is why it’s so important for citizens to pay attention to the details of the legislative process.

Originally Published: Nov 25, 2017

 

Capping retirement accounts is a worrisome tax-cut notion

Posted on by j.giglio

Tax cuts often look like free lunches for taxpayers. Such is the case with the recent federal tax reform proposal. But tax cuts eventually have to be paid for with tax increases, closing of tax loopholes, or spending cuts, and that’s why average Americans need to pay attention to the unfolding debate on Capitol Hill.

The first red flag came several weeks ago when it was reported that House Republicans were thinking of drastically slashing the tax deduction for 401(k) contributions from the current annual $18,000 or $24,000 for workers over 50 to as little as $2,400, and mandating the use of after-tax Roth accounts for retirement savings.

Retirement income in the United States comes primarily from three sources: Social Security, pension plans sponsored by public and private employers and individual savings in taxable and tax-advantaged accounts. There are generally two types of employer-sponsored pension plans: defined benefits and defined contributions.

Back in the day, workers could depend on defined benefit pensions in which retirees received a predetermined monthly annuity, either for the rest of their lives or those of their spouses. The benefit amount was usually based on an employee’s wage, years of service and age at retirement. The employer was responsible for contributing assets sufficient to fund the promised benefits.

But employers claimed these plans left them overburdened by pension obligations and that defined contribution plans were much less expensive.

Now defined-contribution pensions are the most common employer-sponsored plans.

Around 54 million American workers participate in about 550,000 so-called 401(k) plans, named after the section of the tax code that created them in 1978. These plans hold more than $5 trillion in assets. Tax-deductible contributions to defined contribution plans are predetermined, but the amount of benefits received upon retirement is not guaranteed.

Workers pay taxes when they withdraw the funds, manage the money themselves and hope the market doesn’t crash just when they retire. While in a defined benefit plan the employer bore the risks associated with investing assets in the plans, the employee is responsible for bearing those risks un-der defined contribution.

When news filtered out that the deduction for 401(k) contributions might be slashed, retirement experts, Vanguard, Fidelity and other large mutual fund companies that manage assets in the lucrative 401(k) business joined together and howled like a pterodactyl. President Trump tweeted, “There will be NO change to your 401(k). This has always been a great and popular middle-class tax break that works, and it stays!”

Fortunately, the long-awaited GOP tax plan unveiled last week leaves current contribution limits in place and abandons the notion that American workers are saving too much for retirement.

What were these Mighty Mendicants thinking? Cooking up a raiding party on workers’ 401(k) plans was a way to pay for the middle-class tax cuts lawmakers claim they want to provide. They also want to significantly cut corporate taxes to catch up with the rest of the world, which has already done so.

The proposal was pure budget chicanery. Capping what the average American can place in these pension plans would force workers to pay more in taxes now rather than when they make withdrawals from their pension account. In effect, the proposal would have helped pay for tax cuts by pulling future tax revenues forward.

Equally important, it would have undermined workers’ retirement security since the up-front deduction is an important incentive for workers to participate in retirement plans. Mil-lions of Americans depend on the favorable tax treatment of 401(k)s, IRAs and other savings vehicles to build long-term financial security.

The fate of House Republicans’ tax proposal is uncertain; the twists and turns ahead will surely provide first-rate entertainment. And taxpayers had best pay close attention to the tax legislation as it makes its way through Congress to ensure that the notion of capping 401(k) contributions is not resurrected as lawmakers scramble to find ways to pay for the tax cuts.

 

Bringing corporate earnings back into the U.S.

Posted on by j.giglio

A member of Congress was walking along one of St. Bart’s sandy beaches on holiday. Suddenly she stumbled on an old lamp that had washed up on the beach. She picked it up, rubbed it and, of course, a genie appeared.

The genie said, “I am the most powerful genie who has ever lived. I can do great and wonderful things, including granting you your dearest wish, but only one.”

This member of Congress was well attuned to international affairs, so she pulled out a map of the Middle East and said her dearest wish was a solution to the Israeli-Palestinian conflict.

The genie stroked his beard; looked around worried and said, “Oh dear that is a tough one. You should probably make another wish.”

The congresswoman was disappointed.but understood. “Alright,” she said, “I want you to rewrite the American tax code so everyone can understand it.

After a long silence, the genie said, “Let’s have another look at that map.”

With Republicans back in charge of Congress, corporate tax reform is on the agenda for 2015. Although it is hard to see how they can reduce corporate tax rates without also doing something for individual taxpayers.

If congressional leaders can cobble together a set of reform proposals, their next problem would be how to pay for them. Given the large federal debt, many policymakers believe corporate tax reform should be revenue neutral. To do that, any reduction in corporate tax revenue must be made up for by things like eliminating tax preferences, cutting spending programs, or adding to the deficit passed on to future generations.

Achieving broad tax reform is further complicated by political realities of 2016 presidential politics. Several senators are considering a run.

While the prospects for broad tax reform may be dim, one bright spot is a bipartisan proposal by Sens. Barbara Boxer, D-California, and Rand Paul, R-Kentucky, to bring back some of the estimated $2 trillion of foreign earnings that are now parked in foreign banks by reducing the corporate tax rate on profits earned abroad from 35 percent to 6.5 percent for the next five years.

Revenue from this short-term tax would be used to maintain the solvency of the Highway Trust Fund that is scheduled to run out of money in May unless Congress and the president do something.

In theory, repatriating the money would also increase investment in plant and equipment and new technology, thereby strengthening the economy and creating jobs at the same time it increases federal revenues.

There is no assurance that the repatriated corporate earnings wouldn’t instead be used for things like executive compensation, higher dividend payouts, and stock buybacks.

The president also waded in this week. Instead of a voluntary repatriation tax holiday, his $4 trillion 2016 budget proposal includes a one-time 14 percent tax on the $2 trillion of foreign earnings held overseas, with much of the proceeds going to fund infrastructure. There is no reason to believe that Republicans will embrace this proposal.

It doesn’t have to be this way if Congress and the administration had the minerals to fund the HTF by increasing the 18.4-cent per gallon federal fuel tax for the first time since 1993. If adjusted for inflation, the fuel tax would be 30 cents a gallon today.

Corporate taxes should be addressed in the context of broader tax reform. The American people are sick and tired of short-term fixes and lurching from crisis to crisis. They want a system that is simpler, eliminates unfair and inefficient loopholes, and levels the playing field for the middle class.

originally published: February 7, 2015

Congress must open its eyes to carried interest

Posted on by j.giglio

When the 114th Congress convenes on Jan. 15 with a Republican majority in both houses,
comprehensive tax reform will be high on their to-do list. Among the first things they should address is ending the practice of treating so-called carried interest as ordinary income.

For those of you who did not grow up passing around copies of the tax code, there are few subjects more esoteric than America’s byzantine tax code. The federal tax code consists of nearly 74,000 pages and about four million words, twice the length of the King James Bible and the entire works of Shakespeare combined.

This voluminous magnum opus validates the average American’s suspicions that Washington is a stage of prancing marionettes tweaked by Wall Street (aka Crime Central) and other moneyed interests.

Rewriting the tax code is a difficult undertaking given the multitude of well-capitalized special interest groups from every comer of American business and society that have skin in the game when it comes to tax policy. Closing tax loopholes that favor particular groups instigates knock-down drag-out political fights. This is why the last serious tax reform came in 1986, also known as light years ago, under President Reagan.

One place to start comprehensive tax reform is to bring an end to the carried interest loophole, which allows super wealthy investment managers, including those in the private equity, hedge fund and venture capital business, to define their compensation as capital gains and pay income tax at a far lower rate. This forces ordinary people to pay more by transferring the burden to those who cannot afford tax attorneys.

Investment managers take a considerable portion of their pay as carried interest, which means being compensated for managing funds’ investments as a share of fund profits, without putting their own capital at risk. Under current tax law, carried interest is treated as a capital gain, subject to the top 20 percent capital gain rate plus a 3.8 percent surcharge on unearned income to help pay for the Affordable Care Act, rather than as ordinary income subject to the top marginal tax rate of 39.6 percent.

As former Treasury Secretary Robert E. Rubin noted several years ago, “I think what they’re doing is getting paid a fee for running other people’s money.” Put differently, carried interest is performance­ based compensation for investment management services rather than a return on financial capital invested by managers.

The one-percenters, who tend to be big political donors, are the principal beneficiaries of carried interest. Quite apart from basic fairness, treating all taxpayers who provide a service the same, the Obama administration has estimated that ending this tax loophole would generate an additional $15 billion in revenue over 10 years.

For a long time, this loophole has unfairly enabled some of the highest paid individuals in the country to sharply reduce their tax bills and it is time to close it once and for all. Legislation is needed to fix the carried interest dodge and ensure that income earned managing other people’s money is taxed at the same rates as that earned by teachers, factory workers, attorneys and millions of other Americans for the services they provide.

Because of the financial sector’s outsized influence, you can expect to hear how closing the carried interest loophole will destroy capitalism as we know it and undermine the economy. Experience teaches us that the financial sector’s lobbying clout, combined with the fact that doing the right thing is a dangerous luxury for politicians, Main Street standing on the sidelines is not a recipe for success on this issue.

The American public has to actively engage and abandon the assumption that so many things are now taken for granted that it’s as if the public literally no longer sees them.

originally published: December 27, 2014