Category: Tax


Come With Me and Escape

“If you like Pina Coladas, and getting caught in the rain.
If you’re not into yoga, if you have half-a-brain.”

Bay Area radio struggles to have decent music. I tend to cycle through the few stations that may have something of interest. A recent addition to the dial focuses on 60s. 70s, and 80s. As a competitor points out, the new comer tends to repeat the same track several times a day. Recently the song Escape (The Pina Colada Song) has been playing quite a bit. The funny thing to me is that yoga and health food seem to have been dating and compatibility differentiators for more than 30 years. The style of the song and especially the attire, however, may not be as timeless; just reminders of the end of the seventies and the start of eighties (It was the last number 1 of the seventies and first of the eighties). Oddly that decade seems a bit more sane regarding taxes.

It took more than two years to produce that tax code overhaul. During that time, Reagan went on the road to plead his case for the plan. At a high school in Atlanta, Ga., in 1985, Reagan said they were going to “close the unproductive loopholes that allow some of the truly wealthy to avoid paying their fair share.”
Meanwhile in Congress, Democrats and Republicans worked together to merge competing proposals for tax reform. Still in office today, Democratic Sen. Patrick Leahy of Vermont was there during the passage of the bill. He says it was a different era.
“We had a lot of grownups in both parties, people who actually wanted the government to work,” Leahy says.

All of which makes me wish there was a world where I could write a personal ad seeking a new politician and find that the one who turned up was already in place. Now that is a fantasy.

Anyway, enjoy the song. Oh as moment of who knew: The song was released on September 21, 1979. The movie “10” which is a rather similar story and also a huge hit of the era was released October 5, 1979. As far I know they were not connected directly; yet they stuck together in my head because of the story lines.

Jost on a Drafting Error in the Affordable Care Act

A few days ago, Timothy Jost offered insights on the Fourth Circuit’s jurisdictional rulings on constitutional challenges to the Affordable Care Act. (That post was part of a terrific series he has done for the Health Affairs Blog.) Today, Jost offers a fascinating perspective on “an ACA drafting error that would seem to deprive millions of uninsured Americans of tax credits to purchase health insurance and invalidate regulations recently proposed by HHS and the Treasury Department:”

The mistake is found in section 1401 of the ACA, which creates a new section 36B of the IRC. Two subsections of 36B ((b)(2)(A) and (c)(2)(A)(i)) suggest that premium tax credit eligibility under the ACA depends on the applicant being enrolled in a qualified health plan “through an Exchange established by the State under section 1311.” This would in turn suggest that individuals enrolled in a qualified health plan through a federal exchange established under section 1321(c) would not be eligible for premium tax credits, contrary to the recent proposed regulations.

That this is a drafting error is obvious to anyone who understands the ACA. Section 1311 of the ACA requests the states to establish American Health Benefit Exchanges and sets out the duties of the exchanges. Section 1321 of the ACA, however, provides that if a state elects not to establish and exchange or fails to do so, HHS must “establish and operate” an exchange in such a state and “take such actions as are necessary to implement” the other requirements of title I of the ACA, which includes section 1401. There is no coherent policy reason why Congress would have refused premium tax credits to the citizens of states that ended up with a federal exchange. None of the CBO reports scoring the ACA suggest that premium tax credits would only be available though 1311 state exchanges and not through 1321 federal exchanges. It is, finally, highly unlikely that the House, whose bill included only a federal exchange, would have approved a bill that only provided tax credits through state exchanges but not through the federal exchange.

For the full argument, check out his post at the Health Reform Watch blog.

Do the Rich Need the Rest?

The top 10% of Americans now make about as much as the bottom 90%. But within that group, an even smaller fraction dominates. Nobel Prize winning economist Joe Stiglitz has observed that the US is ruled by the top 1%, for the top 1%. And within that top 1%, the top tenth has been triumphant. Earning on average $5.6 million in 2008 (and at least $1.7 million), the group has seen its income rise 385% from 1970 to 2008, while earnings of the bottom 90% declined.

Worldwide, the rich are pulling away from the rest as well. Given this political reality, what kind of future is likely for the bottom 99%? Will the sort of precarious existence now common for the poor and lower-middle classes climb higher up the income ladder?

Michael Lind suggests this is likely, because so many jobs can be done by “less expensive and more deferential foreign nationals,” or prisoners. WSJ reporter Robert Frank has also observed a decoupling of destinies: “the economic fate of Richistan seems increasingly separate from the fate of the U.S.” (or any particular country).

Meanwhile, progressive thinkers like Bruce Judson, Robert Reich, and David Callahan have hoped for the rise of a conscientious superclass. In their view, any nation’s wealthy should see middle class prosperity as part of its own self-interest properly understood. Most of these thinkers hold up Germany or Sweden as models of egalitarianism that helps even those at the top. A book called “The Spirit Level” has made a complementary case, arguing that, as a statistical matter, even the richest in an unequal society tend to be less healthy and secure than those at the top of a more equal social order. (Consider, for instance, that even if you were in the oil-drilling elite of Equatorial Guinea, making $250,000 per year, you might well want to move to Sweden for a similar position paying $100,000 a year.)
Read More


YLJ Online Symposium: “Winn and the Inadvisibility of Constitutionalizing Tax Expenditure Analysis” and “A Winn for Educational Pluralism”


The Yale Law Journal Online has published the first two installments in our new series, Summary Judgment, which will feature timely responses to recent Supreme Court decisions from academics and practitioners. The two inaugural pieces comment on the Court’s April decision in Arizona School Tuition Organization v. Winn, 131 S.Ct. 1436 (2011), in which a five-Justice majority held that taxpayers do not have standing to challenge the constitutionality of state tax credits that support religious schools and other educational institutions.

In Winn and the Inadvisibility of Constitutionalizing Tax Expenditure Analysis, Professor Edward A. Zelinsky responds to Justice Kagan’s blistering dissent in Winn. In that dissent, the Court’s most junior Justice draws on tax law scholarship to argue that tax credits and other tax expenditures are economically indistinguishable from direct spending. Zelinsky adopts a skeptical approach toward Justice Kagan’s core claim. According to Zelinsky, although tax expenditure analysis has helped policymakers and legislators with regard to budgetary matters, its utility does not extend to Establishment Clause jurisprudence. After decades of debate, tax law scholars have still not arrived at any satisfactory definition of tax expenditures. Ultimately, Zelinsky writes, “the Court is ill-advised to invoke tax expenditure analysis” in its Establishment Clause cases because “[a]t the end of the day, we do not know what a tax expenditure is.”

In A Winn for Educational Pluralism, Professor Nicole Stelle Garnett assesses the implications of the Winn decision for students, families, and communities. She argues that scholarship tax credits can stem the tide of Catholic school closures, which are linked to increased disorder, crime, and neighborhood disintegration. Drawing on her own past research, she also suggests that “scholarship tax credits may . . . enable cities to retain the young parents who all too frequently flee to suburbs and their high-performing public schools.” She concludes that Winn, by opening constitutional space for scholarship tax credit programs, represents “a victory for civil society.”

The Summary Judgment series is available on YLJ Online. Please also visit the site to read our latest Online Essays and to view recent issues of our print edition in an electronic format.

Correlating Home Size and Seriousness

NBC anchor Brian Williams once complained about the amateurization of media in rather colorful terms:

All of my life, developing credentials to cover my field of work, and now I’m up against a guy named Vinny in an efficiency apartment in the Bronx who hasn’t left the efficiency apartment in two years.

Williams himself is careful to maintain his own credibility. According to a 2007 report, Williams “lives in a restored farmhouse in Connecticut where he parks his 477-horsepower black Porsche GT2 (that is, when he’s not decamping on the Upper East Side).” How else would you spend a $10 million annual salary?

Some have insinuated that Williams was trying to help his bosses when he failed to report on NBC’s parent company’s low tax rate. But perhaps it’s more likely that government spending just doesn’t register on Williams’s radar. Poor Vinny, cramped in his studio apartment, may worry about someday needing Medicaid, home heating assistance, or help for his mom in a nursing home. He might wonder why all these programs are under attack, while small changes in the tax system could support them for years, and larger changes could support them for decades. But those are not the serious concerns of serious people with seriously large houses. Perhaps only people like Williams should be able to vote, too.

Tax Day Stats

A few stats & stories in honor of Tax Day:

A. This “could be the best tax day for rich since ’30s:”

17% . . . was the effective tax rate paid by the 400 Americans with the highest adjusted gross income in 2007, the most recent year with IRS data available. The figure is down from almost 30 percent in 2005.  [W]ith top rates on ordinary income, capital gains, dividends, estates and gifts at or near historic lows,” [this year could be even better].

B. A tax loophole for the top 25 hedge funders is worth about 120,000 teachers’ salaries.

C. The favorite shelters and dodges of America’s wealthiest.

D. Journalist states that “”Tax havens have grown so fast in the era of globalization, since the 1970s, that they are now right at the heart of the global economy.”

E. David Cay Johnston states that, “during seven of the eight George W. Bush years, the IRS report on the top 400 taxpayers was labeled a state secret.”  Johnston also notes that, “When it comes to state and local taxes, the poor bear a heavier burden than the rich in every state except Vermont.”

F. Joshua Holland compares changes in the tax burden over time:

The federal income tax bill for a person making $15,000 is 51 percent higher today than it was 30 years ago — a big jump. . . . If you brought in a half-million dollars, your tab would have dropped by 49.5 percent, saving you around $150,000. It’s about the same decrease for someone making a cool million.

Read More

Economic Policy for the Worried Wealthy

Why is the austerity movement so powerful in the US? Many people are hurting, and corporate, CEO, and finance sector gains since 2008 have been enormous. Why not expect a little more from the wealthy? Why are states from Arizona to New York going after poor Medicaid patients and schools instead? We know the economic case for austerity in a deep recession is bunk. Why its enduring appeal?

Perhaps voters have lost faith in the ability of the state to do anything competently, including redistribution. The always-insightful Elisabeth Young-Bruehl suggests as much, noting:

[Americans] have been led to believe that their well-being and their democracy depend upon the success of capitalism, with its limitless growth ideology; but this very capitalism is taking over their state. They have been promised that if America has a strong, competitive, innovative economy, the benefit of that will trickle down to all, just as Ronald Reagan promised it would. Even Barack Obama speaks this language. But it is becoming obvious that there is not going to be any trickle down. . . . [The system] is a closed loop, which is not designed to trickle anything much down to support those who are not in the loop[.]

As plutonomy advances, buying power is being segregated by the very wealthy into closed circuits of spending and investment. Young-Bruehl makes a similar case about political power in a post-Citizens United world. As Martin Gilens has shown, in the US, “actual policy outcomes strongly reflect the preferences of the most affluent but bear virtually no relationship to the preferences of poor or middle income Americans.”

Yet that still leaves a puzzle. The wealthy in the US may have extraordinary influence over the political process, but they could use it in many different ways. Warren Buffett complained about being taxed less than his secretary, and Bill Gates’s father has fought for the estate tax. Progressive thinkers like Bruce Judson, Robert Reich, and David Callahan have all hoped for the rise of a conscientious superclass. At some point the marginal value of money diminishes; why not spread it around a bit?

Anxious at the Top

I think Reich, Callahan, and Judson have failed to take into account the enduring anxietes of of America’s rich. Consider two studies, and an anecdote, reflecting worry at the top of the income scale:
Read More

Neo-Feudalism: Shaxson on Tax Havens

Parag Khanna has frequently discussed the rise of a neo-feudal age, with power devolving from nation-states to cities. Why are nation-states losing relevance?

One important reason is that tax havens are diverting ever more revenue away from social needs. Powerless to confront the wealthy or powerful corporations which take advantage of them, states must tax their middle classes more or cut services. Many authors have noted the proliferation of tax havens in recent years. But one rarely sees the literal trappings of feudalism re-emerge, as Nicholas Shaxson describes in his provocative account of the “City of London Corporation:”

The term “tax haven” is a bit of a misnomer, because such places aren’t just about tax. What they sell is escape: from the laws, rules and taxes of jurisdictions elsewhere, usually with secrecy as their prime offering. The notion of elsewhere (hence the term “offshore”) is central. The Cayman Islands’ tax and secrecy laws are not designed for the benefit of the 50,000-odd Caymanians, but help wealthy people and corporations, mostly in the US and Europe, get around the rules of their own democratic societies. The outcome is one set of rules for a rich elite and another for the rest of us.

The City’s “elsewhere” status in Britain stems from a simple formula: over centuries, sovereigns and governments have sought City loans, and in exchange the City has extracted privileges and freedoms from rules and laws to which the rest of Britain must submit. The City does have a noble tradition of standing up for citizens’ freedoms against despotic sovereigns, but this has morphed into freedom for money.

Read More

Why Big Banks Fail to Act in Their Own Self Interest

In an earlier post, I characterized some financial institutions as “shadowy and unstable ensembles of desks and divisions whose main goal is slipping by whatever bonus-maximizing scheme won’t set off alarms among risk managers and regulators.” Too harsh? Well, today ProPublica’s Jake Bernstein and Jesse Eisinger offer offer yet another confirmation of value-destroying skulduggery at the core of contemporary finance. They explain how payments of a few million in “bonuses” to employees running one division of Merrill Lynch helped those running another division “offload” billions of dollars in toxic assets to their own firm:

Two years before the financial crisis hit . . . [n]o one, not even the bank’s own traders, wanted to buy the supposedly safe portions of the mortgage-backed securities Merrill was creating. Bank executives came up with a fix . . . .They formed a new group within Merrill, which took on the bank’s money-losing securities. But how to get the group to accept deals that were otherwise unprofitable? They paid them. The division creating the securities passed portions of their bonuses to the new group, according to two former Merrill executives with detailed knowledge of the arrangement.

The executives said this group, which earned millions in bonuses, played a crucial role in keeping the money machine moving long after it should have ground to a halt. “It was uneconomic for the traders” — that is, buyers at Merrill — “to take these things,” says one former Merrill executive with knowledge of how it worked. Within Merrill Lynch, some traders called it a “million for a billion” — meaning a million dollars in bonus money for every billion taken on in Merrill mortgage securities. Others referred to it as “the subsidy.” One former executive called it bribery. The group was being compensated for how much it took, not whether it made money.

The three men at the top of the scheme made about $6 million each that year, and there were probably some handsomely paid lieutenants beneath them. Surely, there must have been someone who objected to such deals? There was: “a Merrill trader [who refused to go along] . . . was sidelined and eventually fired.” The power in the firm was held by those who could make quick money in big deals. Has anything changed about the structure of these firms since the crisis to alter that dynamic?
Read More

A Thanksgiving Message From Bill Black

Bill Black has done extraordinary work as a whisteblower and voice of conscience on financial fraud. I found this blog post of his a heartening reminder of “things to be thankful for” this holiday season:

I am personally thankful to the scientists that developed treatments for pneumonia and the doctors and nurses that provided the treatments. I suffered from pneumonia three times in my youth and had I been born a decade earlier I would have died as a child. I am grateful to my teachers, who recognized and cultivated a love of learning in their students. I am grateful to Social Security, which made it possible for our family to avoid economic disaster when my father died of a second heart attack when he was 41. (The moderately successful governmental effort against cigarettes came too late to save him.) The Social Security survivors’ benefits prevented my mother (and we three kids) from losing the home and allowed me to go on to college and post-graduate education.

Today, all the things Black (and I) are thankful for are under assault. A failing public health and pharma research infrastructure is giving new and dangerous microbes a foothold in our hospitals. States are laying off teachers as society allocates ever more of its resources to other, “more valuable” ends. And Social Security is dismissed as a “milk cow with 310 million tits” by President Obama’s Deficit Commission Co-Chair, who apparently wants blood this Spring.

But all these trends have generated reactions from those who care deeply about educational opportunity, concern for the sick, and respect for the aged. Patriotic pride in programs like Social Security or Medicare may seem outdated in an era of cosmopolitan, globalizing capitalism. But Black’s advocacy of programs like these (and lifelong fight against the frauds that undermine a government capable of funding them) is an inspired message for a day of gratitude. As he states, “I am grateful to the Ancients, who faced a vastly crueler world and recognized that the key was for each of us to try to repair it, and whose advice has led generations to make those repairs rather than accepting cruelty, greed, exploitation, and indifference as the natural state.”

PS: More “New Deal 2.0” Thanksgiving here.