capital-gains

House Passes Payroll Tax Bill Packed With Poison Pills

by on December 13, 2011

Huffington Post…

WASHINGTON — A GOP plan to pay for a payroll tax cut by docking federal workers and cutting Medicare passed the House Tuesday, but appeared headed for quick failure in the Senate as both parties jockeyed for political advantage. The Republican-controlled House of Representatives voted 234 to 193 for the bill, in spite of a White House promise to veto it and a warning from Senate Majority Leader Harry Reid (D-Nev.) that it would never pass in his chamber. The plan would pay for the one-year, 2 percent payroll tax cut by means-testing Medicare so that recipients making $85,000 and above have to pay higher premiums — effectively raising $31 billion. Another $62 billion would come from freezing federal pay for a year and making federal retirees pay more for health care. It would raise yet another $38 billion by hiking fees on banks doing business with Fannie Mae and Freddie Mac. Besides the controversial methods of paying for the bill, it would also stop clean air regulations estimated to save 20,000 lives , circumvent an environmental review of the Canada-to-Texas Keystone XL oil pipeline, slash emergency unemployment benefits from 73 weeks to 33 weeks, and allow states to force the jobless to prove they’re not on drugs in order to get unemployment benefits. Earlier, Reid called the pipeline provision “ideological candy coating” and said the unemployment reforms were “on the wrong side of ridiculous.” Still, Republican leaders insisted it was a bipartisan plan that should be passed immediately. “This has been a very balanced package put together by the House, designed to appeal to both Republicans and Democrats,” said Senate Minority Leader Mitch McConnell (R-Ky.). “The way it is paid for — much of it has been recommended by the administration itself in various talks that we’ve had over the past year.” Democrats have proposed a larger payroll tax cut of 3.1 percent, paid for largely by levying a surtax on income about $1 million. At stake is a break worth about $1,000 to 160 million Americans, or $1,500 if the Democrats’ proposal passes. The cut expires Jan. 1 if the sides cannot agree. Democrats — and even some Republicans — feel like they have been winning the message battle over the issue, with Democrats pointing to the lengths Republicans are going to in order to preserve the rich from a tax hike. If Congress can’t strike some kind of deal before the end of the month, 1.8 million long-term jobless will miss expected benefits in January, according to the National Employment Law Project, a worker advocacy nonprofit. Congressional Democrats want to preserve the current regimen of extended federal benefits, which provide compensation for up to 73 weeks for laid-off workers who use up 26 weeks of state benefits. The White House has signaled it would be willing to forgo 20 weeks of federal assistance. But Republicans want to cut the federal portion by 40 weeks to 33 weeks max, and its bill gives states the option of trimming benefits further. It also lets states require the jobless to pass a drug test to be eligible for unemployment compensation. Rep. Sander Levin (D-Mich.), the top Democrat on the committee that oversees unemployment insurance, said Tuesday that 3.3 million jobless would miss weeks of checks next year under the GOP bill. Both Republicans and Democrats have insisted they will extend unemployment benefits and the payroll tax cut, but with agreement on only one part of the method for funding the tax cut — raising fees on Fannie and Freddie — it was unclear Tuesday how they would proceed. A Democratic source said Reid approached McConnell earlier Tuesday and offered to bring the GOP measure up for a vote immediately. Such a move requires unanimous consent in the Senate, but McConnell declined. “We need to begin real negotiations on how to prevent a $1,000 tax hike on American families,” Reid said after the House voted. “The sooner we get this vote over with, the sooner those negotiations can begin in earnest. I will speak with Sen. McConnell again tomorrow to determine how soon we can hold this vote.” Dozens of jobless have told HuffPost they’re anxiously watching Congress for a reauthorization of federal benefits. Susan Lundberg of Palm Springs, Calif., said she lost her waitress job one year ago. Now she’s worried that her unemployment benefits will run out before she finds a job. She said she’d worked at the same restaurant for longer than a decade. She has felt that her age, 60, has been a major obstacle to finding new work, and that she’ll be “screwed” if her benefits stop before she finds employment. “I was happy at my job and am sorry they closed,” Lundberg said in an email. “Due to things beyond my control I am now in this situation. Congress should assume at least some accountability for the current situation that they have put people in.” Having used up her 26 weeks of state benefits halfway through this year, Lundberg recently advanced to the second “tier” of federal Emergency Unemployment Compensation, which offers up to 14 weeks of checks. It’s unclear how Lundberg would be affected under the Republican plan, which would eliminate the second and fourth tiers of EUC and phase out the 20-week Extended Benefits program halfway through next year. The third tier of EUC, which Republicans would save, offers up to 13 weeks of benefits. Lundberg said she did not like the way things like unemployment insurance and the payroll tax cut got rolled up in a bill with the Keystone pipeline. “If they really thought it was a serious issue they wouldn’t put in all this other stuff,” she said. “They should vote on it separately. It just makes things not happen when you put all these things in the bundle.” As for drug testing, Lundberg said: “I think they should drug test Congress. They’ve been acting a little weird.” Nine Poison Pills In The GOP Payroll Tax Extension Bill:

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House Passes Payroll Tax Bill Packed With Poison Pills

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Don Tapscott: Cutting Out the Banker Middleman

by on November 21, 2011

Huffington Post…

In the wake of the 2008 global financial crisis, we need to rethink and redesign many organizations and institutions that have previously served us well but are now beginning to falter. Fortunately, the Internet lets us do this. It slashes collaboration costs and makes possible completely new models of combining people, skills, knowledge and capital for economic and social development. Around the world, individuals and groups are working together, developing new businesses based on peer-to-peer (P2P) collaborative networks. The financial services industry has always been the antithesis of P2P collaboration. Hierarchy is deeply entrenched in this industry, for good reasons such as security, auditing, and regulatory compliance. But we are now seeing the rise of three types of P2P activities in this sector. First, financial services companies are moving beyond electronic mail, document management and other primitive technologies to new collaborative software suites like Jive and Moxie Software Spaces, which encourage P2P collaboration within corporate boundaries. Second, financial services companies themselves are beginning to act as peers, and are collaborating rather than treating one another as superiors or subordinates in the supply chain. This is good. The industry needs a new modus operandi, where all of the key players (including banks, insurers, investment brokers, rating agencies and regulators) embrace principles of transparency, integrity, collaboration and sharing of information. For example, banks should open up financial modeling and make pertinent assumptions and data transparent to all interested parties. Among other things, such P2P collaborations could enable banks to value the trillions of dollars in toxic assets that are weighing down their balance sheets. But the third and most interesting of P2P innovations in financial services is the growing number of lenders and borrowers connecting directly via the Internet and avoiding the cost and frustration of dealing with banks altogether. The goal is to benefit both the lender and the borrower. For example, if one person is now receiving one percent interest on a savings account and another is paying 29 percent on a credit card, a mutually-agreed 10 percent rate is a match made in heaven, giving the lender a tenfold increase in return while affording the borrower a chance to begin paying down the principal. Typical P2P borrowers want to consolidate debts and pay off credit cards. Initial attempts at Internet-enabled loan banks were a disaster. From 2005 (when P2P lending launched in the U.S.) till 2009, P2P startups experienced a boom and then went bust, culminating with regulators shutting them all down. Many investors were burned. In the case of one company, Prosper.com, angry investors launched a class-action lawsuit . After the initial debacle, two of the main U.S. services, Prosper and LendingClub.com , registered their platforms with the SEC in 2009 and 2008 respectively. Both overhauled their business models, with the stated goal of offering greater protection to the lender. They publish online their detailed financial performance figures, which are monitored by third-party sites such as www.LendStats.com . In the past two years the growth of P2P lending companies has been dramatic, with 15 percent month-over-month growth rates, and lenders receiving 8 – 10 percent returns. With these numbers, it’s no surprise that some of the biggest venture capital firms, such as Union Square, Draper Fisher Jurvetson, and Google Ventures are moving into the industry. Both Prosper and LendingClub subject would-be borrowers to rigorous scrutiny. Deadbeats are not welcome. Prosper rejects 80 percent of loan applicants; LendingClub’s rejection rate is 90 percent. According to estimates by analysis group Gartner Inc., the value of outstanding loans transacted P2P will grow to $5 billion in 2013. Although that’s still a paltry amount compared to the Wall Street titans, the P2P model strikes at the core of the banking industry. There are already more than 35 social-banking companies in more than 20 countries. Prosper in the U.S., Community Lend in Canada, Smava in Germany and Qifang in China have similar models. Today the U.K. and U.S. social-banking market has outstanding loans of $700 million. What these P2P networks do that banks can’t (or won’t) is let people align their investments with individuals or causes that they believe in. Prosper accepts investments of as little as $25 and estimates its returns to be from 6 percent to 16 percent. Borrowers can post their personal stories, endorsements from friends, and group affiliations, in an effort to win the hearts, minds and dollars of potential lenders. It’s easy to see why a growing number of consumers feel this is better than putting their money in a bank and watching it being gobbled away in fees. Is this the beginning of an outright social movement? P2P lending will certainly not displace the retail lending divisions of the big banks anytime soon. That said, well-regulated social banking clearly offers many advantages, in developed markets as well as rising economies. If some of the early hurdles can be ironed out, the phenomenon has a promising future. The sheer growth of the sector has certainly chipped away at the skepticism surrounding it and reinforced the viability of a more cost-effective way for lending. Banks should find ways to embrace these new models rather than fighting them. Experience shows that such industry disrupters can hurt those who ignore or resist them. This article originally appeared on Reuters.com .

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Don Tapscott: Cutting Out the Banker Middleman

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Robert Reich: A Good Fight

September 19, 2011

So the really big fight — perhaps the defining battle of 2012 — won’t be over Medicare. It won’t even be over Obama’s jobs program. It will be over whether the rich should pay more taxes. The president has vowed to veto any plan to tame the debt that doesn’t increase taxes on the rich. The Republicans have vowed to oppose any tax increases on the rich. It’s a good fight to have. In a Rose Garden ceremony this morning, Obama proposed new taxes on the wealthy — including a special new tax for millionaires, the closing of loopholes and deductions for people making more than $250,000 a year, and an end to the portion of the Bush tax cut going to higher incomes. Republicans accuse the president of instigating “class warfare.” But it’s not warfare to demand the rich pay their fair share of taxes to bring down America’s long-term debt. After all, the richest 1 percent of Americans now takes home more than 20 percent of total income. That’s the highest share going to the top 1 percent in almost 90 years. And they now pay at the lowest tax rates in half a century — half the rate they paid on ordinary income prior to 1981. (Unfortunately, the President isn’t proposing to raise the capital-gains tax — which, now at 15 percent, creates a loophole large enough for the super-rich to drive their Ferrari’s through. About 80 percent of the income of America’s richest 400 comes in the form of capital gains. Here’s where billionaire hedge-fund and private-equity fund managers make out like bandits. As I’ve noted, I also wish he aimed higher — for more brackets and higher rates at the very top. But at least he’s drawn a line in the sand. The veto message is clear.) Anyone who says the American economy suffers when the rich pay more in taxes doesn’t know history. We grew faster the first three decades after World War II than we have since. Trickle-down economics has been a cruel joke. On the other hand — given projected budget deficits — if the rich don’t pay their fair share, the rest of us will have to bear more of a burden. And that burden inevitably will come in the form of either higher taxes or fewer public services. If anyone’s declared class warfare it’s the people who inhabit the top rungs of big corporations and Wall Street (and who comprise a disproportionate number of America’s super rich). They’ve declared it on average workers. The ratio of corporate profits to wages is higher than it’s been since before the Great Depression. And even as corporate salaries and perks keep rising, the median wage keeping dropping, and jobs continue to be shed. You’ve got the chairman of Merck taking home $17.9 million last year. This year Merck announces plans to boot 13,000 workers. The CEO of Bank of America takes in $10 million, and the bank announces it’s firing 30,000 workers. Maybe I’m old-fashioned, but the way I see it we’ve got a huge budget deficit and a giant jobs problem. And under these circumstances it seems to me people at the top who have never had it so good should sacrifice a bit more, so the rest of us don’t have to sacrifice quite as much. According to the polls, most Americans agree. Robert Reich is the author of Aftershock: The Next Economy and America’s Future , now in bookstores. This post originally appeared at RobertReich.org .

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Joseph J. Thorndike: Why Liberals Should Learn to Love the Debt Debate

August 2, 2011

The debt limit crisis is the best thing to happen to liberalism in 30 years. It’s a manufactured crisis, of course. Republicans conjured it out of thin air, convinced that it will force a radical — and permanent — reduction in the size of government. But they’re wrong. Far from starving the beast, the debt limit debate is just as likely to feed it. By rescuing taxes from the political wilderness, it has given liberals a chance to rebuild the fiscal foundation of progressive government. A Fake Crisis As any number of levelheaded commentators have pointed out, the debt ceiling is all about the past, not the future. It’s a function of spending and taxing decisions made years ago. (And made by many of the same lawmakers decrying those decisions today.) By extension, raising the debt limit is really a question of collective accountability. In a democracy, you take responsibility for your government’s decisions, even if you didn’t like them when they were made and you like them even less today. That’s the deal — you don’t get to pick and choose. Of course, it’s possible to transform the debt ceiling into something more than simply a procedural hurdle. If you’re suitably rash, you can make it about the future as well as the past. Over the past few months, Republicans in the House have shown us how it’s done: Start walking the nation toward the edge of the abyss and threaten to keep on going. A Real Crisis But if the short-term crisis over a debt ceiling is fake, the long-term crisis over debt itself is very real. As William Gale and Benjamin Harris asserted in a recent paper for the Tax Policy Center , “The United States faces a large medium-term federal budget deficit and an unsustainable long-term fiscal gap. Left unattended, these shortfalls will hobble and eventually cripple the economy.” Those warnings have been around for years, but politicians have shown scant interest in making the hard decisions that would actually stave off disaster. Politics-as-usual doesn’t make room for much in the way of sacrifice. But the artificial crisis of the debt ceiling debate has recast politics, spurring change in the face of intractable inertia. And in that sense, it’s been spectacularly effective. By insisting that payment of past debts be tied to future spending, the House GOP has managed to put entitlements on the table. That’s no small feat. But the debt limit crisis has also put taxes on the table. Sure, Republicans are toeing the Tea Party line against any sort of revenue increase. That hasn’t changed, and it isn’t likely to change soon. Even their spin on the pending compromise seeks to minimize the likelihood of a tax hike. But for the first time in many years, Democrats are talking seriously — and even proudly — about the need for more tax revenue. In fact, the transformation is even more profound, challenging the antitax politics that have dominated national politics since 1980. Fake Tax Policy Now let’s be clear: The specific tax proposals coming from the White House are less than serious. Years ago, then-candidate Barack Obama staked out his position on soaking the rich, and as president, he’s been sticking to it. His speech July 25 on the debt ceiling impasse was typical: Most Americans, regardless of political party, don’t understand how we can ask a senior citizen to pay more for her Medicare before we ask corporate jet owners and oil companies to give up tax breaks that other companies don’t get. How can we ask a student to pay more for college before we ask hedge fund managers to stop paying taxes at a lower rate than their secretaries? How can we slash funding for education and clean energy before we ask people like me to give up tax breaks we don’t need and didn’t ask for? Jet owners, oil companies, Wall Street, and himself: These are the usual targets Obama offers up for tax increases. If you’re serious about solving the nation’s long-term fiscal problems, these tax reforms are a sideshow. Real Tax Policy But they’re a necessary sideshow, at least for anyone committed to serious fiscal reform. Ultimately, solving the long-term fiscal crisis will require both spending cuts and tax increases. Both elements will be broadly regressive, sparing the rich and soaking the poor. Lower spending will squeeze programs that principally benefit the non-wealthy, including Medicare and Social Security. Meanwhile, tax increases — at least the kind necessary to make a real dent in the fiscal gap — will fall on everyone, not just the rich. The regressive nature of meaningful fiscal reform — including the likely introduction of a broad-based consumption tax — militates for compensatory policy. In particular, it underscores the need for higher taxes on the rich. If political leaders are going to ask poor and middle-class Americans for sacrifice, they have an obligation to make sure that rich Americans share the pain. Taxing corporate jets, of course, won’t do that. To right the scales of tax justice, more substantive progressive reform is vital. In particular, lawmakers should eliminate the preferential treatment of capital gains (which would, of course, solve the carried interest issue, too). There aren’t many Democrats willing to make that argument — at least not yet. But the sideshow reforms currently in play still represent progress for liberals. By insisting that taxes are a necessary part of any balanced approach, they are building the foundation for a broader program of progressive tax reform. Small Steps Democrats have a long way to go. They are nowhere near breaking the bad tax news to lower- and middle-income Americans. But they finally have a president who is trying to restore the value proposition that lies at the heart of progressive governance. “We all want a government that lives within its means,” Obama said last week. “But there are still things we need to pay for as a country — things like new roads and bridges; weather satellites and food inspection; services to veterans and medical research.” And there it is: the hoary “price of civilization” argument that Oliver Wendell Holmes made famous and American voters made reality. With taxes, we do buy civilization. But Democrats have been afraid to say so for decades. Finally, they may be starting to speak up.

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Obama Reportedly Walks Out Of Tense Debt Ceiling Meeting

July 14, 2011

President Barack Obama walked out of a contentious meeting in ongoing talks to raise the nation’s debt limit on Wednesday, an aide tells Reuters. Politico reports that House Majority Leader Eric Cantor said the president stormed out of the negotiating session with top congressional lawmakers. The Hill reports that House Minority Leader Nancy Pelosi disputed Cantor’s account of what occurred at the end of the meeting. “Cantor’s account of tonight’s meeting is completely overblown,” a House Democratic aide told HuffPost. “For someone who knows how to walk out of a meeting, you’d think he['d] know it when he saw it. Cantor rudely interrupted the President three times to advocate for short-term debt ceiling increases while the President was wrapping the meeting. This is just more juvenile behavior from him and Boehner needs to rein him in, and let the grown-ups get to work.” HuffPost’s Jen Bendery reported earlier in the day: The White House on Wednesday closed the door a little more on the debt proposal being floated by Senate Minority Leader Mitch McConnell (R-Ky.), a measure already under siege by conservatives. “This is not a preferred option,” White House Press Secretary Jay Carney said of McConnell’s proposal in his daily briefing. McConnell’s proposal for avoiding debt default — to transfer full power to raise the debt ceiling to the White House for the remainder of Obama’s current term, cutting Congress out of the process — does nothing to address deficit reduction, Carney said. And Obama is set on making sizable cuts. According to Reuters, House Speaker John Boehner regarded proposed budget cuts put forth by the White House as “gimmicks and accounting tricks” when lawmakers convened on Wednesday. Politico reports that Cantor addressed the situation that unfolded following the meeting. “I know why he lost his temper,” he said of the president in addressing the matter on Capitol Hill. “He’s frustrated. We’re all frustrated.” HuffPost’s Sam Stein reports : By the end of Wednesday, the market seemed fully aware of the debt ceiling debate. U.S. stock-index futures fell after Moody’s Investors Services announced that it may cut America’s AAA credit rating . An Associated Press report earlier on Wednesday that Speaker John Boehner (R-Ohio) had called the likelihood of raising the debt ceiling a “crapshoot” if a compromise between Democrats and Republicans wasn’t reached caused a dive in the Dow Jones Industrial Average . The AP later updated the story to clarify that the speaker had said what would happen if a compromise isn’t reached is a “crapshoot.” The AP reports on the state of discussions to lift the debt limit: What’s left is an assortment of contingencies and increasingly sour squabbling between intraparty factions deeply split over what to do as an Aug. 2 deadline ticks closer. No proposal has the critical mass to raise the limit and avoid default. The lack of clarity about just who is leading — and to where — has taken its toll in goodwill and trust. That has liberated all sides from any urge to follow their leaders, freeing them to propose and oppose whatever they want on an issue that could frame the nation’s economic fate and send ripples around the world for years. A GOP aide told Reuters after Wednesday’s meeting that the president would not renegotiate his bottom line as to what he would compromise in the ongoing discussions. According to the aide Obama said, “I have reached the point where I say enough.” He reportedly added, “Would Ronald Reagan be sitting here? I’ve reached my limit. This may bring my presidency down, but I will not yield on this.” The AP reports that Federal Reserve Chairman Ben Bernanke issued a warning to lawmakers on Wednesday that failing to strike a deal and allowing the country to default on its debt would send “shock waves through the entire financial system.”

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Sen. Mark Warner Receives Big Contributions From JPMorgan During Deficit Talks

June 16, 2011

WASHINGTON — During the first three months of 2011 employees of JPMorgan Chase piled in campaign contributions to the campaign committee of Sen. Mark Warner (D-Va.), who has wound up at the center of the deficit debate over taxes and spending. From January to March, employees of JPMorgan and Highbridge Capital Management , the company’s hedge fund, contributed $87,600 to Warner’s campaign committee, according to campaign finance filings. These contributions, which came from a fundraiser for Warner hosted by JPMorgan, amounted to a quarter of all contributions Warner reported receiving in the first quarter of 2011. JPMorgan’s employees and the company’s political action committee have given a combined $194,400 to Warner over the course of his career, making the company the biggest donor to the senator’s campaign committee. In total, Warner received $151,286 from banks, investment firms and investment advisers in the first quarter of 2011. These contributions accounted for 43 percent of his total receipts during the same period. That’s already more than he raised from these groups over the past two years. Since late last year, Warner has been involved in conversations over how to reduce the long-term deficit as a member of the so-called “Gang of Six.” (The group has since shrunk to a party of five after Republican Sen. Tom Coburn of Oklahoma dropped out.) Many of the issues arising in deficit negotiations are of special interest to JPMorgan, as well as to other banks and investment firms. These include discussions on closing tax loopholes, capital gains tax rates and a potential financial speculation tax. Warner’s office disputes that JPMorgan’s contributions have any bearing on the senator’s positions on the deficit negotiations. Responding to a question of whether contributions provide any special access, Warner spokesman Luke Albee gave HuffPost a one-word answer: “No.” Albee also stated that JPMorgan has never lobbied the senator on the issue of deficit negotiations. Albee labeled Warner as the “most active architect of the Wall Street reform bill,” along with former Sen. Chris Dodd, D-Conn., the chair of the Senate Banking Committee. “[Sen. Warner] repeatedly took public positions at odds with Wall Street,” Albee said, citing the senator’s position on the Credit CARD Act, systemic risk, the Consumer Financial Protection Bureau and an amendment on mortgage cramdown proposed by Sen. Dick Durbin (D-Ill.). According to his office, Warner also refused to accept campaign contributions from the financial industry during the discussions over the Dodd-Frank financial reform bill. Warner did step up for for the financial sector in one area last year: When the House voted to eliminate a tax loophole, the senator worked to exempt venture capital funds from the change. In 2010, Warner was one of a few senators who were instrumental in blocking an increase of the tax rate on carried interest, the percentage of income paid out to investment managers. At the time, James Surowiecki explained in the New Yorker how the carried interest taxation amounts to a multi-billion dollar loophole: In a typical private-equity fund, the managers get paid two per cent of assets as a regular fee, plus twenty per cent of the fund’s profits. They pay regular income tax on the two per cent. But on their share of the profits, which is called “carried interest,” they usually pay only long-term capital gains — even though they put up hardly any of the fund’s actual capital, most of which comes from outside investors. Last year, a provision attached to a House-passed tax extenders bill sought to tax most of the carried interest earned by venture capital, private equity and real estate investment fund managers as earned income, increasing the tax rate as high as 38.6 percent. When the bill moved to the Senate, Warner backed a change that would have exempted venture capital funds from the higher rate. Warner voiced his concern about the provision in a letter co-signed by three other Democrats and Sen. Scott Brown (R-Mass.) which stated that the provision “could not occur at a worse time.” The letter echoed talking points from the National Venture Capital Association, including on statistic that said “venture-backed start-ups are adding over 4,000 jobs each month.” The carried interest provision was ultimately omitted from the bill . JPMorgan is currently the only major bank that lists carried interest as a lobbying issue for 2011. One explanation for the bank’s stake in preserving carried interest could be the January announcement of JPMorgan’s intent to create a new real estate fund. Known as Junius Real Estate Partners, it “will be wholly owned by J.P. Morgan Asset Management; however, the seven or eight team members will keep a ‘sizable portion of the profits’ in the form of carried interest.” The President’s deficit commission has proposed eliminating the capital gains tax rate — which currently affects carried interest — entirely. Capital gains and carried interest would both be taxed at the personal income rate, which the commission recommends lowering to counterbalance the elimination of loopholes like carried interest taxation and the special rates for capital gains. Warner has already stated that the “Gang of Six” will avoid tax hikes, which would likely include raising capital gains taxes to the personal income tax level. According to an earlier HuffPost report , Warner said the group will not propose actually raising tax rates.

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1031 Exchange – Trade Real Estate Investments and Defer Taxable …

June 2, 2011

The “like kind” provision for Real property is quite broad and includes land, rental and commercial property ; any of which can be exchanged for the other. The “like kind” provision for personal property is more restrictive. … Your interest in a partnership cannot be traded for an interest in another partnership . Exception: The partnership “as an entity” can exchange real estate it owns for other like-kind real estate . D. Transfer between Spouses …

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State Legalizes Gold, Silver Coins As Currency

May 23, 2011

SALT LAKE CITY — Utah legislators want to see the dollar regain its former glory, back to the days when one could literally bank on it being “as good as gold.” To make that point, they’ve turned it around, and made gold as good as cash. Utah became the first state in the country this month to legalize gold and silver coins as currency. The law also will exempt the sale of the coins from state capital gains taxes. Craig Franco hopes to cash in on it with his Utah Gold and Silver Depository, and he thinks others will soon follow. The idea is simple: Store your gold and silver coins in a vault, and Franco issues a debit-like card to make purchases backed by your holdings. He plans to open for business June 1, likely the first of its kind in the country. “Because we’re dealing with something so forward thinking, I expect a wait-and-see attitude,” Franco said. “Once the depository is executed and transactions can occur, then I think people will move into the marketplace.” The idea was spawned by Republican state Rep. Brad Galvez, who sponsored the bill largely to serve as a protest against Federal Reserve monetary policy. Galvez says Americans are losing faith in the dollar. If you’re mad about government debt, ditch the cash. Spend your gold and silver, he says. His idea isn’t to return to the gold standard, when the dollar was backed by gold instead of government goodwill. Instead, he just wanted to create options for consumers. “We’re too far down the road to go back to the gold standard,” Galvez said. “This will move us toward an alternative currency.” Earlier this month, Minnesota took a step closer to joining Utah in making gold and silver legal tender. A Republican lawmaker there introduced a bill that sets up a special committee to explore the option. North Carolina, Idaho and at least nine other states also have similar bills drafted. At the moment, Franco’s idea would generally be the only practical use of the law in Utah, given the legislation doesn’t require merchants to accept the coins, either at face value – $50 for a 1-ounce gold coin – or market value, currently almost $1,500 per ounce. And no one expects people will be walking around town with pockets full of gold and silver. Matt Zeman, market strategist for Kingsview Financial in Chicago, expects more people will start investing in gold as America’s growing debt and bankruptcies in other countries continue to decrease the value of government-backed money. “You’ve seen gold replacing these currencies as safety instruments,” Zeman said. “If I don’t feel good about the dollar or other currencies, I’m putting my money in precious metals.” Some supporters, including the law’s sponsor, seek to push Congress toward removing the tax burdens that discourage use of the coins, such as a federal capital gains tax. “Making gold and silver coins legal tender sends a strong signal to Congress and the Federal Reserve that their monetary policy is failing,” said Ralph Danker, project director for economics at the Washington, D.C.-based American Principles in Action, which helped shape Utah’s law. “The dollar should be backed by gold and silver, so we have hard money.” The U.S. and many other countries largely abandoned gold-backed money during World War II because they needed to print more cash to pay for the war. Later, during the Great Depression, President Franklin D. Roosevelt took steps that essentially prohibited gold and silver as legal currency to prevent hoarding. In 1971, President Nixon formally abandoned the gold standard. Fifteen years later, the U.S. Mint began producing the gold and silver American Eagle coins, primarily aimed at investment portfolios and allowing people to trade them at market value but with capital gains taxes on profits. Utah is now allowing the coins to be used as legal tender while levying no taxes. Opponents of the law warn such a policy shift nationwide could increase the prospect of inflation and could destabilize international markets by removing the government’s flexibility to quickly adjust currency prices. “We’d be going backward in financial development,” said Carlos Sanchez, director of Commodities Management for The CPM Group in New York. “What backs currency is confidence in a government’s ability to pay debt, its government system and its economy.” Larry Hilton, a Utah attorney who helped draft the law, disagrees and says the gold standard would restore faith in American money at a time when spiraling debt is weakening confidence. “We view this as a dollar-friendly measure,” Hilton said. “It will strengthen the dollar by refocusing policy matters in Washington on what led to the phrase, `the dollar is as good as gold.’” .

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Ruud de Mooij: To Owe or Be Owned — Depends on How You Tax It

May 13, 2011

In February, President Obama said , “Companies are taxed heavily for making investments with equity; yet the tax code actually pays companies to invest using leverage.” And he is right: the corporate tax code in the United States creates a significant bias toward debt finance over equity. Of course, the U.S. is not unique. In most of Europe, Asia and elsewhere in the world, the tax advantages of debt finance are even bigger than in the U.S. The crux of the issue is that interest paid on borrowing can be deducted from the corporate tax bill, while returns paid on equity — dividends and capital gains — cannot. The debt distortion is not new. What is new, however, is that we have come to realize that excessive debt (or leverage) is much more costly than we have always thought. The global financial crisis was a stark lesson that excessive leverage ratios in financial institutions can create massive spillover effects to the rest of the economy or even beyond national borders. Financial distortions have grown larger in recent years. Indeed, firms respond more aggressively to the tax bias of debt. For example, innovation in financial products has blurred the distinction between debt and equity, creating ample opportunities for tax avoidance. And multinational firms are increasingly reallocating debt and equity between countries to exploit the most favorable tax environments, thus eroding corporate tax bases. Arguably, this matters more when the public purses in advanced economies are under added strain. It would actually make much more sense to tax-penalize debt than to tax-favor it. But that’s not what corporate tax codes do. A recent IMF Staff Discussion Note offers two alternatives to the current corporate tax code. In a nutshell, it will require either reducing the tax deductibility of interest or introducing similar deductions for equity returns. Both reduce or eliminate the more favorable tax treatment of debt. The first is to restrict or eliminate the deductibility of interest for corporate profits. That would broaden the corporate tax base and free up revenue for reductions in the rate. Many advanced countries nowadays pursue such a policy of restrictions on interest deductibility. The problem with restrictions, rather than eliminating deductibility altogether, is that the rules become very complex and firms find their way around them. Added to that, these measures make investment more expensive and tend to hurt economic growth. That is not a desirable long-term prospect. The alternative then is to allow a deduction for normal equity returns. That is, a deduction for the value of returns on equity based on, say, the long-term government bond rate. The traditional allowance for interest deductions would remain, but the debt-equity playing field would be leveled. The flip side of eliminating incentives for excessive debt finance is removing the bias against equity investments, with likely favorable implications for promoting investment, economic growth and job creation. Indeed, estimates suggest the reform can raise GDP by some three percent. Some countries — namely, Belgium, Brazil and Latvia — have had some success in this regard, moving toward such systems during the last decade. The allowance for corporate equity deserves serious consideration from policymakers across the globe. Some governments may be understandably reluctant to introduce an allowance that will narrow the corporate tax base in the short run. But designing a better system will ultimately pay off. The loss of revenue can be kept to a minimum by granting the allowance only to new investment. Improved tax design will make economies less vulnerable to future financial crises, and thus prevent enormous costs in terms of lost revenue. And it could ultimately broaden corporate tax bases by eliminating the ample distortions the current systems create. It’s time for change — end the debt bias in corporate income tax. From iMFdirect blog

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Eric Schoenberg: How I Paid Only 1% of My Income in Federal Income Tax

April 25, 2011

In 2009, the median U.S. family had an income of just under $50,000, on which they would have paid roughly $2,761 (or about 5.5%) in federal income tax. I, by contrast, enjoyed an income of $207,415 in 2009, but paid only $2,173 (or 1.0%) in income tax. In a recent newspaper interview, I mentioned my absurdly low tax rate to illustrate the extent to which the tax system is biased in favor of the wealthy (my income varies widely from year to year, but is typically north of half a million dollars). My point was that with our country facing frightening budget deficits amid an ever-widening income gap between the rich and everybody else, I consider it both unwise and unfair that a former investment banker like myself pays less in taxes than working Americans with far lower incomes. Among the dozens of emails I received in response were many from people who assumed that rich people avoid taxes through complicated strategies devised by an army of expensive advisors (many correspondents asked for the name of my accountant). But under our current tax system, the rich don’t need high-priced lawyers who exploit obscure loopholes; I wasn’t even trying to minimize my taxes (and, in fact, could have paid zero tax if I was). Warren Buffett has observed that if there’s class warfare in this country, the rich are winning. I offer my 2009 tax return, then, as a flare to illuminate the battlefield. Americans are understandably angry over the government’s multi-billion-dollar bailouts of reckless bankers. But low tax rates on investment income have put far more money into Wall Street’s pockets than the TARP bill did. Even President Obama’s proposal to let the Bush tax cuts lapse for the richest Americans would leave a top marginal rate on capital gains and qualified dividends of just 20% — half the proposed rate on labor income. This difference creates a loophole you can drive a Rolls Royce through. Having left Wall Street in 2002, I now earn far more money from my financial portfolio than from my job as an Adjunct Professor, and as a result I consistently pay under 15% of my income to the IRS. Still, I was astonished when my accountant told me that my tax rate for 2009 was a mere 1%. I knew my deductions were an unusually large percentage of my income that year due to three items: $46,000 in charitable gifts, $56,000 in state and local taxes (mostly related to 2008, when my income was much higher) and $45,000 in investment expenses (basically fees paid to various money managers). Personally, I think there are reasonable arguments to be made for keeping each of these types of deduction, but the numerous “tax expenditures” that litter the tax code mean that citizens with similar incomes can end up paying wildly different amounts in tax. Even after deductions and exemptions, however, I still had taxable income of $37,349, putting me in the 15% bracket (higher than the average rate I’ve paid in years past with income twenty times as large). If I’d been an ordinary worker, my tax bill would have been $4,764. But wait! Under the Bush tax cuts, if one’s income from other sources is low enough (which mine was after deductions), certain types of investment income are subject to zero — yes, zero — tax. In my case, the qualified dividends I received in 2009 would have escaped taxation altogether if not for the Alternative Minimum Tax. Even under the AMT, however, I paid less than half the income tax paid by a wage-earner with the same taxable income (and less than a third of the tax burden when including social security taxes, which are not due on investment income). Does that seem fair to you? Advocates of lower taxes on investment income argue that they increase the incentives for folks like me to create jobs. As a long time investor, I’m skeptical. After all, job growth was much higher in the years following the Clinton tax hike in 1993 than it has been over the last decade as investment tax rates were repeatedly slashed. And lower rates on investment income also reward financial speculators, whose actions in recent years haven’t exactly promoted increased employment. Middle class anger in the Tea Party era, meanwhile, has been directed primarily at government spending. Arguing that government will simply waste whatever money it receives, Tea Party supporters oppose higher taxes on anybody (which explains why this is one populist movement which many billionaires are happy to support). But by focusing attention solely on whether government costs too much, the Tea Party ignores the completely separate question of who pays those costs. Last year, the answer was: not me. And I’m not happy about it. Some Tea Party types have observed that I am welcome to pay more voluntarily to the federal government if I want, but this entirely misses the point. Given the choice, of course I prefer to give money to my own causes rather than the federal government. But the whole point of democracy is for the community to decide what activities are in our collective self-interest. “Taxes are the price we pay for civilization,” and since we all share in that benefit, we should all pay our fair share of the cost. While the Republicans talk about the “shared sacrifices” necessary to close our government’s budget deficit, their plan imposes pain mostly on the sick, the elderly, and the poor. Asking the rich to sacrifice by paying higher tax rates surely pales in comparison. I believe that having wealthy investors pay taxes at the same rate as middle-class workers would be an important step towards making sure that we all contribute to putting our fiscal house in order.

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The Top 10 Tax Breaks — And How They Help The Wealthy The Most

April 18, 2011

This is the time of year when we are most aware of our tax burdens. But what we may be less aware of are all the huge tax breaks built into our system. Most Americans benefit from one or more — but it’s the wealthy who benefit the most. The government spends money through appropriations and writing checks, but it also showers individuals and companies with a astonishing array of special exemptions, credits and deductions that amount to a $1.1 trillion giveaway each year. (For comparison: the big budget fight that concluded last week cut spending by about $38 billion.) About half of the money lost to “tax expenditures” comes from the 10 breaks listed below. Few of the biggest breaks directly benefit corporate America. Most are widely distributed among the population and are meant to reward and encourage what is generally considered responsible behavior. Each break also represents a powerful, and in some cases broad-based, constituency. But in stark contrast to, say, social programs, tax breaks vastly favor the rich over the middle class and the poor. They vastly favor people who own homes (especially expensive homes), can put a lot away for their retirements, have generous health insurance plans and live in high-tax states. Even something as simple as the deduction for charitable donations favors the wealthy: Because they pay higher marginal tax rate, they get a bigger federal subsidy for each dollar they give. Some of these terms may require a little explanation: 1. Tax-free health insurance contributions. The tax exclusion for employer-provided health benefits is the single largest tax break — it alone will cost the government $1 trillion in foregone taxes over the next five fiscal years. This huge tax expenditure massively subsidizes the nation’s employer-based health insurance system. It also provides an incentive to employers to overspend in health benefits (which are tax free) and pay less in salary (from which, of course, the IRS takes a bite). This tax break only helps families with at least one member employed by an employer who offers them health benefits. Others have to buy health insurance with after-tax dollars. 2. The mortgage interest deduction. The second-largest tax break is essentially the nation’s largest housing program . By letting taxpayers who itemize deduct the interest they pay on their home mortgages, the government massively subsidizes home ownership. The more expensive the home — and the higher the homeowner’s tax bracket — the bigger that subsidy is. 3. Treatment of capital gains at death. When you die, the government forgives your capital gains tax on appreciated assets that you pass on to your heirs. In accounting terms, this is the ” step up in basis ” on death. From the heirs’ perspective, it means that the “basis” going forward (the amount above which anything is considered taxable capital gains) is the value of the asset at the time they received it. So if you buy stock at $1,000 and it’s worth $10,000 when you die, your heir gets $10,000 as the basis. No one ever pays taxes on the $9,000 in appreciation. Now imagine a multi-million-dollar stock portfolio and multi-million-dollar homes — and you’re talking real money. 4. Tax-free contributions to 401(k)s. Federal government policy encourages savings for retirement by allowing employees and employers to make tax-free contributions to retirement plans, the most common of which is the 401(k). This break is a big gift to the financial securities industry, which is where most of this money goes, and to the very wealthy. Indeed, the bulk of benefits go to high-income households, while little goes to the lower and moderate income households. There are limits to how much can be contributed tax-free, but the amount of tax foregone through contributions to 401(k) plans, along with employer plans, when combined still make tax-deferred retirement savings the second largest tax expenditure. 5. Exclusion of net imputed rental income. Homeowners don’t pay themselves rent. If they didn’t own their own homes, they would pay rent — and whoever received that rent would have to declare it as income and pay taxes on it. But this “imputed rental income” goes untaxed — another major subsidy to homeowners. The foregone rent is called “imputed rental income,” and the White House Office of Management and Budget calculates the foregone tax that results from it at $50 billion a year . 6. Deductibility of state and local taxes. The rationale behind this deduction is that taxes paid to state or local governments reduce a taxpayer’s ability to pay federal income tax. But state and local taxes essentially “pay” for services that, if purchased directly by the taxpayer, would not be deductible. The benefits of this deduction are disproportionately enjoyed by the wealthy, property owners, and residents of high-tax states. Because so many of those high-tax states are blue, this is one tax deduction that some conservative activists actually want dead . 7. Acclerated depreciation. The tax code allows businesses to deduct the costs of investing in such things as equipment faster than the objects in question actually wear out. Seth Hanlon writes for the Center for American Progress: “Accelerated depreciation in general should be thought of as a multibillion-dollar federal spending program that subsidizes business investments. And when they single out specific industries for special benefit, depreciation rules are akin to spending ‘earmarks.’” 8. Capital gains. Salaries, rents, royalties, interest — they’re all considered regular income by the IRS, and get taxed at marginal rates up to 35 percent. But income from the sale of capital assets held for more than a year is considered long-term capital gains, and gets taxed at a flat 15 percent rate. This is a huge windfall for the investor class — and represents a quarter of a trillion dollars in lost revenue over 5 years. 9. Deductibility of charitable contributions. The IRS allows taxpayers to deduct charitable contributions from their taxable income. This amounts to an approximately $43 billion a year subsidy to charitable organizations — and because of progressive taxation, the deduction is more valuable to rich taxpayers than to poor ones. One scholar recently proposed doubling the deduction temporarily to stimulate job growth; but there is actually more talk about reducing or adjusting it instead. 10. Employer plans. This refers to employment-based retirement plans other than 401(K)s. See No. 4.

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America’s Richest Taxpayers See Federal Taxes Dramatically Drop

April 17, 2011

WASHINGTON — As millions of procrastinators scramble to meet Monday’s tax filing deadline, ponder this: The super rich pay a lot less taxes than they did a couple of decades ago, and nearly half of U.S. households pay no income taxes at all. The Internal Revenue Service tracks the tax returns with the 400 highest adjusted gross incomes each year. The average income on those returns in 2007, the latest year for IRS data, was nearly $345 million. Their average federal income tax rate was 17 percent, down from 26 percent in 1992. Over the same period, the average federal income tax rate for all taxpayers declined to 9.3 percent from 9.9 percent. The top income tax rate is 35 percent, so how can people who make so much pay so little in taxes? The nation’s tax laws are packed with breaks for people at every income level. There are breaks for having children, paying a mortgage, going to college, and even for paying other taxes. Plus, the top rate on capital gains is only 15 percent. There are so many breaks that 45 percent of U.S. households will pay no federal income tax for 2010, according to estimates by the Tax Policy Center, a Washington think tank. “It’s the fact that we are using the tax code both to collect revenue, which is its primary purpose, and to deliver these spending benefits that we run into the situation where so many people are paying no taxes,” said Roberton Williams, a senior fellow at the center, which generated the estimate of people who pay no income taxes. The sheer volume of credits, deductions and exemptions has both Democrats and Republicans calling for tax laws to be overhauled. House Republicans want to eliminate breaks to pay for lower overall rates, reducing the top tax rate from 35 percent to 25 percent. Republicans oppose raising taxes, but they argue that a more efficient tax code would increase economic activity, generating additional tax revenue. President Barack Obama said last week he wants to do away with tax breaks to lower the rates and to reduce government borrowing. Obama’s proposal would result in $1 trillion in tax increases over the next 12 years. Neither proposal included many details, putting off hard choices about which tax breaks to eliminate. In all, the tax code is filled with a total of $1.1 trillion in credits, deductions and exemptions, an average of about $8,000 per taxpayer, according to an analysis by the National Taxpayer Advocate, an independent watchdog within the IRS. More than half of the nation’s tax revenue came from the top 10 percent of earners in 2007. More than 44 percent came from the top 5 percent. Still, the wealthy have access to much more lucrative tax breaks than people with lower incomes. Obama wants the wealthy to pay so “the amount of taxes you pay isn’t determined by what kind of accountant you can afford.” Eric Schoenberg says to sign him up for paying higher taxes. Schoenberg, who inherited money and has a healthy portfolio from his days as an investment banker, has joined a group of other wealthy Americans called United for a Fair Economy. Their goal: Raise taxes on rich people like themselves. Shoenberg, who now teaches a business class at Columbia University, said his income is usually “north of half a million a year.” But 2009 was a bad year for investments, so his income dropped to a little over $200,000. His federal income tax bill was a little more than $2,000. “I simply point out to people, `Do you think this is reasonable, that somebody in my circumstances should only be paying 1 percent of their income in tax?’” Schoenberg said. Sen. Orrin Hatch of Utah, the top Republican on the Senate Finance Committee, said he has a solution for rich people who want to pay more in taxes: Write a check to the IRS. There’s nothing stopping you. “There’s still time before the filing deadline for them to give Uncle Sam some more money,” Hatch said. Schoenberg said Hatch’s suggestion misses the point. “This voluntary idea clearly represents a mindset that basically pretends there’s no such things as collective goods that we produce,” Schoenberg said. “Are you going to let people volunteer to build the road system? Are you going to let them volunteer to pay for education?” The law is packed with tax breaks that help narrow special interests. But many of the biggest tax breaks benefit millions of American families at just about every income level, making them difficult for politicians to touch. The vast majority of those who escape federal income taxes have low and medium incomes, and most of them pay other taxes, including Social Security and Medicare taxes, property taxes and retail sales taxes. The share of people paying no federal income tax has dropped slightly the past two years. It was 47 percent for 2009. The main difference for 2010 was the expiration of a tax break that exempted the first $2,400 of unemployment benefits from taxation, Williams said. In 2009, nearly 35 million taxpayers got a tax break for paying interest on their home mortgages, and nearly 36 million taxpayers took the $1,000-per-child tax credit. About 41 million households reduced their federal income taxes by deducting state and local income and sales taxes from their taxable income. About 36 million families cut their taxes by nearly $35 billion by deducting charitable donations, and 28 million taxpayers saved a total of $24 billion because their income from Social Security and railroad pensions was untaxed. “As a matter of policy, there would be a lot of ways to save money and actually make these things work better,” said Leonard Burman, a public affairs professor at Syracuse University. “As a matter of politics, it’s really, really difficult.” ___ Online: Tax Policy Center: http://www.taxpolicycenter.org National Taxpayer Advocate: http://www.irs.gov/advocate United for a Fair Economy: http://www.faireconomy.org

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CHART: America’s Descending Marginal Tax Rates

April 15, 2011

By Catherine Mulbrandon VisualizingEconomics.com (Click picture to enlarge) Green line is the top marginal rate for married couples filing jointly (most years dividends were tax like ordinary income until 2003). Orange is the top rate for income from capital gains. The top corporate tax rate is included for comparison. Your marginal tax rate is the rate you pay on the “last dollar” you earn; but when you view the taxes you paid as a percentage of your income, your effective tax rate is less than your marginal rate, especially after you take into account the deductions and exemptions, i.e. income that is not subject to any tax. Over the years, changing the amount of taxes people pay was accomplished not just by changing rates but by changing the income limits of the tax brackets. Just looking at the top rates does not give the whole picture about who is paying taxes. Before the 1986 tax reform, the income tax had 15 brackets. In the 1930s, there were more than 50. The Wealth Tax Act of 1935, applied the top rate to income over $5 million and had only a single taxpayer: John D. Rockefeller, Jr. As the number of tax brackets decrease, the the top rate was applied to more people over the decades. Since 1987 the income tax brackets were combined so now more than a million people “qualify” for the top marginal rate. If you are interested here is the first 1040 form for 1913 . Tax Data: Married filing jointly , Capital Gains & Regular , Corporate Visualizing Economics is a website by Catherine Mulbrandon dedicated to publishing infographics about economic data. Visualizing Economics has been featured at Slate.com, NPR.org, WashingtonPost.com, The Big Picture, Seeking Alpha and on MSNBC Find more graphics explaining the U.S. economy at VisualizingEconomics.com

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IRS Funding Cut Days Before Report Shows $330 Billion In Uncollected Taxes

April 11, 2011

WASHINGTON — As part of the budget deal hashed out on Friday evening, lawmakers agreed that no additional federal funds would be used to hire new IRS agents. Then on Monday, the Government Accountability Office publicly released a study showing that, as of the end of fiscal year 2010, roughly $330 billion in federal taxes had never been paid — an amount that, if collected, would represent nearly nine times the amount of savings as the budget itself. The dual developments aren’t shocking. Despite evidence that a single dollar spent on enforcing the tax code could result in up to ten dollars in revenue, politicians, naturally, are reluctant to align themselves with tax collectors. And yet, the sacrificing of funds for IRS agents in the continuing resolution deal underscores a particular problem that seems bound to confront fiscally conscious lawmakers. “Cutting back on IRS enforcement could easily cost the treasury much more in revenue than it saves,” said Chuck Marr, Director of Federal Tax Policy at the Center on Budget and Policy Priorities. The GAO report, which looks specifically at the issue of passport holders who have failed to pay their full share of taxes, underscores Marr’s point. Titled “Federal Tax Collection: Potential for Using Passport Issuance to Increase Collection of Unpaid Taxes,” the study labels poor enforcement of tax laws and the tax code as a “high-risk” hole in government policy. In fiscal year 2008, passports were issued to about 16 million individuals. Of those, more than 224,000 owed more than $5.8 billion in unpaid federal taxes. A good chunk of the evasion, the GAO concluded, was committed by individuals with “substantial personal assets” including multi-million-dollar homes and “luxury cars.” One passport recipient bought a house for $2 million and another property for $1.5 million despite owing $1 million in federal taxes. “If you look, you can find records of most capital gains income,” said Rob Shapiro, former U.S. Undersecretary of Commerce. “People deposit it in their bank accounts or the institutions may issue reports if it is capital gains on stock transactions. So it is not hard to pick it up if you have the manpower to look for it. And again, given that the salary of an IRS agent is at least as high as the average salary in America, the fact that there is a ten-to-one ratio for the returns on auditing tells you that [tax evasion] is coming from the high-income brackets.” Regardless of who the worst evaders are, the GAO concludes that “IRS enforcement of federal tax laws is vital,” not just to pinpoint the offenders but to promote “broader compliance.” And what do the study’s authors cite as a compelling reason to beef up IRS functions? A “federal deficit” that “continue[s] to mount.” Indeed, several close observers of the budget debate have wondered exactly how lawmakers can shudder at going after tax evasion while simultaneously preaching fiscal responsibility on the stump. Marr, for one, noted that Congress has already disbanded a tax reporting provision in the president’s health care reform law that would have resulted in stronger compliance. That was scuttled for politically obvious reasons: the paperwork it placed on small businesses was deemed well beyond burdensome. But the decision to deny funding for more IRS agents doesn’t have such an easy-to-distill an explanation. “Hiring more IRS agents would have allowed the Obama administration to enforce its agenda, insofar as its agenda is to make sure that people don’t cheat on their taxes,” wrote Jonathan Cohn in The New Republic . Obama has made buffing up the IRS a relative hush-hush plank of his tax reform agenda. Upon entering office he advocated for more funds for the agency, and as part of his 2012 budget, he proposed a 9.4 percent increase so that it could hire roughly 5100 new employees. The proposal, which pivoted off of previous studies that reached similar conclusions as the GAO’s, was met with somewhat frenzied pushback from conservative circles — the specter of black-suited tax collectors roaming the streets undoubtedly on the mind. And almost immediately, the suggested increase in IRS funds became a target of cut-happy legislators.

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Peter Neill: IRS Topic 556: Alternative Minimum Tax

March 31, 2011

IRS.gov describes Topic 556 — Alternative Minimum Tax — as follows: The tax laws provide tax benefits for certain kinds of income and allow special deductions and credits for certain kinds of expenses. The alternative minimum tax (AMT) attempts to ensure that anyone who benefits from these tax advantages pays at least a minimum amount of tax. The AMT is a separately figured tax that eliminates many deductions and credits, thus increasing tax liability for an individual who would otherwise pay less tax. The tentative minimum tax rates on ordinary income are percentages set by law. For capital gains and certain dividends, the rates in effect for the regular tax are used. The recent report of the General Electric Company’s failure to pay any tax to the United States government, indeed to be owed a tax refund, may not have surprised the beltway cognoscenti and business cynics, but it sure stunned the folks around here. If there were ever a simple fact to infuriate a population already damaged and embittered by corporate actions on the employment and political front, this was it. But we have the Citizens United case to hand. Corporations may act as individuals. So here is a simple proposal: let’s tax corporations as individuals and make them subject at least to the Alternative Minimum Tax. And let’s make sure to include all government subsidies as ordinary income. Will someone do the math? Might help the deficit.

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Dal LaMagna: Take Care of Your Employees and They Will Take Care of You

March 30, 2011

As chronicled in my book Raising Eyebrows, A Failed Entrepreneur Finally Gets It Right , from the beginning of Tweezerman , the company that became my big success, I was empowering my employees. My story included me being exploited by powerful men whose orbit I had fallen into. Rather than copying their behavior, I promised myself that I would do the opposite when I had employees. I’d empower rather than exploit them. Many employers underpay and/or overwork their employees and feel proud of how they can help increase the profits for themselves and other shareholders. I saw this as short-term gains at the expense of long-term rewards. I also saw my employees as more important than even the product I was selling. Initially my big delivery to employees at Tweezerman was health and job security. As soon as we had three employees, the number then required to get company health insurance, we got it. I instituted a policy where the last thing we did was fire someone. And no one person, including me, could fire a person without another employee of the company agreeing. You had to be drunk or drugged on the job, not show up, or get caught stealing to get fired. As we grew and more jobs were created, if you couldn’t make it in your job we’d find another job for you to try. We had one woman whom we cycled through five jobs before discovering she was great at handling returns. Once in a while we rued this policy of not getting rid of incompetent employees quickly and directly, but generally the sense of job security for everyone was worth the occasional deadwood. One way companies exploit their employees is to pay them a salary and set an expectation that you have to work more than 40 hours a week to advance. With Tweezerman during the initial years I paid people by the hour. If you worked 45 hours you got paid for 45 hours. Eventually as we got big and top-level employees with bigger compensation arrived we did paid them salaries. However the laborers stayed on the hourly rate to ensure they were fairly compensated for the work they were doing. “Take care of your employees and they will take care of you” was one of my mantras. Caring about and for your employees is a necessary foundation for empowering them. Many employees have stressful home lives. It makes an enormous difference to their productivity if work is actually a haven away from their problems at home. What really has to happen for employees to be empowered is they need to be involved, given responsibility, and pushed to grow in their job. My sister Teri who worked with me for years used to say, “Dal sees in people what they themselves don’t see.” In other words I would throw people into a job that they might not feel qualified for. Usually I was right and they thrived and did a great job. When we hired people during the interview I’d find out what would be their dream job. If a job opened up that fit closer to their dream job I would offer it to them. We established a steering committee of the all the department heads and met twice a month. The committee was always comprised of an odd number of people so we were always able to make decisions. I considered them my partners and made that their reality. 5% of our profits were distributed to all employees, excluding me, in January after each year. We had a formula that was considered fair. The theory was what you earned working for the company is a fair measure of your worth to it. Each employee got a percentage of the total profits pool that was equal to what percentage their earnings were of all employee earnings. From day one I designed the capital structure of Tweezerman to reserve 20 percent of the stock to be owned by my employees. Half of that went to the top managers and the other half (10 percent of the stock) went into an ESOP (Employee Stock Ownership Plan) that involved all the other employees. As partial owners of the company I thought it critical that they understand how the numbers worked. I conducted company-wide meetings where I’d explain the profit and loss statement and our budgeting process. We also ran Quaker style meetings where everyone sat in a circle facing each other and anyone could take the floor and make a comment, deliver a complaint or compliment, or ask a question. I was very grateful my employees showed up for work every day and did things I didn’t want to do. The way Tweezerman grew to a much bigger size than I was ever interested in being responsible for was because I delegated every operational job to someone else — including President of the company. Probably a little sooner than she herself thought feasible I made one of my first employees, Lisa Bowen, President of Tweezerman. Because I had empowered my employees from the outset, twenty-five years later I owned a company that was dramatically bigger than I ever desired or dreamed. I sold it for much more money than I ever thought possible. My employees shared millions of dollars in capital gains and kept their jobs when I sold the company to the Zwilling J.A. Henckels AG in 2004. I continue to stay in touch with many of my employees and have close relationships with many of them to this day. For even more stories, like how we didn’t lay anyone off after 9/11 and how that turned out, and more details about best practices of employee empowerment read my book Raising Eyebrows .

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William Meers: Is Swiss Banking Still the Way to Go for Private Banking?

January 23, 2011

The complex financial world of Swiss Banking is far too extensive to examine in a brief article such as this one, however it is possible to introduce a few ideas, and render a few misconceptions regarding this misunderstood world redundant. The mere mention of the words ‘Swiss Banking’ often conjures images of James Bond, and Bond Villains, luxurious lifestyles and mafia bosses stepping off private yachts with suitcases full of pristine condition 100 bills ready to be left in an anonymous account with a lengthy number. If this is what springs to mind your vision of Swiss Banking is far removed and detached entirely from reality as, contrary to what Hollywood may tell you, Swiss Banking and the entire world of offshore banking is not a haven for the rich and it is not a place to take your criminal activity. To fully explain what the world of Swiss Banking entails it is necessary to understand certain concepts such as ‘offshore banking’, ‘offshore bank account’, ‘tax haven’ and more relevant terms such as OFC and IFC. I will begin this brief overview by explaining these concepts in the simplest possible way before offering a brief, but balanced, view as to what Swiss Banking actually is, and how it works. Concepts such as offshore bank accounts are often, unreasonably, associated with criminal activity and tax evasion — and tax havens as being the location where this activity takes place and is facilitated. This is an oversimplified gross misrepresentation of the truth in which the offshore banking world actually takes its place as fully integrated in the global economy. An offshore bank account is simply a bank account which is based in a different jurisdiction to where you, as an individual or entity, legally reside. No more — no less. A tax haven is simply a location which has lower tax rates for foreign investors than would be available in their domestic jurisdiction — and entices investment overseas. These definitions are oversimplified for the purpose of facilitating understanding, but to illustrate how complex the issue is, the OECD (Organization for Economic Cooperation and Development) has not been able to produce a definition as to what a tax haven actually is. The idea behind them is that by offering zero or low tax to foreign investors, they can encourage investment from a foreign jurisdiction, which obviously has implications for another country. It may surprise you to learn that every country does this — the USA for example offers several capital gains and investment tax relief benefits that, by traditional definitions, makes it the world’s largest tax haven. The entire concept of a tax haven is, however, over-simplistic and implies that tax evasion or avoidance is the only reason to move investment money to an alternative jurisdiction. Again this is a gross misrepresentation of the reality where there are a number of benefits and investment specialists who work to make an individual or corporation’s investment work for them. The terms OFC (Offshore Financial Center) and IFC (International Financial Center) are becoming more popular and are, perhaps, a more appropriate label for a complex and diverse series of financial services. Why then, would one open an account with a Swiss Bank? The answer depends on one’s individual or corporate circumstances. Swiss Banking offers a wide range of services, but as a rule those who benefit will be on the wealthier side of society, but this is not limited to individuals. Nearly all multinational companies have offices, and are often focused in areas generally considered ‘tax havens’. There is no minimum limit, but as services are often fee and commission based and structures such as trusts require set up and maintenance fees, an individual being required to be worth over U$1 million is common. Businesses are usually only worth moving offshore if profits of U$100,000 are being made annually, while opening an offshore bank account is usually not worthwhile for less than U$100,000. However, for these, not inconsiderable, sums of money there are certain benefits such as tax benefits due to PTRs (Preferential Tax Regimes) in certain cases and in the case of Switzerland if you become a legalized resident. However Ta x Benefits are not the only benefit, and entering the world of Swiss Banking opens you to a world of specialist advisors in the world of asset protection and investment advice. Such advisors dedicate themselves to protecting and helping you to take full advantage of your money — and is generally a fee or commission based service. Swiss financial institutions are famous for their professionalism and loyalty and uphold one of the most unique financial characteristics of Swiss Banking — ‘Banking Secrecy’. The concept of Banking Secrecy originally developed from the 1934 Swiss Bank act and offers a legal support for your financial data and offers you a certain degree of discretion and peace of mind. This leads us to the first paragraph of this article — the image of Swiss Banking. If there is intent of criminal activity, this anonymity is NOT designed to protect those interests. Swiss institutions follow a strict KYC (Know Your Customer) protocol which is used to determine legitimate sources of all funds being invested. If one’s interests are motivated by illegal tax evasion, Swiss banking is not the place for you — you are far more likely to be reported by the Swiss institution involved than be found by your own jurisdiction.

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The Top IPOs To Watch For In 2011

January 12, 2011

The market for Initial Public Offerings is booming.  After seeing so many IPOs trade exponentially higher than expected in 2010, the market should continue to be strong in 2011.  We have created what was supposed to be a top ten list for the year.  There are so many great names here already in the IPO pipeline that this list came to seventeen key IPOs to watch in 2011. Private equity tried to unload stakes in 2010 with mixed results.  Now that the capital gains tax and dividend tax rates have been extended for another two years,  there is a 24 month period with some breathing room.  We are also seeing many great venture capital-backed deals coming to market.

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TAX CUT MYTHS: Fact Checking The Showdown In Congress

December 4, 2010

NEW YORK — As debate rages on extending tax cuts set to expire at the end of the year, politicians are making misleading statements about who might be hurt or helped. Before the midterm elections, President Barack Obama insisted that lower income-tax rates should be permanently extended only to those he called the “middle class.” People in the top two tax brackets would face higher rates. Now, with Republicans triumphant, the White House is trying to hash out a compromise so rates don’t automatically revert to their higher, pre-2001 levels for everyone in the new year. One possible deal: extending all the lower rates for a yet-undetermined period of time, perhaps two or three years. Time is running out, as is patience. In a purely symbolic vote, House Democrats on Thursday passed a bill extending lower rates for everyone but those in the top brackets. House Republican leader John Boehner said the vote ran counter to efforts to forge a deal, dubbing it “chicken crap” political maneuvering. Here are a few myths, half-truths and short-hand distortions that have marred the debate: _ Under the Obama plan, taxes will increase for families making more than $250,000. Wrong. Actually, a family could make a lot more and still not face higher taxes. Obama wants to raise the top two brackets from 33 percent to 36 percent and from 35 percent to 39.6 percent. The first of the two – 36 percent – is widely assumed to kick in at $250,000. Obama says that himself. But that’s not right. The higher rate would apply to families with $232,000 or more of taxable income, or what’s left after personal exemptions and deductions have been subtracted from income. Deductions can be sizable, especially for wealthy people. Think state and local taxes, mortgage interest and charitable contributions. The result is that a family making $300,000 or even more could have taxable income of less than $232,000. “A lot of people making more than $250,000 won’t be paying higher taxes,” says Clint Stretch, a managing principal of Deloitte Tax. So where does the $250,000 come from? That’s a number for “adjusted gross income,” which is total income minus a few things like 401(k) contributions and alimony payments. A family that had adjusted gross income of $250,000 and took two personal exemptions, plus a standard deduction instead of itemizing, would have taxable income of $232,000. So $250,000 is distorting. It refers to adjusted gross income, not total income. And most people in that income range itemize their deductions. The key number for families is taxable income of $232,000; for individuals, it’s taxable income of $191,000. Only 2 percent of U.S. households would face the 36 percent tax rate, according to the nonpartisan Tax Policy Center, a Washington think tank. _ Tax hikes would prevent small businesses from hiring. Well, maybe. But the numbers cited as proof are flimsy at best. Critics say Obama’s plan to raise taxes on the highest earners would hobble the businesses that generate most of the nation’s new jobs. Yet fewer than 3 percent of small businesses produce enough income to face the higher rates, according to the Tax Policy Center. Some Republicans note that this tiny slice accounts for half of total small-business income. So the damage to the economy would be more than you’d think, they say. But many of these businesses aren’t what most people would consider small anyway. The IRS doesn’t have a category of tax filers called “small business.” Analysts who study taxes use the next best thing, which isn’t very good at all: business owners who use their personal 1040 to file taxes instead of a corporate return. For example, some hedge funds and law firms pay their taxes through the personal returns of their individual partners. While these are lumped in as “small businesses” and would pay higher taxes, they are far different from the retail stores and small manufacturers that most people associate with the term and which would not pay higher taxes. _ Keeping Bush’s tax cuts for the top earners would swell U.S. debt by $700 billion, unconscionable in an age of budget-busting outlays. Somewhat misleading. The lower tax receipts would accumulate over 10 years – not one year. On average, that means $70 billion less for the government each year, or about 1/30th of all federal receipts. _ Bush tax cuts for millionaires average more than $100,000 a year and should be eliminated. Misleading, again. The term millionaire can include people making tens of millions or even billions. Their tax breaks are much larger. An average doesn’t capture the benefit for most millionaires. According to Deloitte Tax, a typical family making exactly $1 million pays about $50,000 less each year in federal income taxes than it would if the Obama plan were rejected and the tax cuts expired. _ The rich would pay 36 percent or more of their income in taxes under Obama’s plan. Wrong. A rich family would pay 36 percent – and 39.6 percent – only on taxable income above $232,000. The family would continue to benefit from the other four brackets established earlier this decade – 10 percent, 15 percent, 25 percent and 28 percent – on taxable income below $232,000. A family with taxable income of $350,000 would pay a higher rate on $118,000. The family would pay $42,480 in taxes on that amount, or $3,540 more than it pays now. Of course, for the really rich, the two higher brackets would take a bigger bite. A family making $2 million would pay about $100,000 more in taxes under Obama’s plan, according to the Tax Policy Center. _ The tax debate is all about income tax rates. Wrong. For all the attention given to higher taxes on earned income if current rates expire, the big hit to some families will come from taxes on capital gains and dividends. The government now takes 15 percent of both. If the Bush cuts aren’t renewed, the tax on long-term gains would rise to 20 percent. And the rate on dividends would shift to your income tax rate, or a maximum 39.6 percent. Under Obama’s plan, the tax on dividends would rise to 20 percent for everyone. If Congress doesn’t act to stop taxes from reverting to their pre-2001 levels, new limits would be placed on deductions and exemptions, too. And a $1,000 child credit would be halved.

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Tim Ryan: Investors Need Tax Certainty

November 17, 2010

Uncertainty. It’s the reoccurring theme reverberating throughout our economy at the moment. It’s on the minds of politicians, business owners, and American families. Recent economic data also suggests that uncertainty is having a material impact on growth. Some certainty was provided to financial markets and the broader economy after the enactment of the Dodd-Frank financial reform law. More work still needs to be done by regulators in crafting the new rules the law requires, but nevertheless, the path forward is clearer than it was before Dodd-Frank became law. But key contributors to our economy: financial markets, investors, businesses and families are still unclear over what their tax burden will be next year. Congress has an opportunity and responsibility to address this important issue before the end of the year. Our member firms employ hundreds of thousands financial advisers that work with millions of Americans everyday to help them plan their financial future. One of the most frequent questions these advisers here from their clients is what will happen to capital gains and dividend tax rates, and how that will affect their investments. Unless Congress acts, the taxes on capital gains and dividends will increase substantially in 2011. The capital gains tax rates would increase by as much as 33 percent, from a current maximum rate of 15 percent to 20 percent. The tax hike for dividends is even more drastic, with tax rates for many investors increasing by nearly 164 percent. These increases do not include the additional 3.8 percent tax on investment income that was already passed this year as part of the health care reform bill. While all investors will be affected by this increase, senior citizens will be hit the hardest. According to the Tax Foundation , 42 percent of taxpayers over 65 reported dividend income on their tax returns. The vast majority of dividend income, 48 percent, is earned by those over 65, and dividend income accounts for 6 percent of all the income earned by seniors. Additionally, one-third of all taxpayers reporting capital gains income are over 65 and they earn 30 percent of all capital gains income. Taxing investment not only hurts America’s savers and investors, it undermines potential economic growth and job creation. According to the Heritage Foundation , high tax rates on capital gains and dividends would lead to 270,000 fewer jobs in 2011 and 413,000 fewer jobs in 2018. The economic effects would be felt in take-home pay as well. Personal income after taxes would decrease by $113 billion after inflation in 2011 and $133 billion after inflation in 2012 when compared to tax rates that would have existed under the current policy. Indeed, gross domestic product (GDP) would fall by $44 billion in 2011 and $50 billion in 2012 if taxes on capital gains and dividends were left to rise to pre-2001 levels. The numbers speak for themselves. American investors — especially seniors — are faced with potentially massive tax hikes, and time is running out. Given the still fragile state of our economy, Congress absolutely must continue the current rates on capital gains and dividends regardless of income level to provide increased certainty for American businesses and families, but for our future economic growth and job creation. Tim Ryan is President and CEO of SIFMA the leading financial services trade group which represents hundreds of securities firms, banks and asset managers throughout the country.

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Robert Reich: Obama’s First Stand

November 10, 2010

The president says a Republican proposal to extend the Bush tax cuts to everyone for two years is a “basis for conversation.” I hope this doesn’t mean another Obama cave-in. Yes, the president needs to acknowledge the Republican sweep on Election Day. But he can do that by offering his own version of a compromise that’s both economically sensible and politically smart. Instead of limiting the extension to $250,000 of income (the bottom 98 percent of Americans), he should offer to extend it to all incomes under $500,000 (essentially the bottom 99 percent), for two years. The economics are clear: First, the top 1 percent spends a much smaller proportion of their income than everyone else, so there’s very little economic stimulus at these lofty heights. On the other hand, giving the top 1 percent a two-year extension would cost the Treasury $130 billion over two years, thereby blowing a giant hole in efforts to get the deficit under control. Alternatively, $130 billion would be enough to rehire every teacher, firefighter, and police officer laid off over the last two years and save the jobs of all of them now on the chopping block. Not only are these people critical to our security and the future of our children but, unlike the top 1 percent, they could be expected to spend all of their earnings and thereby stimulate the economy. Conservative supply-siders who argue the top 1 percent will stop working as hard if they have to return to the 39 percent marginal rate of the Clinton years must be smoking something (probably an expensive grade). Their incomes of the top are already soaring (Wall Street is reading a 5% boost in bonuses, executive salaries and perks are back on the trajectory they were on before the collapse, and the stock market is booming), so it’s hard to argue much hardship. Besides, only earnings over $500,000 would be affected because — remember — we’re talking about the marginal tax rate. In addition, the Clinton years weren’t exactly bad years, economically, for the top 1 percent. Finally, the Bush tax cuts didn’t trickle down anyway. To the contrary, between 2001 and 2007, the median wage dropped. And Bush’s record on jobs was pitiful. The politics are even clearer. Over the next two years, Obama must clarify for the nation whose side he’s on and whose side his Republican opponents are on. What better issue to begin with than this one? The top 1 percent now takes in almost a quarter of all national income (up from 9 percent in the late 1970s), and its political power is evident in everything from hedge-fund and private-equity fund managers who can treat their incomes as capital gains (subject to a 15 percent tax) to multi-million dollar home interest deductions on executive mansions. If the President can’t or won’t take a stand now — when he still has a chance to prevail in the upcoming lame-duck Congress — when will he ever? Robert Reich is the author of Aftershock: The Next Economy and America’s Future , now in bookstores. This post originally appeared at RobertReich.org .

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Don Tapscott: Macrowikinomics: Rebooting the Economy

November 5, 2010

This article is the first in a series of 12 over the next 3 weeks written by Don Tapscott and Anthony D. Williams, authors of the newly released book Macrowikinomics: Rebooting Business and the World. The book is receiving a lot of buzz. The Economist calls it “a Schumpeterian story of creative Descruction.” The book argues that many of the institutions of the industrial age have finally come to the end of their lifecycle, and now being reinvented around a new set of principles and a networked model. Today’s blog is about rebooting the economy. ***** The election is over, but the economic stagnation gripping the country is not. Many economists are warning us to buckle down for a period of prolonged sluggishness, reminiscent of Japan’s lost decade or the Swedish crisis of 1992. Arguably, we’ve been in this slump for a decade. We just didn’t know it. Booming house prices and the massive expansion of cheap credit made a lot of us feel rich as kings. Now that the jig is up it’s clear that the housing bubble was masking a dark economic picture. The economy is growing more slowly than at any time since the Great Depression. It was announced today by the Labor Department that the unemployment rate for October remained unchanged at 9.6 percent with close to nearly 15 million Americans out of work. The Total unemployed (called U6 including all persons marginally attached to the labor force) is 17 percent. There has been virtually no net job creation since 2000. And unless you happen to work in finance (where average salaries are four times higher than in the rest of the economy) your wages have probably stagnated. Factor in the collapse of the housing market and it turns out that the net worth of ordinary Americans is lower now than at the turn of the Century. A foreclosure crisis and stubbornly high unemployment suggest that the forward-looking picture is not getting rosier anytime soon. It’s far too convenient for critics to pin our economic problems on Obama. To do so makes the solution self-evident. Replace Obama, turf out the Democrats and you have your answer to America’s woes. If only it were so simple. Evidence is mounting that this not simply a crisis of political leadership. Rather than the normal ups and down of capitalism, the global slump is symptomatic of a deeper secular change. There is a case to be made that industrial economy and many of its institutions have finally run out of gas — from newspapers and old models of financial services to our energy grid, transportation systems, education and institutions for global cooperation and problem solving. Take media and entertainment. Newspapers throughout the United States and Canada are collapsing. Some say bad business decisions are to blame. What, you might ask, were the managers of the New York Times thinking when they borrowed hundreds of millions of dollars to buy lavish real estate and other dubious properties like the Boston Globe? Others say that crashing circulation and revenues are caused by the tough economic climate. But no amount of rationalization or denial can hide the looming truth that the collapse of the newspapers is not coincidental, conjunctural, or containable. It is systemic – rooted in the digital revolution. So the leaders of the old media should take a deep breath and get going on the kind of experimentation required to forge some new approaches that are optimized for a world of digital data. Newspapers are just the beginning. Across the board, a lot of old models and industries need rebooting. Greater openness in innovation and science, for example, is creating more economic opportunity for start-ups and small business owners businesses who can acquire global marketing and product development capabilities that used to be available only to the world’s largest and wealthiest enterprises. Or when it comes to fixing and restoring confidence in the financial services industry more is required government intervention and new rules; it’s becoming clearer that what’s needed is a new modus operandi based on new principles like transparency, integrity and collaboration. Bankers can get going now to rebuild the industry on a new model. For example they could remove the value and dispose of the $trillion of toxic assets on their balance sheets by placing them in a commons and letting the world’s leading financial modelers determine their value. Companies like the Open Models Corporation are working hard to make this happen – using the web and 21st century strategic thinking to create a human genome of risk management information. On the health care front, Republican lawmakers have pledged to gut Obama’s reforms. This would no doubt deliver a significant setback to the Democrats’ efforts to boost equity and contain costs. But convincing and empowering the American population as a whole to live healthier lives would arguably amount to a far greater accomplishment and no enabling legislation would be required. Possibly the greatest failure of the current healthcare system is that it clearly doesn’t engage a large part of the population. And when we don’t think about our health we get unhealthy. Close to two-thirds (63.1 percent) of adult Americans are becoming overweight or obese, exercising less, and eating unhealthy foods. Compared to healthy-weight people, overweight and obese people have particularly unhealthy lifestyles–lifestyles that contribute to the skyrocketing rates of preventable diseases like diabetes and heart conditions, which are among the most costly public health afflictions. A population truly engaged in the issue of wellness would not act so recklessly with respect to its own wellbeing. To change that, we need to shift from a model of health care where patients are passive recipients of care only after they become sick to one in which one where patients become much more active in managing their own health over their lifespan. A main benefit, as studies show, is that when patients are more engaged in managing their own health, they are more committed to being healthy. Collaborative healthcare could not just improve health it could reduce costs of a system that is close to 20 percent of the GDP and acting as an anchor on the economy. The same fresh thinking is required to job creation. A study done last year by the Kauffman Foundation of Entrepreneurship shows the extent to which job creation depends on new business creation. Using Census Bureau data, the Foundation examined net new job creation in terms of firm age rather than firm size. From 1980 to 2005, nearly all net job creation in the United States occurred in firms less than five years old. Without start-ups, net job creation for the American economy would be negative in all but a handful of years. Estimates from the Panel Study of Entrepreneurial Dynamics samples suggest there are about 12.6 million U.S. nascent entrepreneurs. “Add to this the swelling ranks of the unemployed and there is substantial latent entrepreneurial job creation potential in this country,” says Kevin Kimberlin, Chairman of Spencer Trask – the Venture Capital company that has supported some big job creators dating back to Thomas Edison. “We need to help these budding companies achieve liftoff. Failure to launch need not be the norm. With the proper incentives and platforms in place, we could quickly create hundreds of thousands of new jobs.” Because of the Internet, small companies can have the same capabilities as large companies, without the same liabilities, like bureaucracy and legacy cultures, processes, people and systems. The world’s most dynamic innovators are using the Internet and new business models to transform industries ranging from manufacturing and transportation to fashion and retail. So rather than simply debating the merits of fiscal stimulus, the task before us is to support more start-ups that lay the groundwork to get the country back to the high level of pre-recession job creation. A moratorium on capital gains for start-ups would be a good place to start. More on this is subsequent articles in this series. The list goes on. In Macrowikinomics we discuss the sparkling initiatives underway to rebuild our stalled institutions. But these initiatives need to be come mainstream and not just light house undertakings. So rather than simply tinkering, leaders in business need face up to the new realities and get going on rebooting their industries. Paul Krugman writes that “financial crises have consistently been followed by long periods of economic distress.” Among others, he’s calling for further stimulus. But the fact of the matter is that this just isn’t going to happen. With a congress in stalemate we need to seek other solutions. Instead, let’s use this opportunity to rethink and rebuild many of the organizations and institutions that have served us well for decades, but now have come to the end of their life cycle. If we do this there can be growth, jobs and a new time of prosperity.

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Robert Reich: The Perfect Storm That Threatens American Democracy

October 19, 2010

It’s a perfect storm. And I’m not talking about the impending dangers facing Democrats. I’m talking about the dangers facing our democracy. First, income in America is now more concentrated in fewer hands than it’s been in 80 years. Almost a quarter of total income generated in the United States is going to the top 1 percent of Americans. The top one-tenth of one percent of Americans now earn as much as the bottom 120 million of us. Who are these people? With the exception of a few entrepreneurs like Bill Gates, they’re top executives of big corporations and Wall Street, hedge fund managers, and private equity managers. They include the Koch brothers, whose wealth increased by billions last year, and who are now funding tea party candidates across the nation. Which gets us to the second part of the perfect storm. A relatively few Americans are buying our democracy as never before. And they’re doing it completely in secret. Hundreds of millions of dollars are pouring into advertisements for and against candidates — without a trace of where the dollars are coming from. They’re laundered through a handful of groups. Fred Maleck, whom you may remember as deputy director of Richard Nixon’s notorious Committee to Reelect the President (dubbed Creep in the Watergate scandal), is running one of them. Republican operative Karl Rove runs another. The U.S. Chamber of Commerce, a third. The Supreme Court’s Citizens United vs. the Federal Election Commission made it possible. The Federal Election Commission says only 32 percent of groups paying for election ads are disclosing the names of their donors. By comparison, in the 2006 midterm, 97 percent disclosed; in 2008, almost half disclosed. We’re back to the late 19th century when the lackeys of robber barons literally deposited sacks of cash on the desks of friendly legislators. The public never knew who was bribing whom. Just before it recessed the House passed a bill that would require that the names of all such donors be publicly disclosed. But it couldn’t get through the Senate. Every Republican voted against it. (To see how far the GOP has come, nearly ten years ago campaign disclosure was supported by 48 of 54 Republican senators.) Here’s the third part of the perfect storm. Most Americans are in trouble. Their jobs, incomes, savings, and even homes are on the line. They need a government that’s working for them, not for the privileged and the powerful. Yet their state and local taxes are rising. And their services are being cut. Teachers and firefighters are being laid off. The roads and bridges they count on are crumbling, pipelines are leaking, schools are dilapidated, and public libraries are being shut. There’s no jobs bill to speak of. No WPA to hire those who can’t find jobs in the private sector. Unemployment insurance doesn’t reach half of the unemployed. Washington says nothing can be done. There’s no money left. No money? The marginal income tax rate on the very rich is the lowest it’s been in more than 80 years. Under President Dwight Eisenhower (who no one would have accused of being a radical) it was 91 percent. Now it’s 36 percent. Congress is even fighting over whether to end the temporary Bush tax cut for the rich and return them to the Clinton top tax of 39 percent. Much of the income of the highest earners is treated as capital gains, anyway — subject to a 15 percent tax. The typical hedge-fund and private-equity manager paid only 17 percent last year. Their earnings were not exactly modest. The top 15 hedge-fund managers earned an average of $1 billion. Congress won’t even return to the estate tax in place during the Clinton administration – which applied only to those in the top 2 percent of incomes. It won’t limit the tax deductions of the very rich, which include interest payments on multimillion dollar mortgages. (Yet Wall Street refuses to allow homeowners who can’t meet mortgage payments to include their primary residence in personal bankruptcy.) There’s plenty of money to help stranded Americans, just not the political will to raise it. And at the rate secret money is flooding our political system, even less political will in the future. The perfect storm: An unprecedented concentration of income and wealth at the top; a record amount of secret money flooding our democracy; and a public becoming increasingly angry and cynical about a government that’s raising its taxes, reducing its services, and unable to get it back to work. We’re losing our democracy to a different system. It’s called plutocracy. Robert Reich is the author of Aftershock: The Next Economy and America’s Future , now in bookstores. This post originally appeared at RobertReich.org .

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Dr. Philip Neches: Suppose the Tax Cuts Expired

October 8, 2010

In ordinary human interaction, when almost everyone agrees on something, except for one part, you implement the parts everyone agrees on and discuss the remaining part until it is resolved. In the tortured, hyperbolic echo chamber we call the nation’s capitol, no such logic prevails. Such is the case with the so-called debate on what to do about the Bush era tax cuts, which expire on December 31, 2010. I say “so-called debate” because a “debate” assumes that both sides listen and respond to each other. Republicans took a stand based on their leaders’ perception of the tactical interests of their party, and now in the election season, Democrats respond in kind. It may be a validly political process, but it insults the integrity of the English language to call it a debate. The tax cut bills passed during the last presidency went through the Senate by “reconciliation” rules of procedure. Under these arcane Senate rules, the normal need to get 60 votes for cloture (the process that brings a bill to the floor for a vote) do not apply: the bill can advance by simple majority vote. However, the bill moved under reconciliation procedures must be only a fiscal (spending and revenue) measure, and must be deficit-neutral over 10 years. Of course, there is no way a permanent tax rate reduction can be deficit-neutral. Therefore, the bill had to be written as a temporary rate change, with an expiration date. The promoters of the bill assumed that their party would still be in power when the expiration date approached, and could extend the cuts using the same procedures that were used to first enact it. If the promoters’ party loses power, then the expiration creates what the British call a “sticky wicket” for the opposition, now the party in power. And so it goes. In a common sense world, the Senate would pass the Obama administration proposal to keep the Bush tax cuts for all but the highest income taxpayers. After all, hardly anyone opposes that step. Then one could have an actual, real debate on the merits of letting the cut for the highest income group expire, or not. According to Senate Majority Leader Harry Reid, common sense is now scheduled to break out in the lame-duck session after the elections and before the new Congress is seated in January, 2011. But suppose it doesn’t. Suppose that the same political calculus that prevailed for the last 18 months continues after the election — unlikely as that may seem. The new tax cut bill would remain stalled, and would procedurally die with the waning session of Congress. The tax cuts would then expire on New Year’s Eve, and we would enter 2011 with Clinton-era tax rates. What would happen? If you listen to the inside-the-Beltway hyperbole, all hell would break loose. But what would happen on planet Earth, in the actual United States of America? To get a handle on this, I start with something my tax accountant told me. His clients are, for the most part, relatively wealthy people. They own their own businesses, are senior corporate executives, or are retired with substantial investments to manage. In other words, top bracket folks. Their dirty secret? Year in, year out, despite the ongoing flood of new tax rules, procedures, forms, and rates, they actually pay about 25% of their gross to Uncle Sam. How does this work? Well, he explains, his job is to advise his clients so that they can utilize the deductions, rules, and programs to their best advantage, while still fully complying with the law. So what would you do in this situation if your nominal tax rate goes up? A lot of things, it turns out. You may put more into tax-deferred vehicles, or arrange your income to come as capital gains (lower rates). If you don’t have time to do the year-plus ahead planning for those strategies, the simplest thing is to spend more on things that generate deductions. Give more to charity. Buy a new computer. Do more business travel: go more often, stay longer, upgrade accommodations. When it comes to spending a bit more, creativity is easy. The result is that even though the rules changed, the check to Uncle will remain about the same. And while I have described the behavior changes of the highest income taxpayers, other taxpayers can employ similar strategies. They do not have as much discretion to implement them, but they also would have a lower tax rate increase to try to offset. In other words, Americans will do what they always have done since the Sixteenth Amendment went into effect in 1913: curse and scream — then quietly adapt. Who knows, they might actually boost the economy by spending more in certain areas (deductible, of course). That may explain, at least in part, the disparity between common political wisdom about tax cuts, particularly for the wealthy, and actual economic performance. A higher marginal tax rate can actually encourage spending, where a lower marginal tax rate can encourage saving. This seems to be the opposite of common sense, but it is the logic for people who are rich. In this context, “rich” simply means having sufficient resources to meet one’s actual, minimal, immediate needs — by this definition, a majority of Americans are at least somewhat rich. Finally, if the Bush era tax cuts expired, the Obama administration would then be free to devise a tax rate policy proposal not constrained by the policy of the prior administration. Political common sense would seem to say that not only would they, but they would be very motivated to pass it early in 2011 and make it retroactive to New Year’s Day. All this will most probably turn out to be idle speculation on a sunny Friday in October. But if Harry Reid is wrong about common sense erupting in the Senate, remember — you read it here first.

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Income Gap Widens: Census Finds Record Gap Between Rich And Poor

September 28, 2010

WASHINGTON — The income gap between the richest and poorest Americans grew last year to its widest amount on record as young adults and children in particular struggled to stay afloat in the recession. The top-earning 20 percent of Americans – those making more than $100,000 each year – received 49.4 percent of all income generated in the U.S., compared with the 3.4 percent earned by those below the poverty line, according to newly released census figures. That ratio of 14.5-to-1 was an increase from 13.6 in 2008 and nearly double a low of 7.69 in 1968. A different measure, the international Gini index, found U.S. income inequality at its highest level since the Census Bureau began tracking household income in 1967. The U.S. also has the greatest disparity among Western industrialized nations. At the top, the wealthiest 5 percent of Americans, who earn more than $180,000, added slightly to their annual incomes last year, census data show. Families at the $50,000 median level slipped lower. “Income inequality is rising, and if we took into account tax data, it would be even more,” said Timothy Smeeding, a University of Wisconsin-Madison professor who specializes in poverty. “More than other countries, we have a very unequal income distribution where compensation goes to the top in a winner-takes-all economy.” Lower-skilled adults ages 18 to 34 had the largest jumps in poverty last year as employers kept or hired older workers for the dwindling jobs available, Smeeding said. The declining economic fortunes have caused many unemployed young Americans to double-up in housing with parents, friends and loved ones, with potential problems for the labor market if they don’t get needed training for future jobs, he said. Rea Hederman Jr., a senior policy analyst at The Heritage Foundation, a conservative think tank, agreed that census data show families of all income levels had tepid earnings in 2009, with poorer Americans taking a larger hit. “It’s certainly going to take a while for people to recover,” he said. The findings are part of a broad array of U.S. census data being released this month that highlight the far-reaching impact of the recent economic meltdown. The effects have ranged from near-historic declines in U.S. mobility and birth rates to delayed marriage and the first drop in the number of illegal immigrants in two decades. The census figures also come amid heated political debate in the run-up to the Nov. 2 elections over whether Congress should extend expiring Bush-era tax cuts. President Barack Obama wants to extend the tax cuts for individuals making less than $200,000 and joint filers making less than $250,000; Republicans are pushing for tax cuts for everyone, including wealthy Americans. The 2009 census tabulations, which are based on pre-tax income and exclude capital gains, are adjusted for household size where data are available. Prior analyses of after-tax income made by the wealthiest 1 percent compared to middle- and low-income Americans have also pointed to a widening inequality gap, but only reflect U.S. data as of 2007. Among the 2009 findings: _The poorest poor are at record highs. The share of Americans below half the poverty line – $10,977 for a family of four – rose from 5.7 percent in 2008 to 6.3 percent. It was the highest level since the government began tracking that group in 1975. _The poverty gap between young and old has doubled since 2000, due partly to the strength of Social Security in helping buoy Americans 65 and over. Child poverty is now 21 percent compared with 9 percent for older Americans. In 2000, when child poverty was at 16 percent, elderly poverty stood at 10 percent. _Safety nets are helping fill health gaps. The percentage of children covered by government-sponsored health insurance such as Medicaid and the Children’s Health Insurance Program jumped to 37 percent, or 27.6 million, from 24 percent in 2000. That helped offset steady losses in employer-sponsored insurance. The 2009 poverty level was set at $21,954 for a family of four, based on an official government calculation that includes only cash income. It excludes noncash aid such as food stamps. Arloc Sherman, a senior researcher at the left-leaning Center on Budget and Policy Priorities, noted the effects of expanded government programs in cushioning the impact of skyrocketing unemployment. For example, the Census Bureau estimates that 3.6 million people would have been lifted above the poverty line if food stamps were counted – a number that would have reduced the 2009 poverty rate from the official 14.3 percent to 13.2 percent. Sheldon Danziger, a University of Michigan public policy professor, said while the U.S. has developed policies to combat poverty, it has trouble addressing ever-widening income inequality – even with a growing federal deficit and previous warnings by former Federal Reserve Chairman Alan Greenspan about soaring executive pay. An Associated Press-GfK Poll this month found that by 54 percent to 44 percent, most Americans support raising taxes on the highest U.S. earners. Still, many congressional Democrats have expressed wariness about provoking the 44 percent minority so close to Election Day. “We’re pretty good about not talking about income inequality,” Danziger said. ___ Online: http://www.census.gov

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Fred Hassan: President Obama’s Opportunity

September 8, 2010

As President Obama presents his “economic rejuvenation package” to the American people, he must use this great opportunity to send a message. He should signal that he wants to encourage private-sector capital formation, so jobs can be created, and set the course of our country toward long-term strength. Earlier this year, I prepared and delivered to the Beltway, a position paper on the subject of encouraging economic growth via encouraging long-term behavior in our country. The following is an edited version of this paper. The “Short-Termism” Problem A creeping problem I call “short-termism” is a looming American weakness on the global stage. None of our most celebrated industries are exempt these days. From autos to computers to many other science-based enterprises – it is now common thinking to conclude that an Asian or even European competitor with a long-term attitude will have an edge over American competitors in the long run. What is driving this? The American competitor is usually a captive of “short-term” thinking and goals imposed by its institutional investors. These investors now constitute up to 60% – 90% ownership in most public companies. As an example, just look at the spectacular success story in American biotechnology – Genentech. Genentech, as a young and vulnerable biotech, sold 60% of its shares to the Swiss company Roche in September 1990. This was also a particularly stressed time for the US economy, for individual companies and for Genentech. The transaction provided cover to Genentech management to invest in R&D for the long term. Roche saw losses on its investments for the first eight years before its profit situation turned positive. But the prize for Roche’s long-term thinking was historic. A strong and unprecedented flow of biotech innovations came out of Genentech. For example, drugs such as Herceptin and Avastin have revolutionized the treatment of breast cancer. And Roche’s original investment of $2.1 billion has multiplied many fold in terms of long-term return. Could such a long-term attitude have worked for US institutional investors? Unfortunately, this scenario probably would have proved too long of a wait for them – then and today – even if the rewards would be huge in the end. Just look at how things have evolved for a typical large US public company. About two decades ago, I remember the average publicly held stock turned over about 50% in a year. Now, it’s over 100%! Here’s another way to look at this. For the 12 months ending March 2009, the Dow Jones Industrials’ total trading volume was 35 times higher than the volume in the 12 months ending March 1989, or 70.9 billion shares compared with 2 billion shares respectively. In this environment, the year end annual bonus for the fund manager managing the stock portfolio has often become the driver of shareholder pressure on public company management in the US. This can supersede the vital need to invest for the long term in important areas such as innovation, jobs, equipment, training and infrastructure. Board members, in order to get re-elected every year by the same investors, are forced to make compromises in favor of the short term; CEO’s face similar pressures. It is no wonder then that some of the best ideas originating in America have seen their value being captured in Asia or Europe. A Proposal I think the tax system can be a powerful incentive to change this. One idea to encourage long-term thinking and vision – is to extend the 15% capital gains rate beyond 2010 (when Bush era tax cuts are set to expire). However, this rate would only apply on the condition that the asset be held for a minimum of five years, on a prospective basis starting January 1, 2011. With this legislation, there may be more tax revenues in 2011 as some investor’s cash out their existing holdings to invest in this opportunity. The amount of overall tax leakage over the next ten years should be relatively small with this scenario; one could hope the JCT score to be modest. However, an important statement would have been made. There will be encouragement for those who invest in the future of America for the long term – and cause a rethink among those who are caught in short-termism. On a personal note, I focused intensely on the long term when, in 2003, I took over the difficult job of stabilizing, repairing and turning around Schering-Plough. I even led the way among our peer companies by dropping financial guidance, not only for the quarterly number, but also for annual financial guidance. This action, though not popular with many in the financial community at that time, helped us get the Company focused on doing what was right for the long term. The R&D pipeline and the strong global operations that Schering-Plough ultimately built from that made it the envy of many in the pharmaceutical industry. I share this position paper with all as a concerned citizen who believes that there should be an attitude shift for the long term. This is how we can lead the way to jobs and growth. The President of the United States has a great opportunity to show the way.

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Jim Worth: The Taxing Debate Over Taxes

August 31, 2010

American’s perception of taxes is both perplexing and disturbing . Americans have difficulty grasping the effect taxes have on their lives. There are many reasons for their confusion. Taxes have become a political football with each side vehemently arguing their position in hopes of being reelected. The Bush Tax Cuts are set to expire at the end of this year and a decision must be made by Congress whether to extend them or let them sunset. If Congress does nothing taxes will return to the levels of 2002; the lowest being 15% and the highest moving back to 38.6, a 3.6% increase. It’s understandable, given the complexity of the current tax code and the political posturing that clouds the discourse of such a sensitive personal subject, that the average person doesn’t quite know which is best for them and the economy. What is the truth about taxes? Which are good and which are bad? This is the question we should be asking. Taxes are a very personal thing and, to put it quite frankly, everyone hates them; especially those taxes that touch them personally. There’s a widespread misconception about taxes — who they effect, their purpose, which ones will help and which will hurt the country, and their relationship to the economy. Mark Zandi, Chief Economist at Moody’s Economy.com addressed the issue in his New York Times Op-Ed, ” The Tax Cut We Can Afford ,” and presented a reasoned approach to the current tax dilemma. There is a fear by some, including Mr. Zandi, that increasing the marginal tax rate on the top two income brackets will dramatically slow the economy and possibly send us into the dreaded douple dip. But that fear may be unjustified if a double dip is imminent. Despite the possibility of a double dip, allowing those that caused this recession to slide another year is unacceptable. Phasing, as suggested by Mr. Zandi, is a great concept, one I’ve advocated for nearly 40 years. Phasing in taxes is a good idea, but it must begin immediately. Mr. Zandi would prefer to wait until 2012, but delaying the increase may also be destructive to an already sputtering economy and escalating deficit. The marginal tax rate on upper-income Americans is too low and has been for far too long. We have been at some of the lowest rates in our lifetime, and the Bush tax cuts have done little to stimulate the economy. They have only served to redistribute the wealth upward. Warren Buffet acknowledged the insanity of low upper tax rates on the wealthy when he declared something to the affect: “My chauffeur pays a higher tax rate than I do!” His reference to the ‘ effective tax rate ,’ the actual amount of tax that is paid after deductions, is much lower than the ‘ marginal tax rate .’ The average upper income family pays an ‘average rate’ of 18 to 20% after figuring their adjusted gross income. Raising the tax rate by 2% in 2011 would increase the actual taxes these individuals pay by about half a percent. Some feel raising the top two rates would slow consumer spending. Moody’s Chief Economist estimates that the group accounts for nearly a fourth of consumer spending. The question he, and other tax-extension advocates should be asking is — why? The answer should be obvious. Thirty years of redistribution of wealth has killed the middle-class — usurped their buying power — while elevating the elite to 1920′s excesses. Though they represent one quarter of consumer spending much of what the elite buy does little to help the economy of the other 98%; the ‘ real ‘ economy. The arguments on taxes are fraught with myths and lies. They distort the real issue confronting us: declining tax receipts and a rapidly rising deficit. Even the Tea Party, through their naivete, have muddied the ‘ real ‘ discussion we should be having over taxes. Republicans, still enamored by Ronald Reagan, conjure up the myth that his tax cuts created a thriving, robust economy. That’s a lie! And it’s repeated by all Republicans. Top Marginal Tax Rates during Reagan’s two terms were higher than the current rate for seven of his eight years in office. Even more devastating was his tripling of the national debt from $900 billion to nearly $2.67 trillion; an increase of 189%. His two band-aid terms forced George H.W. Bush to raise taxes during his administration to make up for Reagan’s economic insufficiencies. Bush raised the TMR to 31% from 28% and was vilified, losing reelection to Bill Clinton as a result. Clinton immediately raised it to 39.6% where it remained for 8 years and allowed President Clinton to leave George W. Bush a surplus which he promptly spent, then pushed the economy into untenable deficits. His tax cuts dramatically reduced the tax receipts collected each year which drove the national debt to $10.7 trillion; nearly doubling the $5.6 trillion when he came into office. It is easy to understand the confusion if talking points are all most voters get. This is evidenced by the deception of the estate tax. Frank Luntz’s suggestion to the Republicans to call it a ‘ death tax ‘ is unAmerican and should be an indictable offense. The Estate Tax has absolutely no affect on 97.5% of the people in this country, yet individuals making $100,000 a year are screaming about getting rid of the death tax. Sheep following a stupid idea. The confusion over the Capital Gains Tax and how it will hurt small business, delay someone from starting a business, or from hiring a needed employee is a diversion. So what is the right thing to do about taxes? As Mr. Zandi says, phase in the increases on the top two tax brackets. Start immediately: 35% Bracket — 2% in 2011, 1.5% in 2012, and 1% in 2013; 33% Bracket — 1.5% in 2011, 1% in 2012, and .5% in 2013. That would bring the rates to 2000 levels by 2013 and cause less pain. But we should consider something unique, something bold ! Let’s also lower the lowest three tax rates over the next three years. Current Tax Rate should be reduced to new lower levels by 2013: 10% Bracket : 9% in 2011, 8.5% in 2012, and 8.5% in 2013 15% Bracket : 14% in 2011, 13% in 2012, and 12.5% in 2013 25% Bracket : 23.5% in 2011, 22% in 2012, and 21% in 2013 This would put money in the hands of people that will spend all of it on necessities and other products that will stimulate the economy from the bottom up. Eight years of tax cuts have done nothing to help this dying economy. We’ve tried it at the top and it doesn’t work. It’s time to try it at the bottom and see if it works better. This has been a horrific recession and it is not yet over. We may have to feel more pain and level the playing field if we have any hope of recovering from this morass. Not only do people need to research taxes, but they must insist that their Congressional representatives fully explain their position rather than merely repeat talking points. The Internet has all the necessary tools to research taxes. If you want to be an American, get off your lazy asses and do some. With even a little research, the vote regarding the Estate Tax should be 95% to keep and raise it, and 5% to eliminate it. We need more than talking points to understand taxes. We need honest discussion. Our survival and the survival of this country depends on it!

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Speculation Rising Over Impact of Expiring Capital Gains Tax Cuts on CRE Sales

August 25, 2010

The debate over tax cuts enacted in 2001 is expected to heat up when the U.S. Senate reconvenes in September after its summer recess. The maximum tax rate on capital gains and dividends will revert from the current 15%, a 70-year low, back to 20% on Jan…

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David Coates: The Poverty That Blights Us All

August 9, 2010

We face a political season in the fall that will be full of Republican calls to continue the Bush tax cuts and conservative demands to scale back government spending. Those calls are already in full cry, and with the mid-terms looming, we can only expect more of the same — arguments like this, placed by Arthur Laffer in the August 2nd edition of The Wall Street Journal . Few things are as clear in economics as the fact that high tax rates don’t succeed in raising revenue or increasing the burden on the wealthy….Not only do the direct tax consequences of higher tax rates on those in the highest brackets lead to higher deficits, the indirect effects magnify the tax revenue losses many fold. As a result of higher tax rates only on those people in the highest tax brackets, there will be less employment, output, sales, profits and capital gains – all leading to lower payrolls and lower total tax receipts. There will also be higher unemployment, poverty and lower incomes, all of which require more government spending. It’s a Catch-22. Higher tax rates on the rich create the very poverty and unemployment that is used to justify their presence. Really? Oh that it was that simple. But it is not — not, for at least the following four sets of reasons, not one of which appeared alongside the Laffer piece in the paper most widely read in US business circles. 1. Contrary to the logic of the Laffer argument, the Bush tax cuts did not generate the generalized economic prosperity that those advocating their retention now imply. It was indeed the case that the Bush tax cuts did disproportionately advantage the rich. They were the kind of tax cuts that the Laffer argument requires. The Bush tax cuts of 2001 lowered income tax for the top ten percent of American taxpayers by $50,000 a year. They lowered taxes for the average American family by just $300. But what they did not do was generate investment and job creation on the scale which their advocates anticipated. As Alan Greenspan later put it, “I think we misunderstood the momentum of this deficit going forward.” So it would appear, since the Bush tax cuts he originally supported triggered the least successful investment cycle in US post-war history, and simply failed to add any numbers to the total employment of the economy as a whole. The bulk of the leading companies whose tax burden the Bush administration eased responded by lowering rather than raising their levels of corporate investment in plant and equipment here in the United States. This perhaps helps to explain why total employment in the US economy as the tax cuts began, at 132 million, was slightly higher than the number as those employed (131.4 million) three years later when the tax cuts had been long up and running. It is a remarkable truth, often overlooked by those advocating the prolongation of the Bush program, that “the economy did not add a single job during three years under the Bush tax cuts.” For tax-cutting and out-sourcing were partners in the years of Republican leadership. So too were tax-cutting and growing income inequality. And we should remember that, as economic recession unexpectedly reappeared on George Bush’s watch after six years of favoring the rich, even his administration responded by providing a tax cut of between $600 and $1,200 to middle-class rather than to upper-class America. Trickle-down economics had so failed by 2007 that even its advocates in the White House quietly adjusted to trickle-up economics; supported at the time by the votes in Congress of many of the Republican House members and Senators who now advocate so strongly tax-cutting for the top 2 percent of income earners. Alan Greenspan thinks it is a good idea to let the tax cuts expire as intended in 2010. Even Tim Geithner agrees: and so should sane people everywhere. 2. Contrary to popular wisdom in conservative circles, tax-cutting and the restraint of public spending is not the most effective way of generating economic growth and job creation in economies beset by recessions of this depth. Welfare spending and public investment in infrastructure are much more effective tools to end a recession of the kind we now face – one sustained by lack of consumer confidence and demand – than any tax cuts can ever hope to be. We have two very strong bodies of evidence to sustain that claim. The first is the widely accepted calculations of Mark Zandi (who worked for John McCain in the 2008 election campaign, we should remember, not for Barack Obama) that cutting taxes on capital gains and dividends is only likely to stimulate the economy by 37 cents for every dollar of taxation foregone. If that same dollar is directed at infrastructure development, the stimulus will be $1.57; if at unemployment insurance, $1.69; and at temporarily increasing food stamps, $1.74. The second is the report published last week by Alan Blinder (and again Mark Zandi) recording the remarkable impact of TARP spending on the recession to which it was a response. The TARP money was not as focused on infrastructure spending as its more radical advocates would have preferred: the price of even the possibility of Republican support was the inclusion in the package of $250 billion of direct tax cuts, targeted at middle-America. But even a TARP full of tax cuts as well as spending programs had significant effects: “raising 2010 real GDP by about 3.4%, holding the unemployment rate about 1½ percentage points lower, and adding almost 2.7 million jobs to U.S. payrolls.” This is not to say that TARP was perfect. It was not. It is to say rather that, without it, our current situation would be significantly worse. 3. TARP is ending, of course, even though the recession persists; and all the evidence suggests that the avoidance of a double-dip recession will require a TARP2, and not a short-term return to government spending cuts as conservative critics of TARP now demand. For as an economy and society, we are not in good shape right now. On the contrary, economic growth is sluggish, unemployment is high and prolonged, personal bankruptcies are on the rise, and where recovery is happening, employers are proving slow to rehire, preferring instead to increase the length and intensity of work for those already on their payroll. In June the private sector created just 71,000 jobs while the temporary cushion of census employment ended for 143,000 Americans. Right now, even if the economy was miraculously to “sustain the strongest pace of job growth seen in the boom of the late 1990s (2.6% in 1998), it would still take until 2015 to return to pre-recession levels of unemployment.” Remarkably, “more than half of all adults in the U.S. labor force have suffered a spell of unemployment, a pay cut or reduction in working hours” since this recession began: so confirming that “out of the 13 recessions the U.S. has endured since the Great Depression of 1929-33, none has presented a more punishing combination of length, breadth and depth than this one.” Yet in Washington there is still no automatic trigger that releases additional unemployment pay to the long-term unemployed. Instead it is all politics there, and we have just witnessed the appalling spectacle of the Republican leadership playing loose and fast with the issue -willingly funding the Afghan War with more money ($37 billion) than the $34 billion they temporarily denied to the long-term unemployed, before just failing to block $26 billion of extra funding to the states (to protect the jobs of teachers, police officers and fire-fighters) that was won at the cost of cuts in planned long-term spending on food stamps. Currently we are combining a deep recession with a dysfunctional politics, and it is the poor who are paying the most direct price for both. 4. Policy inertia of this kind only reinforces a divide between the rich and the poor which TARP did not alleviate and which the recession has only intensified. The result is that contemporary America remains scarred by a scale of income inequality, and an associated depth of poverty, that actually hurts us all. Not two years out from a financial crisis caused by Wall Street recklessness, and the very bankers who triggered the crisis are back rewarding themselves with huge bonuses as CEO salaries continue to soar. Meanwhile, and at the other end of the American income ladder, unemployment remains particularly high among groups which were already poor; and rates of economic insecurity are at an all-time high. In 2008, one American family in seven reported that they experienced “food insecurity” and “16.6 million American children – more than one in five – lived in homes that couldn’t afford enough food for their families.” Indeed, “because of stagnating wages and higher costs for basic necessities, the average two-wage earner family [now] has less disposable income than a one-wage-earner family did a generation ago.” The gap between rich and poor is now so stark that — unless the soothing balm of “trickle-down economics” can be applied to any thinking brain — moral outrage ought to be the general order of the day. But even if it is not, even if the prevailing response is one of personal selfishness, the personally selfish would do well to realize that income inequality of this scale actually hurts us all. The clearest evidence for that is now to be found across the Atlantic, where a new study of the economic and social impact of income inequality – The Spirit Level – demonstrates conclusively that societies more equal than ours (or indeed the UK’s) “enjoy better physical and mental health, lower homicide rates, fewer drug problems, fewer teenage births, higher math and literacy scores, higher standards of child wellbeing, lower obesity rates and fewer people in prison.” The bulk of the Bush tax cuts are in any case due to remain in place. The only part that will be allowed to lapse is the one extending the tax cuts to the top 2 percent of income earners — those earning more than $250,000 a year. So the question must be asked. Are the advocates of the Bush tax cuts really interested in generalized prosperity, as they claim; or is their “trickle-down” argument just a smokescreen for a politics of selfishness and greed. It certainly looks like the latter to me. Time, I think, to call their bluff. What is it to be: taxes for the wealthy, or cuts in food stamps for the poor? We really need to know. First posted (with full sourcing) at www.davidcoates.net

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Timothy Geithner: Allow Bush Tax Cuts For The Wealthy To Expire (VIDEO)

July 25, 2010

WASHINGTON — Treasury Secretary Tim Geithner said that allowing tax cuts for the wealthy to expire would be “the responsible thing to do.” This is the last year for the tax cuts enacted under President George W. Bush. Republicans have generally favored extending all of them. While Democrats are divided on the issue, President Barack Obama has favored allowing the expiration of cuts he says have applied to the wealthiest people. “It’s responsible to let the tax cuts expire that just go to 2 percent to 3 percent of Americans, the highest earning Americans,” Geithner told ABC’s “This Week” in an interview broadcast Sunday. Doing so would show the world that the U.S. is “willing as a country now to start to make some progress” reducing long-term budget deficits, he said. Geithner said he does not believe that higher taxes for those high earners will hurt economic growth. He also said he “absolutely” believes Congress will act on taxes before the election. That’s a touchy issue for Democrats, some of whom may not be eager to address a hot-button issue like taxes so close to Election Day. WATCH: Speaking on NBC News’ “Meet the Press,” Geithner says he supports allowing the top capital gains tax rate to revert to 20 percent. It’s 15 percent now. He also addressed the future of Fannie Mae and Freddie Mac, the mortgage buyers whose bailout has cost taxpayers $145 billion so far. The financial overhaul didn’t address their future. The Obama administration has said it wants to wait until next year to determine their future. “I think we’re not going to preserve Fannie and Freddie in anything like the current form,” Geithner said on “Meet the Press.” “We’re going to have to bring fundamental change to that market.”

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Timing Of George Steinbrenner’s Death Could Mean His Heirs Will Dodge Estate Tax

July 13, 2010

CHICAGO — Born on the Fourth of July, George Steinbrenner left the world stage with a great sense of timing too. By dying in 2010, the billionaire and long-time New York Yankees owner’s wealth avoids the federal estate tax, likely saving his heirs enough money to field an entire team of Alex Rodriguezes. Steinbrenner’s death Tuesday came during an unplanned year-long gap in the estate tax, the first since it was enacted in 1916. Political wrangling has stalemated efforts in Congress to replace the tax that expired in 2009. That deprives the government of billions of dollars in annual revenue but represents an unexpected bonanza for those who inherit wealth. “If you’re super-wealthy, it’s a good year to die,” said Jack Nuckolls, an attorney and estate planner with the accounting firm BDO Seidman. “It really is.” The death of the 80-year-old Steinbrenner, who had been in poor health for years, highlights a quirky tax situation that has drawn much scrutiny among the moneyed but little on Main Street. Only those with estates valued at more than $3.5 million had to pay under the old law. Without knowing the exact details of Steinbrenner’s holdings and estate plan, it’s impossible to say how much money will be saved. But estate planners and tax experts say it’s likely that the estate benefited hugely by the timing of his death. A glance at some numbers suggests roughly how it may work. Forbes magazine has estimated Steinbrenner’s estate at $1.1 billion. The federal estate tax in 2009 was 45 percent, with the $3.5 million per-person exemption. If he had died last year, his estate could thus have faced federal taxes of almost $500 million, depending on how the estate was structured. That doesn’t mean his heirs permanently escape all taxes related to his assets. They will still have to ultimately pay a capital gains tax if and when assets are sold. And due to a change in tax law this year, the tax would be applied to the amount by which the assets have appreciated since Steinbrenner acquired them. Even if the Steinbrenners sold the assets right away, the top capital gains tax rate is 15 percent. Worst-case scenario, depending on how much the assets appreciated after Steinbrenner acquired them: a $165 million tax bill. That’s a tax break of about $328 million. A-Rod’s 2010 salary: $32 million. The Steinbrenner family has not suggested any sale is planned. “There are no succession issues, and the team will not be sold,” Yankees president Randy Levine said. The Steinbrenners therefore are expected to avoid what happened to the family of Chicago Cubs owner P.K. Wrigley after he died in 1977. The family was forced to sell the Cubs to the Tribune Co. four years later to pay the taxes on Wrigley’s estate. As Steinbrenner’s Yankees transformed into Yankee Global Enterprises, which includes the cable TV operation YES Network and Legends Hospitality, estate planning issues for a transfer to his children were dealt with, according to a Yankees official who spoke on condition of anonymity because those details weren’t released Estate taxes can be reduced through certain planning measures – such as gifts and asset sales to family members at discounted values. However, except for the unusual circumstances of 2010, they cannot be eliminated unless you give it all to charity. Some wealthy families use trusts to lower estate taxes. But even transferring assets to family trusts wouldn’t have significantly lessened Steinbrenner’s federal tax liability unless he gave vast amounts of assets to relatives as gifts before he died. Those would have been subject to a large gift tax. That’s unlikely since very few people choose to pay a large tax anount sooner than necessary, according to Richard Behrendt, senior estate planner for Baird Financial Advisors in Milwaukee and a former estate tax attorney for the Internal Revenue Service. The estate tax is scheduled to return in 2011, with a top rate of 55 percent. The House passed a bill last year that would have extended the estate tax at the 2009 rates, but it stalled in the Senate. Many Republicans want to eliminate the federal estate tax altogether, while many Democrats want to extend it at the 2009 rates. There had been talk on Capitol Hill of reinstating it retroactively, to the start of the year. But as the year progresses, lawmakers say that is increasingly unlikely. “If Congress doesn’t go retroactive, then he picked a great year to die,” said Robert Steele, who heads of the trusts and estates department at the law firm of Wolf Haldenstein Adler Freeman & Herz in New York. “There will be possibly tremendous capital gains tax, but the capital gains rate is a lot lower than the estate tax rate would have been.” ___ Ohlemacher reported from Washington. AP Sports Writer Ronald Blum also contributed to this report.

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Timing Of George Steinbrenner’s Death Could Mean His Heirs Will Dodge Estate Tax

July 13, 2010

CHICAGO — Born on the Fourth of July, George Steinbrenner left the world stage with a great sense of timing too. By dying in 2010, the billionaire and long-time New York Yankees owner’s wealth avoids the federal estate tax, likely saving his heirs enough money to field an entire team of Alex Rodriguezes. Steinbrenner’s death Tuesday came during an unplanned year-long gap in the estate tax, the first since it was enacted in 1916. Political wrangling has stalemated efforts in Congress to replace the tax that expired in 2009. That deprives the government of billions of dollars in annual revenue but represents an unexpected bonanza for those who inherit wealth. “If you’re super-wealthy, it’s a good year to die,” said Jack Nuckolls, an attorney and estate planner with the accounting firm BDO Seidman. “It really is.” The death of the 80-year-old Steinbrenner, who had been in poor health for years, highlights a quirky tax situation that has drawn much scrutiny among the moneyed but little on Main Street. Only those with estates valued at more than $3.5 million had to pay under the old law. Without knowing the exact details of Steinbrenner’s holdings and estate plan, it’s impossible to say how much money will be saved. But estate planners and tax experts say it’s likely that the estate benefited hugely by the timing of his death. A glance at some numbers suggests roughly how it may work. Forbes magazine has estimated Steinbrenner’s estate at $1.1 billion. The federal estate tax in 2009 was 45 percent, with the $3.5 million per-person exemption. If he had died last year, his estate could thus have faced federal taxes of almost $500 million, depending on how the estate was structured. That doesn’t mean his heirs permanently escape all taxes related to his assets. They will still have to ultimately pay a capital gains tax if and when assets are sold. And due to a change in tax law this year, the tax would be applied to the amount by which the assets have appreciated since Steinbrenner acquired them. Even if the Steinbrenners sold the assets right away, the top capital gains tax rate is 15 percent. Worst-case scenario, depending on how much the assets appreciated after Steinbrenner acquired them: a $165 million tax bill. That’s a tax break of about $328 million. A-Rod’s 2010 salary: $32 million. The Steinbrenner family has not suggested any sale is planned. “There are no succession issues, and the team will not be sold,” Yankees president Randy Levine said. The Steinbrenners therefore are expected to avoid what happened to the family of Chicago Cubs owner P.K. Wrigley after he died in 1977. The family was forced to sell the Cubs to the Tribune Co. four years later to pay the taxes on Wrigley’s estate. As Steinbrenner’s Yankees transformed into Yankee Global Enterprises, which includes the cable TV operation YES Network and Legends Hospitality, estate planning issues for a transfer to his children were dealt with, according to a Yankees official who spoke on condition of anonymity because those details weren’t released Estate taxes can be reduced through certain planning measures – such as gifts and asset sales to family members at discounted values. However, except for the unusual circumstances of 2010, they cannot be eliminated unless you give it all to charity. Some wealthy families use trusts to lower estate taxes. But even transferring assets to family trusts wouldn’t have significantly lessened Steinbrenner’s federal tax liability unless he gave vast amounts of assets to relatives as gifts before he died. Those would have been subject to a large gift tax. That’s unlikely since very few people choose to pay a large tax anount sooner than necessary, according to Richard Behrendt, senior estate planner for Baird Financial Advisors in Milwaukee and a former estate tax attorney for the Internal Revenue Service. The estate tax is scheduled to return in 2011, with a top rate of 55 percent. The House passed a bill last year that would have extended the estate tax at the 2009 rates, but it stalled in the Senate. Many Republicans want to eliminate the federal estate tax altogether, while many Democrats want to extend it at the 2009 rates. There had been talk on Capitol Hill of reinstating it retroactively, to the start of the year. But as the year progresses, lawmakers say that is increasingly unlikely. “If Congress doesn’t go retroactive, then he picked a great year to die,” said Robert Steele, who heads of the trusts and estates department at the law firm of Wolf Haldenstein Adler Freeman & Herz in New York. “There will be possibly tremendous capital gains tax, but the capital gains rate is a lot lower than the estate tax rate would have been.” ___ Ohlemacher reported from Washington. AP Sports Writer Ronald Blum also contributed to this report.

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David Fiderer: David Brooks’ Big Wet Kiss To Hedge Fund Managers

July 13, 2010

After he read a book that he didn’t understand, David Brooks came up with another crackpot distortion of capitalism. This time, he finds a sharp contrast between bankers and hedge fund managers, whom he lumps together all other business entrepreneurs. In his latest column he writes: The smooth operators at the big banks were playing with other people’s money, so they borrowed up to 30 times their investors’ capital. The hedge fund guys usually had their own money in their fund, so they typically borrowed only one or two times their capital. The social butterflies at the banks got swept up in the popular enthusiasms. The contrarians at the hedge funds made money betting against them. The well-connected bankers knew they’d get bailed out if anything went wrong. The solitary hedge fund guys knew they were on their own and regarded their trades with paranoid anxiety. Because they weren’t playing with other people’s money, hedge fund managers were more careful than the big banks? How fatuous is Brooks’ analysis? Let’s count the ways: 1. Hedge fund managers are insulated from investment losses and from taxes, whereas bankers are not. As anyone who reads The Wall Street Journal knows, hedge fund managers get rich because of the “Heads-I-win-tails-I-don’t-lose” fee structure paid by their investors. Typically, they charge a 2% management fee, plus they take 20% of all profits . The fund manager only shares in the profits, not the losses. So his primary incentive is to seek a big short-term upside, rather than to limit downside risk. When a hedge fund manager puts his own money into a fund, he benefits primarily from the leverage of other investor contributions, rather than from external debt. And when a fund manager collects his no-risk fees, he doesn’t pay taxes the way ordinary Americans do. Those fees, which take out 20% of the fund’s profits, are considered capital gains rather than ordinary income, which is quite a trick, since the theory behind lower rates on capital gains is that money was put at risk. A hedge fund manager who takes spectacular losses can start over by launching a new fund right away, whereas a bank executive who screws up usually gets fired. At best, Brooks’ claim that, “well-connected bankers knew they’d get bailed out if anything went wrong,” is grossly misleading. Banks that got bailed out also got dismantled. Bear Stearns, Wachovia, and Washington Mutual no longer exist. AIG is being broken up and Merrill is a shadow of its former self. The one possible exception is Citibank, which was forced to sell Salomon Smith Barney. Moral hazard remains a huge issue, and the senior executives who failed to properly manage their banks walked away rich. But these guys were also fiercely driven and committed staying on top, which is why they never thought, “I’m well-connected so I’ll get bailed out.” Instead, their common failure in judgment was to accept bogus triple-A ratings on mortgage securities at face value 2. Hedge funds made money by exploiting secrecy, whereas banks were regulated. The largest hedge fund in the world was run by Bernie Madoff . Many other hedge funds invested almost exclusively in the Madoff Fund. Clearly, these feeder fund managers, and other sophisticated investors, were clueless. The Madoff scam thrived because the entire hedge fund industry, which dominated many credit markets , had operated in secrecy. The funds that offered the skimpiest financial disclosures were able to snare investors who treated due diligence as a joke. This complete lack of transparency gave hedge funds large incentives and opportunities to manipulate markets and to trade on inside information. Amarenth and Centaurus exploited that secrecy to manipulate natural gas markets. In a prequel to the financial crisis of September 2008, a single hedge fund, LTCM, brought Wall Street to its knees. Commercial banks are subject to a lot of regulatory oversight. Again, the banks failed, and the regulators failed to provide effective oversight, primarily for one simple reason: They all relied on bogus triple-A ratings for toxic mortgage securities. They saw the rating and disregarded the need for substantive due diligence or analysis on those investments. John Paulson, and other “contrarian” hedge fund managers whom Brooks’ exalts, had figured out the triple-A scam and got rich by creating, and then shorting, new toxic assets designed to fail. 3. Because they are black boxes, hedge funds borrow in the repo market, whereas bank leverage is a consequence of Bush-era cronyism. Brooks insinuates that hedge funds had two times leverage because their managers were cautious. Not true. Banks would only lend to them on an overnight basis, while they held marketable securities as collateral, because a hedge fund’s financial position can change instantaneously. Investment grew their leverage, to 30 times equity, because a Bush-era crony, S.E.C. Chairman Chris Cox, gutted regulatory oversight of investment banks . Over the objections of a unanimous commission investigating the subject, Cox decided that investment banks could opt in or out for “voluntary oversight” whenever they felt like it. All of this segues into Brooks’ real agenda, which is to pervert history. He wants us to equate the Bush Administration’s refusal to enforce the law, and its wholesale emasculation of regulatory institutions, with a creeping socialism. He wants to us to believe that the bank profits are caused by government regulation, which stifles those engines for growth in the real economy, hedge funds. He calls bankers “princes” and hedge fund managers “grinders”: The princes can thrive while the government intervenes in the private sector. They’ve got the lobbyists and the connections. The grinds, needless to say, don’t. Over the past decade, professionals — lawyers, regulators and legislators — have inserted themselves into more and more economic realms. The princes are perfectly at home amid these tax breaks, low-interest loans and public-private partnerships. They went to the same schools as the professionals and speak the same language. The grinds try to stay far away and regard the interlocking network of corporate-government schmoozing with undisguised contempt. For the record, banks are making lots of money because of low-interest rates and reduced competition, two offshoots of the Bush financial crisis, and because financial reform has yet to pass. As for those hedge fund managers who show disdain for Washington lobbyists, check out this . There’s a reason the book touted by Brooks is titled, More Money Than God.

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Robert Reich: The Root of Economic Fragility and Political Anger

July 13, 2010

1 Missing from almost all discussion of America’s dizzying rate of unemployment is the brute fact that hourly wages of people with jobs have been dropping, adjusted for inflation. Average weekly earnings rose a bit this spring only because the typical worker put in more hours, but June’s decline in average hours pushed weekly paychecks down at an annualized rate of 4.5 percent. In other words, Americans are keeping their jobs or finding new ones only by accepting lower wages. Meanwhile, a much smaller group of Americans’ earnings are back in the stratosphere: Wall Street traders and executives, hedge-fund and private-equity fund managers, and top corporate executives. As hiring has picked up on the Street, fat salaries are reappearing. Richard Stein, president of Global Sage, an executive search firm, tells the New York Times corporate clients have offered compensation packages of more than $1 million annually to a dozen candidates in just the last few weeks. We’re back to the same ominous trend as before the Great Recession: a larger and larger share of total income going to the very top while the vast middle class continues to lose ground. And as long as this trend continues, we can’t get out of the shadow of the Great Recession. When most of the gains from economic growth go to a small sliver of Americans at the top, the rest don’t have enough purchasing power to buy what the economy is capable of producing. America’s median wage, adjusted for inflation, has barely budged for decades. Between 2000 and 2007 it actually dropped. Under these circumstances the only way the middle class could boost its purchasing power was to borrow, as it did with gusto. As housing prices rose, Americans turned their homes into ATMs. But such borrowing has its limits. When the debt bubble finally burst, vast numbers of people couldn’t pay their bills, and banks couldn’t collect. Each of America’s two biggest economic downturns over the last century has followed the same pattern. Consider: in 1928 the richest 1 percent of Americans received 23.9 percent of the nation’s total income. After that, the share going to the richest 1 percent steadily declined. New Deal reforms, followed by World War II, the GI Bill and the Great Society expanded the circle of prosperity. By the late 1970s the top 1 percent raked in only 8 to 9 percent of America’s total annual income. But after that, inequality began to widen again, and income reconcentrated at the top. By 2007 the richest 1 percent were back to where they were in 1928–with 23.5 percent of the total. We all know what happened in the years immediately following these twin peaks–in 1929 and 2008. Yes, China, Germany and Japan have contributed to America’s demand-side problem by failing to buy as much from us as we buy from them. But to believe that our continuing economic crisis stems mainly from the trade imbalance–we buy too much and save too little, while they do the reverse–is to miss the biggest imbalance of all. The problem isn’t that typical Americans have spent beyond their means. It’s that their means haven’t kept up with what the growing economy could and should have been able to provide them. A second parallel links 1929 with 2008: when earnings accumulate at the top, people at the top invest their wealth in whatever assets seem most likely to attract other big investors. This causes the prices of certain assets–commodities, stocks, dot-coms or real estate–to become wildly inflated. Such speculative bubbles eventually burst, leaving behind mountains of near-worthless collateral. The crash of 2008 didn’t turn into another Great Depression because the government learned the importance of flooding the market with cash, thereby temporarily rescuing some stranded consumers and most big bankers. But the financial rescue didn’t change the economy’s underlying structure — median wages dropping while those at the top are raking in the lion’s share of income. That’s why America’s middle class still doesn’t have the purchasing power it needs to reboot the economy, and why the so-called recovery will be so tepid–maybe even leading to a double dip. It’s also why America will be vulnerable to even larger speculative booms and deeper busts in the years to come. The structural problem began in the late 1970s when a wave of new technologies (air cargo, container ships and terminals, satellite communications and, later, the Internet) radically reduced the costs of outsourcing jobs abroad. Other new technologies (automated machinery, computers and ever more sophisticated software applications) took over many other jobs (remember bank tellers? telephone operators? service station attendants?). By the ’80s, any job requiring that the same steps be performed repeatedly was disappearing–going over there or into software. Meanwhile, as the pay of most workers flattened or dropped, the pay of well-connected graduates of prestigious colleges and MBA programs–the so-called “talent” who reached the pinnacles of power in executive suites and on Wall Street–soared. The puzzle is why so little was done to counteract these forces. Government could have given employees more bargaining power to get higher wages, especially in industries sheltered from global competition and requiring personal service: big-box retail stores, restaurants and hotel chains, and child- and eldercare, for instance. Safety nets could have been enlarged to compensate for increasing anxieties about job loss: unemployment insurance covering part-time work, wage insurance if pay drops, transition assistance to move to new jobs in new locations, insurance for communities that lose a major employer so they can lure other employers. With the gains from economic growth the nation could have provided Medicare for all, better schools, early childhood education, more affordable public universities, more extensive public transportation. And if more money was needed, taxes could have been raised on the rich. Big, profitable companies could have been barred from laying off a large number of workers all at once, and could have been required to pay severance–say, a year of wages–to anyone they let go. Corporations whose research was subsidized by taxpayers could have been required to create jobs in the United States. The minimum wage could have been linked to inflation. And America’s trading partners could have been pushed to establish minimum wages pegged to half their countries’ median wages–thereby ensuring that all citizens shared in gains from trade and creating a new global middle class that would buy more of our exports. But starting in the late 1970s, and with increasing fervor over the next three decades, government did just the opposite. It deregulated and privatized. It increased the cost of public higher education and cut public transportation. It shredded safety nets. It halved the top income tax rate from the range of 70-90 percent that prevailed during the 1950s and ’60s to 28-40 percent; it allowed many of the nation’s rich to treat their income as capital gains subject to no more than 15 percent tax and escape inheritance taxes altogether. At the same time, America boosted sales and payroll taxes, both of which have taken a bigger chunk out of the pay of the middle class and the poor than of the well-off. Companies were allowed to slash jobs and wages, cut benefits and shift risks to employees (from you-can-count-on-it pensions to do-it-yourself 401(k)s, from good health coverage to soaring premiums and deductibles). They busted unions and threatened employees who tried to organize. The biggest companies went global with no more loyalty or connection to the United States than a GPS device. Washington deregulated Wall Street while insuring it against major losses, turning finance–which until recently had been the servant of American industry–into its master, demanding short-term profits over long-term growth and raking in an ever larger portion of the nation’s profits. And nothing was done to impede CEO salaries from skyrocketing to more than 300 times that of the typical worker (from thirty times during the Great Prosperity of the 1950s and ’60s), while the pay of financial executives and traders rose into the stratosphere. It’s too facile to blame Ronald Reagan and his Republican ilk. Democrats have been almost as reluctant to attack inequality or even to recognize it as the central economic and social problem of our age. (As Bill Clinton’s labor secretary, I should know.) The reason is simple. As money has risen to the top, so has political power. Politicians are more dependent than ever on big money for their campaigns. Modern Washington is far removed from the Gilded Age, when, it’s been said, the lackeys of robber barons literally deposited sacks of cash on the desks of friendly legislators. Today’s cash comes in the form of ever increasing campaign donations from corporate executives and Wall Street, their ever larger platoons of lobbyists and their hordes of PR flacks. The Great Recession could have spawned another era of fundamental reform, just as the Great Depression did. But the financial rescue reduced immediate demands for broader reform. Obama might still have succeeded had he framed the challenge accurately. Yet in reassuring the public that the economy will return to normal he has missed a key opportunity to expose the longer-term scourge of widening inequality and its dangers. Containing the immediate financial crisis and then claiming the economy is on the mend has left the public with a diffuse set of economic problems that seem unrelated and inexplicable, as if a town’s fire chief deals with a conflagration by protecting the biggest office buildings but leaving smaller fires simmering all over town: housing foreclosures, job losses, lower earnings, less economic security, soaring pay on Wall Street and in executive suites. Much the same has occurred with efforts to reform the financial system. The White House and Democratic leaders could have described the overarching goal as overhauling economic institutions that bestow outsize rewards on a relative few while imposing extraordinary costs and risks on almost everyone else. Instead, they have defined the goal narrowly: reducing risks to the financial system caused by particular practices on Wall Street. The solution has thereby shriveled to a set of technical fixes for how the Street should conduct its business. What we get from widening inequality is not only a more fragile economy but also an angrier politics. When virtually all the gains from growth go to a small minority at the top — and the broad middle class can no longer pretend it’s richer than it is by using homes as collateral for deepening indebtedness — the result is deep-seated anxiety and frustration. This is an open invitation to demagogues who misconnect the dots and direct the anger toward immigrants, the poor, foreign nations, big government, “socialists,” “intellectual elites,” or even big business and Wall Street. The major fault line in American politics is no longer between Democrats and Republicans, liberals and conservatives, but between the “establishment” and an increasingly mad-as-hell populace determined to “take back America” from it. When they understand where this is heading, powerful interests that have so far resisted fundamental reform may come to see that the alternative is far worse. This post originally appeared at RobertReich.org

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Dave Johnson: The Real Deficit Is Jobs!

June 29, 2010

This post originally appeared at Campaign for America’s Future (CAF) at their Blog for OurFuture . I am a Fellow with CAF. The real deficit is jobs. That is one more of those things that everyone can see in front of their faces, but we’re told it isn’t what it is. There aren’t enough jobs, and we’re being told this is our fault because we wanted pensions and good wages and vacations and respect and dignity and please, sir, just a little slice of the pie. In case you haven’t noticed, the world’s economy is suddenly undergoing a classic “Shock Doctrine”-style, coordinated propaganda attack. The wealthy and powerful, having insisted that countries cut their taxes and run up debt , now insist that the middle class and poor must work harder, have their pensions reduced, sell off (to them) their publicly-held resources, and take other “austerity” steps to pay off the debt that these lazy, parasitic peasants dared to run up. The excuse is that “the markets” will “lose confidence” in us. Apparently we aren’t working the salt mines hard enough . “The markets” — that’s the crowd who got in trouble and insisted that the world would end unless we immediately handed over to them all the rest of the money in the world — will “lose confidence” in our ability to work the mines hard enough, and will cut us off, unless we cut our pensions, sell off (to them) our resources, and promise never to be lazy and make demands for better wages, pensions, workplace safety, and do it now . The real deficit is jobs. History teaches that the way out of an economic slowdown is to invest in infrastructure, education and modernizing manufacturing. Slactivist said it best the other day: This calls to mind an old story: But knowing their hypocrisy, he said unto them, “Why are you putting me to the test? Bring me a dime and let me see it.” And they brought one. Then he said to them, “Whose head is this — FDR’s or Herbert Hoover’s?” They answered, “Roosevelt’s.” And he said unto them, “Right. So shut up. Have you morons already forgotten the 20th Century? When the choice is between imitating what worked and what really, really didn’t work, why are you pretending it’s terribly complicated?” And after that, no one dared to ask him any question. I’m not an economist, but we’ve got five applicants for every single job opening. If you tell me that the best response to that situation is to lay off hundreds of thousands of teachers, I will not accept that this means that you’re smarter and more expert than I am. I will instead conclude — regardless of your prestige or position or years of study — that you’re a moral imbecile. According to the Labor Department: By the end of 2009, the jobless rate stood at 10.0 percent and the number of unemployed persons at 15.3 million. Among the unemployed, 4 in 10 (6.1 million) had been jobless for 27 weeks or more, by far the highest proportion of long-term unemployment on record, with data back to 1948. That’s right, it was the policies of austerity that created a depression, and the policies of job-creation, infrastructure investment and taxing the wealthy to pay for it that got us out. But that was back when We, the People were still in charge. In other news: Number Of Millionaires Grew Amid Recession . The rich grew richer last year, even as the world endured the worst recession in decades. Top 1 Percent of Americans Reaped Two-Thirds of Income Gains in Last Economic Expansion , Income Concentration in 2007 Was at Highest Level Since 1928, New Analysis Shows: Two-thirds of the nation’s total income gains from 2002 to 2007 flowed to the top 1 percent of U.S. households, and that top 1 percent held a larger share of income in 2007 than at any time since 1928, according to an analysis of newly released IRS data by economists Thomas Piketty and Emmanuel Saez. During those years, the Piketty-Saez data also show, the inflation-adjusted income of the top 1 percent of households g rew more than ten times faster than the income of the bottom 90 percent of households. Top 1% Increased Their Share of Wealth in Financial Crisis , According to his analysis, the top 1% held 34.6% of all national wealth in 2007. By Dec. 31, 2009, they held 35.6%. Meanwhile, share of national wealth held by the bottom 90% fell to 25% from 27%. Corporate Wealth Share Rises for Top-Income Americans In 2003 the top 1 percent of households owned 57.5 percent of corporate wealth, up from 53.4 percent the year before, according to a Congressional Budget Office analysis of the latest income tax data. . . . For every group below the top 1 percent , shares of corporate wealth have declined since 1991. . . . Long-term capital gains were taxed at 28 percent until 1997, and at 20 percent until 2003, when rates were cut to 15 percent. The top rate on dividends was cut to 15 percent from 35 percent that year. See if you can make the connection. They want us to cut back our pensions, cut our wages, sell off our resources and work harder, to pay back the money that was borrowed and handed to them . Sign up here for the CAF daily summary .

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Dan Dorfman: Why 2011 Will Be A Bummer

June 28, 2010

Forget about that champagne toast on New Year’s eve. A bottle of Budweiser might be far more appropriate. Why beer instead of Don Perignon? Because it won’t be a happy 2011 as the economic mess promises to get messier. Likewise, we’ll all feel more financial aches and pains from Uncle Sam’s heftier tax grab, which will assuredly depress economic growth. This dreary year-ahead outlook comes from Madeline Schnapp, a sharp, perceptive economist who boasts a number of excellent calls on the economic front, especially as it relates to the critical job and housing markets. As such, she’s no stranger in my writings. Her view, it should be noted, is a contrary view. The general expectation is that the recovery will continue to hum in 2011, following a pickup in 2010, as the economy shifts from slippers to sneakers. Schnapp, the economics chief at West Coast liquidity tracker TrimTabs Research, which is partially owned by Goldman Sachs, is convinced the timing is wrong to think about a jitterbug economy next year. A slow fox trot, she believes, is much more in line, based on her work which shows we’re in for a disappointing 2011 economy and a limping stock market to boot. Schnapp figures you don’t really need the IQ of an Albert Einstein to recognize that the 2011 economy will be riddled with a number of significant land mines, which strongly suggests the general expectation of 3% to 3.5% GDP growth next year is overblown. Our economic worrier, by the way, is not looking for a double-dip recession next year, but rather anemic growth (on the order of 2%-2.5%), which reminds her of her favorite quote pertaining to exaggerated economic expectations. It comes from none other than Warren Buffett, who said: “You can’t produce a baby in one month by getting nine women pregnant. It just doesn’t work that way.” It means, Schnapp says, no matter how hard you try or what rabbit you try to pull out of your hat, the recovery process is just going to take a long time. Credit crises that lead to banking crises, she observes, take a lot longer to recover than say a business cycle characterized by bloated inventory. Speaking of economic land mines, Schnapp takes particular note of a bigger tax bite. Noting that the Bush tax cuts expire at the end of this year, she points out that if they all expire en masse, that would translate into tax increases approximating half a trillion dollars. Since that would be political suicide, she says, tax hikes will probably come in at $200-$250 billion, mostly on the shoulders of those individuals earning $200,000 a year. That, she believes, will shave 1%-2% off GDP growth next year. Among the most prominent tax boosts slated to go into effect on January 1, 2011, the top capital gains tax will rise to 20% from 15%, the top dividend tax rate will go up to 39.6% from 15%, the top personal income tax rate will climb to 39.6% from 35%, and the lowest person income tax rate will increase to 15% from 10%. As a result, Schnapp points out, many investors will probably be selling assets in the fourth quarter to avoid paying higher taxes next year. Aside from a larger tax bite, Schnapp takes note of several other developments that will stifle economic growth next year. In brief: –Loss of stimulus measures, such as income tax refunds, cash for clunkers and the homeowner’s tax credit. –Ongoing high unemployment, likely in the 9.5%-10% range, with additional job losses of 900,000 to one million. Adding to labor woes will be more than a million new entrants into the labor force. –A darker housing picture, what with another 7-8 million new mortgage delinquencies projected over the next couple of years on top of the current population of 7.2 million delinquencies. It means, says Schnapp, a bigger inventory overhang and a further decline in housing prices. –De-leveraging cycle here and in European countries–which is a deflationary event and will take many more years to unwind. This will result in less private and government sector growth, huge deficits, higher unemployment, reduced consumer spending and it all adds up to a dismal economic outlook. What about all those expectations of a fast recovery? Schnapp figures they’re strictly a pipe dream. “You’ll have to wait a long time before we see robust GDP growth again of 3% to 3.5%, and that won’t happen,” she believes, “until 2013 or 2014 when the housing market finally gets back on solid footing.” As far as investors go, Schnapp’s advice is “don’t get sucked into a bullish stock market scenario because it’s not real.” What do you think? E-mail me at Dandordan@aol.com.

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Alan Schram: The Next Thing to Go Wrong

June 20, 2010

Gold prices just hit a new all time (nominal) high of $1,257 an ounce. The Dollar lost more than 70% of its gold value since the beginning of the decade (an ounce of gold was $273 in January 2001). Because most people take note of the dollar in reference to foreign currencies, they overlook the significance of this. The European Union has bigger problems than America, and so their currency has been even weaker, making the dollar’s decline easy to ignore. But since gold prices are quoted in dollars, the meaning of gold going up is that the dollar is falling. A look at energy prices leads to a similar conclusion. For decades the prices of gold and oil closely paralleled one another. In 2003 an ounce of gold would have bought you 12 barrels of oil. Today that ounce will buy you about 16 barrels, even though the price of oil is now more than twice what it was in 2003. Thus the increase in oil prices is really a result of inflation, not energy markets’ supply and demand. Energy prices are simply not keeping pace with the rising price of gold. This erosion in the value of the dollar is effectively inflation, even if it does not yet show up in the CPI. And it is tantamount to a tax more devastating than anything Congress can come up with. Inflation consumes capital. If you receive 5% interest on your savings and pay 100% capital gains tax during a year of zero inflation, you are no worse off than a person who pays no income taxes at all during a year of 5% inflation. Either one is left with no real income. People would riot in the streets if capital gain tax of 120% was enacted, but don’t seem to mind collecting 5% interest rate on their municipal bonds with 6% inflation, even though that is exactly the same as 120% capital gains tax. So far, both inflation and long term interest rates have remained surprisingly low, despite the flagitious promiscuity in which the U.S. has increased its federal debt, from $5.5 billion to $8.6 billion in just 18 months. But Gold has historically been a reliable harbinger of both inflation and rising interest rates. Rising interest rates obviously reduce the value of all fixed income investments. And when the value of the dollar deteriorates, fixed income instruments with principal payments denominated in dollars are not going to do well. Thus, the erosion of the dollar is a threat to our economic stability. Every empire in history has shirked its liabilities by debasing the currency. Aggressive spending plans, especially in a time of war, escalate these inherent tendencies. And the further the dollar declines, the more dire the consequences. Yet investors who should be looking for safe haven are, oddly, confident in our currency and convinced that Washington will honor its long term fiscal obligations. That false sense of security is dangerous, because we are vulnerable to a crisis of confidence in the dollar. And the resulting sudden spike in interest rates will have such large impact on the economy that it will dwarf any other factor. The second Murphy law says that what actually goes wrong is not that we anticipated going wrong. But this scenario is at the top of my worry list. Alan Schram is the Managing Partner of Wellcap Partners, a Los Angeles based investment firm. Email at aschram@wellcappartners.com.

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Alan Schram: The Next Thing to Go Wrong

June 20, 2010

Gold prices just hit a new all time (nominal) high of $1,257 an ounce. The Dollar lost more than 70% of its gold value since the beginning of the decade (an ounce of gold was $273 in January 2001). Because most people take note of the dollar in reference to foreign currencies, they overlook the significance of this. The European Union has bigger problems than America, and so their currency has been even weaker, making the dollar’s decline easy to ignore. But since gold prices are quoted in dollars, the meaning of gold going up is that the dollar is falling. A look at energy prices leads to a similar conclusion. For decades the prices of gold and oil closely paralleled one another. In 2003 an ounce of gold would have bought you 12 barrels of oil. Today that ounce will buy you about 16 barrels, even though the price of oil is now more than twice what it was in 2003. Thus the increase in oil prices is really a result of inflation, not energy markets’ supply and demand. Energy prices are simply not keeping pace with the rising price of gold. This erosion in the value of the dollar is effectively inflation, even if it does not yet show up in the CPI. And it is tantamount to a tax more devastating than anything Congress can come up with. Inflation consumes capital. If you receive 5% interest on your savings and pay 100% capital gains tax during a year of zero inflation, you are no worse off than a person who pays no income taxes at all during a year of 5% inflation. Either one is left with no real income. People would riot in the streets if capital gain tax of 120% was enacted, but don’t seem to mind collecting 5% interest rate on their municipal bonds with 6% inflation, even though that is exactly the same as 120% capital gains tax. So far, both inflation and long term interest rates have remained surprisingly low, despite the flagitious promiscuity in which the U.S. has increased its federal debt, from $5.5 billion to $8.6 billion in just 18 months. But Gold has historically been a reliable harbinger of both inflation and rising interest rates. Rising interest rates obviously reduce the value of all fixed income investments. And when the value of the dollar deteriorates, fixed income instruments with principal payments denominated in dollars are not going to do well. Thus, the erosion of the dollar is a threat to our economic stability. Every empire in history has shirked its liabilities by debasing the currency. Aggressive spending plans, especially in a time of war, escalate these inherent tendencies. And the further the dollar declines, the more dire the consequences. Yet investors who should be looking for safe haven are, oddly, confident in our currency and convinced that Washington will honor its long term fiscal obligations. That false sense of security is dangerous, because we are vulnerable to a crisis of confidence in the dollar. And the resulting sudden spike in interest rates will have such large impact on the economy that it will dwarf any other factor. The second Murphy law says that what actually goes wrong is not that we anticipated going wrong. But this scenario is at the top of my worry list. Alan Schram is the Managing Partner of Wellcap Partners, a Los Angeles based investment firm. Email at aschram@wellcappartners.com.

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Britain’s Buyout Dealmakers Resigned to Losing Carried-Interest Tax Fight

June 16, 2010

By Anne-Sylvaine Chassany June 16 (Bloomberg) — U.K. private equity executives are lobbying against a government plan that may more than double the tax they pay on the profit from their investments. Privately, they say it’s a battle they’re resigned to losing. The coalition government plans to increase capital gains tax from 18 percent to rates closer to those applied to income. Earnings of more than 150,000 pounds ($222,000) a year are subject to a 50 percent levy. The CGT increase may raise 1.9 billion pounds, the Liberal Democrats, the coalition junior member pushing for the levy, said before the May 6 election. Carried interest, the share of profits that executives traditionally receive as the largest part of their compensation, is subject to capital gains tax. Dealmakers say they should be exempt from the rise because their work fuels economic growth. They are going to struggle to win that argument as Prime Minister David Cameron faces a near-record budget deficit . “They are an easy political target,” said Andrew Goldstone , the partner in charge of the personal tax and estate- planning practice at law firm Mishcon de Reya in London. “Capital gains tax is going up, and one of the big targets will most probably be private equity.” Cameron says he plans to raise capital gains tax for “non- business” assets, promising “generous exemptions” for entrepreneurs. Pensioners, who face paying the levy as they sell second homes to fund their retirements, and business owners, are all pushing for exemptions in Chancellor of the Exchequer George Osborne’s first budget on June 22. Tax ‘Injustice’ “It wouldn’t be appropriate to give private equity firms more favorable treatment than retirees,” Brendan Barber , general secretary of the Trades Union Congress, said in an interview. “Private equity is an area of the economy where injustice of the current capital gain tax regime is most evident.” It would be “bizarre” if the dealmakers’ carried interest , their share of the profit from asset sales, wasn’t considered as “business,” Simon Walker , chief executive officer of the British Venture Capital and Private Equity Association said after Cameron’s announcement on CGT last month. “Raising the level of CGT to income tax levels would actually hinder endeavors to stimulate the economy and reduce the deficit, and result in a lower tax take,” he said. Even so, taxes for the industry are likely to rise, executives said. The BVCA, the industry’s lobby group, wasn’t able to provide an estimate for how much the plans will cost their members. Rise ‘Almost Certain’ “It’s almost certain taxes are going to rise,” said Jon Moulton , who helped start the funds that grew into CVC Capital Partners Ltd. and Permira Advisers LLP, two of Europe’s biggest private equity firms. “Firms have been paying very little taxes on their carried interest in the past. They will have to learn to work in a high-tax environment.” The proposed capital gains increase would echo a draft U.S. bill that would make partners pay income tax of as much as 35 percent on carried interest, up from 15 percent. Meanwhile, the European Union is preparing legislation tightening disclosure and fundraising rules for private equity firms to limit systemic risk. Lawyers and accountants are already starting to work on ways to mitigate the increase. Some partners may relocate to Switzerland, according to Gary Heynes, head of the private clients group at London-based accounting firm Baker Tilly. Locking in Lower Rate “Others are looking at crystallizing their gains now to secure an 18 percent rate, by transferring their co-investment or carry to a trust or a company for example,” Heynes said. The CGT rate may rise to about 40 percent, Heynes estimates. CGT generated 7.8 billion pounds in revenue from April 2008 to March 2009, before the worst of the credit crisis hit, according to the government. Before the election, the Treasury forecast it will raise 2.7 billion pounds for the year starting in April 2010. Fund managers pay the 18 percent tax rate on the share of a fund’s profit, or carried interest, they receive from investors when all the assets have been sold above a minimum annual return known as the hurdle. Partners also pay the levy on gains made on their personal money they invest alongside their firms, usually 2 percent of the fund’s total. U.K. firms generated about 2.1 billion pounds of carried interest in 2007, the peak of the buyout boom, according to estimates by London-based research firm Preqin Ltd . Senior partners and executives typically get two thirds of that money, with junior dealmakers receiving the rest, according to Preqin. That would have netted the approximately 1,000 partners and top executives who work for the 340 U.K. firms an average of 1.4 million pounds each that year, calculations by Bloomberg show. ‘Two Years Late’ An increase in the capital gains tax to 50 percent would have boosted a partner’s carry tax bill by 446,000 pounds to about 700,000 pounds that year, the calculations show. In the wake of the credit crisis, only a fifth of active private equity funds in the U.K. are making carried interest as returns dry up, according to Preqin. “The argument that it would not produce much revenue is not politically good, but economically that’s true,” Mishcon de Reya’s Goldstone said. “The government is two years late.” To contact the reporter on this story: Anne-Sylvaine Chassany in Paris at achassany@bloomberg.net

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British Buyout Dealmakers Resigned to Losing Carried Interest Tax Fight

June 15, 2010

By Anne-Sylvaine Chassany June 16 (Bloomberg) — U.K. private equity executives are lobbying against a government plan that may more than double the tax they pay on the profit from their investments. Privately, they say it’s a battle they’re resigned to losing. The coalition government plans to increase capital gains tax from 18 percent to rates closer to those applied to income. Earnings of more than 150,000 pounds ($222,000) a year are subject to a 50 percent levy. The CGT increase may raise 1.9 billion pounds, the Liberal Democrats, the coalition junior member pushing for the levy, said before the May 6 election. Carried interest, the share of profits that executives traditionally receive as the largest part of their compensation, is subject to capital gains tax. Dealmakers say they should be exempt from the rise because their work fuels economy growth. They are going to struggle to win that argument as Prime Minister David Cameron faces a near-record budget deficit . “They are an easy political target,” said Andrew Goldstone , the partner in charge of the personal tax and estate- planning practice at law firm Mishcon de Reya in London. “Capital gains tax is going up, and one of the big targets will most probably be private equity.” Cameron says he plans to raise capital gains tax for “non- business” assets, promising “generous exemptions” for entrepreneurs. Pensioners, who face paying the levy as they sell second homes to fund their retirements, and business owners, are all pushing for exemptions in Chancellor of the Exchequer George Osborne’s first budget on June 22. Tax ‘Injustice’ “It wouldn’t be appropriate to give private equity firms more favorable treatment than retirees,” Brendan Barber , general secretary of the Trades Union Congress, said in an interview. “Private equity is an area of the economy where injustice of the current capital gain tax regime is most evident.” It would be “bizarre” if the dealmakers’ carried interest , their share of the profit from asset sales, wasn’t considered as “business,” Simon Walker , chief executive officer of the British Venture Capital and Private Equity Association said after Cameron’s announcement on CGT last month. “Raising the level of CGT to income tax levels would actually hinder endeavors to stimulate the economy and reduce the deficit, and result in a lower tax take,” he said. Even so, taxes for the industry are likely to rise, executives said. The BVCA, the industry’s lobby group, wasn’t able to provide an estimate for how much the plans will cost their members. Rise ‘Almost Certain’ “It’s almost certain taxes are going to rise,” said Jon Moulton , who helped start the funds that grew into CVC Capital Partners Ltd. and Permira Advisers LLP, two of Europe’s biggest private equity firms. “Firms have been paying very little taxes on their carried interest in the past. They will have to learn to work in a high-tax environment.” The proposed capital gains increase would echo a draft U.S. bill that would make partners pay income tax of as much as 35 percent on carried interest, up from 15 percent. Meanwhile, the European Union is preparing legislation tightening disclosure and fundraising rules for private equity firms to limit systemic risk. Lawyers and accountants are already starting to work on ways to mitigate the increase. Some partners may relocate to Switzerland, according to Gary Heynes, head of the private clients group at London-based accounting firm Baker Tilly. Locking in Lower Rate “Others are looking at crystallizing their gains now to secure an 18 percent rate, by transferring their co-investment or carry to a trust or a company for example,” Heynes said. The CGT rate may rise to about 40 percent, Heynes estimates. CGT generated 7.8 billion pounds in revenue from April 2008 to March 2009, before the worst of the credit crisis hit, according to the government. Before the election, the Treasury forecast it will raise 2.7 billion pounds for the year starting in April 2010. Fund managers pay the 18 percent tax rate on the share of a fund’s profit, or carried interest, they receive from investors when all the assets have been sold above a minimum annual return known as the hurdle. Partners also pay the levy on gains made on their personal money they invest alongside their firms, usually 2 percent of the fund’s total. U.K. firms generated about 2.1 billion pounds of carried interest in 2007, the peak of the buyout boom, according to estimates by London-based research firm Preqin Ltd . Senior partners and executives typically get two thirds of that money, with junior dealmakers receiving the rest, according to Preqin. That would have netted the approximately 1,000 partners and top executives who work for the 340 U.K. firms an average of 1.4 million pounds each that year, calculations by Bloomberg show. ‘Two Years Late’ An increase in the capital gains tax to 50 percent would have boosted a partner’s carry tax bill by 446,000 pounds to about 700,000 pounds that year, the calculations show. In the wake of the credit crisis, only a fifth of active private equity funds in the U.K. are making carried interest as returns dry up, according to Preqin. “The argument that it would not produce much revenue is not politically good, but economically that’s true,” Mishcon de Reya’s Goldstone said. “The government is two years late.” To contact the reporter on this story: Anne-Sylvaine Chassany in Paris at achassany@bloomberg.net

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Obama Urges Congress To Help Small Business, Again

June 11, 2010

WASHINGTON — President Barack Obama is again urging Congress to send him a package of tax breaks and other incentives to help small businesses grow and create jobs. The legislation would eliminate capital gains taxes for investments in such companies and encourage people to open businesses by offering tax relief to small startups. Obama says his administration is constantly hearing from small businesses that want to keep the workers they have and hire more employees, but are having trouble getting credit. Obama spoke at a White House Rose Garden event with small business owners, his second such event in recent weeks.

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London Luxury-Home Prices Increase for Seventh Month on Russian Purchases

May 29, 2010

By Simon Packard May 29 (Bloomberg) — London luxury-home prices climbed in May for the seventh straight month as the pound’s weakness attracted buyers from abroad, Knight Frank LLP said. Houses and apartments costing more than 1 million pounds ($1.4 million) gained 20 percent from a year earlier, the London-based property broker said in a statement today. Prices increased 1.4 percent during the month. They’re still down 6.4 percent from the market’s peak in March 2008. “Overseas buyers view London as offering good value,” Liam Bailey, Knight Frank’s head of residential research, said in the statement. In dollar terms, values are 34 percent less than the peak. A lack of homes offered for sale helped prices recover on a monthly basis from a low in March last year. The pound’s decline sparked demand from wealthy overseas buyers for properties in neighborhoods such as Chelsea, Mayfair and Kensington, Knight Frank said. The number of Russians seeking property through Knight Frank has more than doubled in the past two months, and they now account for almost 8 percent of all purchases of more than 2 million pounds, Bailey said. Russians are targeting London after the ruble appreciated 10 percent against the pound in the last 12 months, said Elena Norton, who heads Knight Frank’s sales team for Russia and the Commonwealth of Independent States. ‘Safe’ Investment Growing interest in refurbishments and development opportunities that add longer-term value “proves Russian buyers consider London a safe and attractive investment,” she said. Properties worth more than 5 million pounds “have come back quite strongly on demand from Russian and Middle East buyers,” said Robert Bailey, whose firm advises and acts for wealthy individuals buying London properties. The euro region’s debt crisis fueled demand from buyers in those countries, particularly for homes worth less than 2 million pounds, he said. For U.K. investors, “we are entering a period of uncertainty” as the government suggests it may lift taxes on capital gains from home sales and given prospects that the economy may slow, Bailey said. The Conservative-Liberal Democrat coalition has indicated it may increase the capital gains tax, currently at 18 percent, to bring it in line with income tax for non-business investments. The top rate for income tax is 50 percent. Chancellor of the Exchequer George Osborne is scheduled to present an emergency budget on June 22 that may include the change. ‘Scaremongering’ “There’s a lot of scaremongering and a lot of people are deeply worried,” Robert Bailey said. His company, Robert Bailey Property, advised on three purchases, including a 7 million- pound home in Knightsbridge, during the past six weeks. Knight Frank compiles its luxury-homes index from estimated values of properties in the Mayfair, St. John’s Wood, Regent’s Park, Kensington, Notting Hill, Chelsea, Knightsbridge, Belgravia and South Bank neighborhoods of London. To contact the reporter on this story: Simon Packard in London at packard@bloomberg.net .

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Lloyd Chapman: Obama Proposes Tax Cut for Mega Rich Venture Capitalist Contributors

May 28, 2010

President Barack Obama has proposed new legislation that will allow many of the nation’s wealthiest venture capitalists to avoid paying billions of dollars in federal income tax. Under the new proposal some of President Obama’s top campaign contributors in the venture capital industry will be exempt from capital gains tax. I believe President Obama will also back legislation and policy that will attempt to change the longstanding federal definition of a small business as being “independently owned.” President Obama will likely back legislation or policy that will change the federal definition of a small business to include firms owned by many of the nation’s wealthiest venture capitalists. If he is successful, billions of dollars a month in federal small business contracts will be diverted from legitimate small businesses, and into the hands of mega wealthy venture capitalists. President Obama has maintained close ties to the National Venture Capital Association (NVCA) since his days in the Illinois State Legislature. Wealthy venture capitalists were major contributors to President Obama’s campaign. In February of 2009, a story in the Venture Capital Journal titled, “Real Change: New President Gets VC,” boasted about the close relationship between President Obama and the venture capital industry. ( http://www.vcjnews.com/story.asp?storycode=46450 ) President Obama’s close ties and political debt to the venture capital industry were clearly demonstrated when he appointed New York venture capitalist, and Tootsie Roll heiress Karen Mills to head the Small Business Administration (SBA). He appointed another venture capitalist, Winslow Sargeant to head the Small Business Administration Office of Advocacy. Both Mills and Sargeant were major contributors and fund raisers during Obama’s Presidential campaign. In addition to millions of dollars in contributions to President Obama, the NVCA and its members have spent millions of dollars lobbying Congress. The vast majority of venture capital industry contributions have been focused on the House and Senate small business committees. A story in AllBusiness.com described House Small Business Committee Chair Nydia Velázquez as “quarterbacking” legislation for well-heeled venture capitalists. ( http://www.allbusiness.com/company-activities-management/business-climate-conditions/9077284-1.html ) In the past, the NVCA and its members have pushed for pro-venture capital loopholes under the guise of “increasing access to capital for small businesses.” Nothing could be further from the truth. In reality, the true purpose of the NVCA political agenda is obviously to increase their access to billions of dollars in federal small business contracts and withdraw profits without paying taxes. According to the U.S. Census Bureau and the Kauffman Foundation, small businesses employ over 50.2 percent of the private sector workforce, are responsible for more than 50 percent of GDP and create nearly all net new jobs. Legislation or policy that would divert federal small business funds away from American small businesses could have a significant negative impact on the national economy. If President Obama truly wanted to increase access to capital for small businesses, he would not have allowed CIT, the nation’s leading lender to small businesses and firms owned by women, minorities and veterans, to fail. If President Obama were sincere about helping small businesses, he would have kept his campaign promises to: implement the 5 percent set-aside goal for woman owned firms, restore the SBA’s budget and staffing, restore the head of the SBA to a cabinet level position, and “end the diversion of federal small business contracts to corporate giants.” ( http://www.asbl.com/documents/20100526_ASBL_AnalysisObamaSB.pdf ) President Obama has broken every campaign promise he made to America’s 27 million small business owners. Instead he has continued to allow billions of dollars a month in federal small business funds to be diverted to corporate giants around the world. His administration has tried to cover up the diversion of federal small business contacts to corporate giants by destroying data in the Federal Procurement Data System such as the “small business flag” and the “parent DUNS number.” The Obama Administration is refusing to release a wide variety of information that the public can use to monitor the actual recipients of federal small business contracts. They have also refused to release reports on prime contractor compliance with federal small business goals. President Obama even refused to accept the recommendation of his own small business advisory council to end the “Comprehensive Subcontracting Plan Test Program.” This program allows prime contractors to ignore federally mandated small business goals and avoid any penalties for noncompliance. As I have said many times, the media and the American people need to quit listening to President Obama’s well written and insincere speeches, and look at what he is actually doing. When you do, it becomes clear that President Barack Obama is no friend to the 27 million small businesses where most American’s work. Quite the contrary, his administration has adopted numerous policies that are clearly anti-small business. I predict that President Obama will continue to pursue legislation and policy that will allow his wealthy contributors in the venture capital industry to hijack billions of dollars in federal small business contracts and avoid paying taxes on their ill gotten gains.

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Paul Abrams: Ignored by Everyone: The Simple, Fair and Correct Solution to Capital Gains Tax Rates

May 24, 2010

The ‘crisis’ of the week for the financial sector is the definition of income that qualifies for capital gains tax rate preferences for fund managers. The noise level suggests the apocalypse is again pending. As usual, the country’s inability to have an intelligent discussion, as opposed to the battling of vested interests, will result in bad policies: neither simplicity nor fairness nor principal nor the expected revenue collection will be enacted or achieved. There is a reason for treating capital gains more favorably than salaries for labor and services. It coaxes money into long-term investments that create valuable products and American jobs. That’s it. There is no divine right of hedge fund managers to keep a greater portion of their incomes and thus either force up deficits or have others pay for what they are not paying. And, to my progressive colleagues, I would tell them that if someone is willing to put his money at risk, over time, and create jobs and value, they ought to be pleased with the benefits to society and incomes that provides. The correct and consistent solution to the current brouhaha over taxing “carried interest” — the amounts hedgies receive if the investments they choose for their partners are successful — is to correlate capital gains preferred rates to job creation. The simple way to do that is to provide the capital gains preferences only for direct investments in US companies, where the invested capital goes into the company coffers and not to some other investor with whom all that happened is that the shares have been purchased and traded, and money has gone from the hands of one investor to another. In financial jargon, that would mean that only investments in “newly-issued” stock by the company would qualify for capital gains treatment. All other arguments are self-servingly ridiculous. For example, I heard today on a financial network the argument that hedgies are really like homeowners, borrowing from banks (i.e., it is not “their” money invested) and then getting a gain when their home is sold. Well, no. A homeowner may have borrowed money from a bank, but he is on the hook for the entire amount over time, and is paying off that loan gradually. By contrast, a hedgie is investing other peoples’ money and benefiting if those investments pay off. He is not on the hook for the investment if it goes sour and owes nothing to the investors (those whose money he is managing) if it implodes. For this year, and this year only, I have previously argued that gains from all investments in “newly-issued stock” be taxed at zero regardless of when that investment is sold. That would cause a rapid rush of capital into companies, and provide them with confidence and capital to hire. After that one year, the capital gains rate should be raised back to, say, 20%, for qualifying investments made subsequently. But, the basic point is that capital gains tax preferences should be tied to job creation, and the best way to do that is to define a qualifying investment as one that directly provides new money to the company — i.e., “newly-issued stock” from the company to the investor. This policy is simple, fair, productive, and consistent with the rationale for a capital gains preference in the first place. Will it be discussed and considered? Of course not. It does not pit one set of absurd arguments against another, so it has no value as spectacle. (Disclosure: I invest and help manage a fund that only makes investments in newly-issued stock and thereby creates jobs. My investment far outweighs my management portion, so this proposal is of no great importance to me personally, but I thought it should be disclosed).

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Paul Abrams: Ignored by Everyone: The Simple, Fair and Correct Solution to Capital Gains Tax Rates

May 24, 2010

The ‘crisis’ of the week for the financial sector is the definition of income that qualifies for capital gains tax rate preferences for fund managers. The noise level suggests the apocalypse is again pending. As usual, the country’s inability to have an intelligent discussion, as opposed to the battling of vested interests, will result in bad policies: neither simplicity nor fairness nor principal nor the expected revenue collection will be enacted or achieved. There is a reason for treating capital gains more favorably than salaries for labor and services. It coaxes money into long-term investments that create valuable products and American jobs. That’s it. There is no divine right of hedge fund managers to keep a greater portion of their incomes and thus either force up deficits or have others pay for what they are not paying. And, to my progressive colleagues, I would tell them that if someone is willing to put his money at risk, over time, and create jobs and value, they ought to be pleased with the benefits to society and incomes that provides. The correct and consistent solution to the current brouhaha over taxing “carried interest” — the amounts hedgies receive if the investments they choose for their partners are successful — is to correlate capital gains preferred rates to job creation. The simple way to do that is to provide the capital gains preferences only for direct investments in US companies, where the invested capital goes into the company coffers and not to some other investor with whom all that happened is that the shares have been purchased and traded, and money has gone from the hands of one investor to another. In financial jargon, that would mean that only investments in “newly-issued” stock by the company would qualify for capital gains treatment. All other arguments are self-servingly ridiculous. For example, I heard today on a financial network the argument that hedgies are really like homeowners, borrowing from banks (i.e., it is not “their” money invested) and then getting a gain when their home is sold. Well, no. A homeowner may have borrowed money from a bank, but he is on the hook for the entire amount over time, and is paying off that loan gradually. By contrast, a hedgie is investing other peoples’ money and benefiting if those investments pay off. He is not on the hook for the investment if it goes sour and owes nothing to the investors (those whose money he is managing) if it implodes. For this year, and this year only, I have previously argued that gains from all investments in “newly-issued stock” be taxed at zero regardless of when that investment is sold. That would cause a rapid rush of capital into companies, and provide them with confidence and capital to hire. After that one year, the capital gains rate should be raised back to, say, 20%, for qualifying investments made subsequently. But, the basic point is that capital gains tax preferences should be tied to job creation, and the best way to do that is to define a qualifying investment as one that directly provides new money to the company — i.e., “newly-issued stock” from the company to the investor. This policy is simple, fair, productive, and consistent with the rationale for a capital gains preference in the first place. Will it be discussed and considered? Of course not. It does not pit one set of absurd arguments against another, so it has no value as spectacle. (Disclosure: I invest and help manage a fund that only makes investments in newly-issued stock and thereby creates jobs. My investment far outweighs my management portion, so this proposal is of no great importance to me personally, but I thought it should be disclosed).

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Paul Abrams: Ignored by Everyone: The Simple, Fair and Correct Solution to Capital Gains Tax Rates

May 24, 2010

The ‘crisis’ of the week for the financial sector is the definition of income that qualifies for capital gains tax rate preferences for fund managers. The noise level suggests the apocalypse is again pending. As usual, the country’s inability to have an intelligent discussion, as opposed to the battling of vested interests, will result in bad policies: neither simplicity nor fairness nor principal nor the expected revenue collection will be enacted or achieved. There is a reason for treating capital gains more favorably than salaries for labor and services. It coaxes money into long-term investments that create valuable products and American jobs. That’s it. There is no divine right of hedge fund managers to keep a greater portion of their incomes and thus either force up deficits or have others pay for what they are not paying. And, to my progressive colleagues, I would tell them that if someone is willing to put his money at risk, over time, and create jobs and value, they ought to be pleased with the benefits to society and incomes that provides. The correct and consistent solution to the current brouhaha over taxing “carried interest” — the amounts hedgies receive if the investments they choose for their partners are successful — is to correlate capital gains preferred rates to job creation. The simple way to do that is to provide the capital gains preferences only for direct investments in US companies, where the invested capital goes into the company coffers and not to some other investor with whom all that happened is that the shares have been purchased and traded, and money has gone from the hands of one investor to another. In financial jargon, that would mean that only investments in “newly-issued” stock by the company would qualify for capital gains treatment. All other arguments are self-servingly ridiculous. For example, I heard today on a financial network the argument that hedgies are really like homeowners, borrowing from banks (i.e., it is not “their” money invested) and then getting a gain when their home is sold. Well, no. A homeowner may have borrowed money from a bank, but he is on the hook for the entire amount over time, and is paying off that loan gradually. By contrast, a hedgie is investing other peoples’ money and benefiting if those investments pay off. He is not on the hook for the investment if it goes sour and owes nothing to the investors (those whose money he is managing) if it implodes. For this year, and this year only, I have previously argued that gains from all investments in “newly-issued stock” be taxed at zero regardless of when that investment is sold. That would cause a rapid rush of capital into companies, and provide them with confidence and capital to hire. After that one year, the capital gains rate should be raised back to, say, 20%, for qualifying investments made subsequently. But, the basic point is that capital gains tax preferences should be tied to job creation, and the best way to do that is to define a qualifying investment as one that directly provides new money to the company — i.e., “newly-issued stock” from the company to the investor. This policy is simple, fair, productive, and consistent with the rationale for a capital gains preference in the first place. Will it be discussed and considered? Of course not. It does not pit one set of absurd arguments against another, so it has no value as spectacle. (Disclosure: I invest and help manage a fund that only makes investments in newly-issued stock and thereby creates jobs. My investment far outweighs my management portion, so this proposal is of no great importance to me personally, but I thought it should be disclosed).

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New Zealand’s English Expected to Increase Sales Tax, Avoid Wider Deficit

May 18, 2010

By Tracy Withers May 19 (Bloomberg) — New Zealand Finance Minister Bill English will probably increase sales tax in his budget tomorrow, providing scope to stimulate economic growth without risking a widening of the government’s deficit. The minister is expected to raise the tax to 15 percent from 12.5 percent and use the money to cut income taxes across the board, arguing that consumers with more disposable income will work harder, save and stay in New Zealand. The government has already pledged to limit new spending to NZ$1.1 billion ($765 million) this year. English, 48, last month said New Zealand’s external debt is its single biggest vulnerability and his budget would focus on achieving faster growth and getting government finances back into shape so that debt can be reduced. Countries such as Japan and the U.K., facing more dire fiscal problems, may also use taxes on consumer spending to rein in their deficits. “The government is trying to grow the economy out of its troubles,” said Craig Ebert , senior market economist at Bank of New Zealand Ltd. in Wellington. “Other countries are almost on a revenue grab. It’s all take, take because they need to get their books back in much better shape.” English in December forecast the budget shortfall would peak at 5.9 percent of gross domestic product next year and return to surplus by 2017. Public debt was predicted to double to “just over” 30 percent of GDP by 2016 as the government borrows to help the economy recover from its worst recession in three decades. IMF Forecast Economic growth has been better than forecast, English said on April 22, signaling that budget deficits will be smaller. The Treasury forecast in December the economy would expand 2.1 percent this year after contracting 1.9 percent in 2009. The International Monetary Fund last month predicted growth would be 2.9 percent this year and 3.2 percent in 2011. English is due to release the budget for 2010-2011 at 2 p.m. in Wellington tomorrow. Fiscal discipline is a global focus for investors since Greece’s budget blowout highlighted a sovereign debt crisis in several European nations. Euro-area ministers and the IMF agreed on May 2 to a 110 billion-euro ($136 billion) aid package for Greece. Spain unveiled on May 12 the biggest budget cuts in at least 30 years. Raising sales taxes and other levies on tobacco, alcohol, carbon and property may be ways for nations to bolster revenue and rein in budget deficits, the Washington-based IMF said in a separate report published on May 14. U.K. Taxes U.K. Prime Minister David Cameron has refused to rule out an increase in value-added tax from the current rate of 17.5 percent to help narrow the record budget shortfall, which was close to 12 percent of GDP in the most recent year, approaching that of Greece and the widest in peacetime. Japan has begun laying the groundwork for a sales tax increase in an effort to contain the world’s largest public debt. The ruling Democratic Party of Japan will call for the 5 percent levy to be raised after the next lower house election, Deputy Secretary-General Goshi Hosono said on May 13. Former U.S. Federal Reserve Chairman Alan Greenspan said in August last year that a consumption tax is “the only thing that raises revenue in significant quantities without significantly impacting on the economy.” English is being guided on tax reform by a working group that said in January the tax system was “broken” and needed fixing. The group recommended cutting income and company taxes, and raising revenue from sales, land and property taxes. The government rejected property taxes, and a comprehensive capital gains tax. In February, Prime Minister John Key said the sales tax might rise to no more than 15 percent. Investment Property English is expected to change rules around taxation of investment properties and may align the top personal tax rate with the rate paid by trusts. On March 23, he said he wanted to close loopholes that are unfair and which see high earners reduce their tax by creating special structures and reducing their taxable income. The government is betting that increased disposable income will boost saving, investment and productivity, and deter people from leaving. One in four residents with university qualifications leave, the highest ratio of nations in the Organization for Economic Development and Cooperation , Key said this week. Encourage to Stay “Those who pay the top personal rate fit into some critical categories for our economy, including doctors, entrepreneurs, scientists, principals,” said Key. “I want those people to stay. The budget is a deliberate attempt to make sure people stay and put their skills to work here in our economy.” New Zealand’s economy is expanding, buoyed by higher prices for milk and log exports, while growth in retail spending and the property market is more gradual. Still, growth alone won’t be sufficient to restore budget surpluses. The government is reviewing all spending and expects to identify savings of NZ$1.8 billion over the next four years which will be redirected into priority areas, English said on April 22. He has told department chief executives they have no new money to spend and that wage rises for government workers will be minimal. The fiscal improvement is likely to be welcomed by Reserve Bank Governor Alan Bollard , who in March said that would reduce the work that monetary policy has to do. Bollard has kept the official cash rate at a record-low 2.5 percent since April last year and said on April 29 he may start raising borrowing costs in coming months. “The Reserve Bank is looking for more fiscal restraint,” said Nick Tuffley , chief economist at ASB Bank ltd. in Auckland. “If the government disappoints, then monetary policy will carry more of the load of reducing the overall stimulus.” To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net .

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Doubling Bonus Taxes in U.K. Sends British Bankers to Accountants, Lawyers

May 17, 2010

By Andrew MacAskill and Jon Menon May 17 (Bloomberg) — U.K. bankers , faced with a potential doubling in tax on the stock component of their bonuses, are asking lawyers and accountants if they can escape the plans. The coalition government said last week it may raise capital gains tax from 18 percent for non-business assets. Bringing it into line with income tax, which has a top rate of 50 percent, would more than double the levy on stock awards. “This will affect thousands of people in the City,” Mike Warburton , a senior tax partner at Grant Thornton in Bristol, England, said in an interview. “If they are going to tax profits on share schemes, then that will double your tax bill.” The decision may undercut efforts by the Financial Services Authority to make bankers take a greater proportion of their bonuses in stock. The FSA is trying to ensure pay is aligned with the interests of shareholders following the worst financial crisis since the Great Depression. “We have had a number of enquiries,” said Patrick Stevens , a tax partner at accounting firm Ernst & Young LLP . “In the next few weeks, lots of executives will say to their employers that they ought to be able to cash-in on any gains.” The Conservative party last week adopted the Liberal Democrat-backed capital gains policy as part of the coalition deal. The tax rise will be used to raise the threshold at which low earners start paying income tax. “Increasing the rate of capital gains cuts across that policy initiative to encourage people to receive bonuses in share form,” said Neal Todd , a tax partner at London-based law firm Berwin Leighton Paisner. “Many people who are sitting on large potential gains will be seeing if they can offload those shares rather quickly to trigger their gain.” ‘Business Assets’ The new government is committed to a budget statement before the end of next month, according to Chancellor of the Exchequer George Osborne. That should state whether bankers’ shareholdings will be classified as business or non-business assets and so liable to the tax increase. “The critical thing is going to be whether acquiring shares in the company you work for is going to be treated as business assets or not,” said Sylvie Watts , a compensation lawyer at London-based Allen & Overy LLP. “For policy reasons, the new government may want the higher rate of tax to apply.” The new government, the first British coalition in 65 years, is planning to raise taxes and cut spending as it seeks to narrow Britain’s record budget deficit . David Cameron “Everyone recognizes there is a problem,” Prime Minister David Cameron told the BBC’s Andrew Marr show yesterday. “When you have a capital gains tax rate of 18 percent and a top rate of income tax at 50 percent, you’ll find people finding all sorts of ways to treat income as capital gains,” he said. “I want to light the flames of entrepreneurialism in Britain and get people investing in businesses.” The tax is most likely to take effect in April next year and may be applied at 50 percent for higher earners, according to Richard Mannion, tax director at Smith & Williamson in London. “Shares in your employer used to get the lower rate of capital gains tax,” John Whiting , tax policy director at the London-based Chartered Institute of Taxation , a professional body that promotes the study and practice of taxation. “ I wouldn’t guarantee that it still will.” Gartmore Plc Chief Executive Officer Jeffrey Meyer said on May 14 that the rise in capital gains tax may lead to investors selling assets to lock in gains before any changes are made. “You may see an increase in redemptions then reinvestment as a result of that,” Meyer said. “So there may perhaps be a higher turnover in the assets under management levels.” To contact the reporters on this story: Andrew MacAskill in London at amacaskill@bloomberg.net Jon Menon in London at jmenon1@bloomberg.net

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Silicon Valley Companies Gear Up for Acquisitions Amid Improving Economy

April 3, 2010

By Ryan Flinn, Serena Saitto and Tim Mullaney April 4 (Bloomberg) — Silicon Valley companies looking to put their cash to work may drive a wave of mergers this year, bankers and venture capitalists say. Companies are eager to make acquisitions because many of them have cut research budgets, says Robert Ackerman , founder and managing director of Allegis Capital in Palo Alto, California. That means they’re not as able to fall back on their own ingenuity to fuel growth. More businesses are relying on acquisitions to find their next new product or service, he says. “The product cabinet is bare, but the market continues to move forward,” Ackerman said. “Wherever you see innovation sprint ahead, companies will have a product deficit, and will look to fill it.” Google Inc. , based in Mountain View, is currently one of California’s most acquisitive companies, buying at least five businesses in 2010. It agreed to buy Picnik Inc. last month, acquiring online photo-editing tools. Its purchase of DocVerse provided it with software that lets people share documents over the Internet. The value of the deals wasn’t disclosed. The state’s largest single deal this year was Shiseido Co.’s purchase of San Francisco-based Bare Escentuals Inc. for about $1.7 billion. California deal-making plummeted after 2007, when more than 2,670 transactions totaled almost $254 billion. So far this year, there have been about 530, worth $16.7 billion. That’s a higher number than in the first three months of 2009, although the value was greater in that year-ago period, at about $30 billion. McAfee, Tibco Local acquisition targets include Santa Clara’s McAfee Inc., Tibco Software Inc. in Palo Alto and Cupertino-based ArcSight Inc., according to Brent Thill , an analyst at UBS AG in San Francisco. McAfee and ArcSight both make programs that protect data, which could be more valuable as cyber threats mount. Tibco’s software helps programs of all kinds share information. Goldman Sachs Group Inc. also cited San Francisco’s Salesforce.com Inc. and Palo Alto-based VMware Inc. as possibilities — though those companies aren’t the most likely targets, the firm says. Salesforce.com makes online customer- relationship software, while VMware sells so-called virtualization programs, which help computers run more than one operating system. Representatives from all the targets declined to comment or didn’t respond to messages. Deal Volume In Northern California, there were 45 deals involving venture-backed startups during the first three months of 2010, according to the National Venture Capital Association. That was the highest number in any quarter in at least five years. More than 50 companies in California have at least $1 billion in cash and equivalents, which they could use for acquisitions. They’re led by a Bay area trio: San Francisco’s Wells Fargo & Co. , with $68 billion; Cisco Systems Inc. in San Jose, with $39.6 billion; and Cupertino-based Apple Inc. , with $24.8 billion, according to Bloomberg data. “There’s a lot of cash on people’s balance sheets, so I think it’s a great time for startups,” said Kate Mitchell , managing director at Scale Venture Partners in Foster City, California. “They see that the faster, better, cheaper venture- backed companies are still growing, and they’re not spending on R&D, so they can be accretive.” The value of deals in California topped out at $378.1 billion in 2000 during the Internet bubble, when there were more than 2,200 transactions. It took five years for the number of deals to surpass that earlier peak, and the dollar amount has never come close to recapturing the dot-com era’s glory. Internet Bust While the latest recession was the worst economic slump since the Great Depression, it actually wasn’t as devastating to California deal-making as the dot-com collapse. After having easy access to venture money and initial public offerings in the late-1990s and 2000, money dried up. The M&A industry hit bottom in 2002, when just 1,505 transactions accounted for $95.3 billion. The deals crept back up over the next four years, peaking again in 2006 and early 2007. There were 665 in the first quarter of 2007, valued at $59.8 billion. That’s more than three times the number reported last quarter. Tor Braham , head of technology mergers and acquisitions for Deutsche Bank AG in San Francisco, says mergers are ready to surge again for two reasons. Pressure’s On? “Private-equity funds have raised a lot of money before the financial crisis and there’s pressure on them to spend it before those commitments expire,” he said. Also: “Sellers want to get their deals done this year, before the expected increase in capital gains tax rate.” Private-equity firms raised $538 billion in 2006 and $587 billion in 2007, just before the recession, according to the Private Equity Council in Washington. Capital-gains taxes, meanwhile, could rise above 20 percent for people earning more than $250,000 under budget proposals before Congress. In the first quarter, Deutsche Bank advised Techwell Inc. in its $370 million takeover by Intersil Corp. The bank also worked with Nimsoft Inc. in its $350 million acquisition by CA Inc., and Francisco Partners on its sale of Numonyx BV to Micron Technology Inc. for about $1.3 billion. Even as mergers pick up, it may take until next year to get back to 2007 levels, Braham says. “Mergers-and-acquisition activity in the technology industry was very quiet in the first quarter,” he said. Matt Murphy , a partner at Kleiner Perkins Caufield & Byers in Menlo Park, is more bullish. The number of acquisitions this year will be close to the 2007 level, he says. “It feels like there is pent-up demand.” Mobile technology is one area where the big companies want to bulk up, leading to more acquisitions, Murphy says. “M&A is definitely picking up,” he said. “This is going to be a big year.” To contact the reporters on this story: Ryan Flinn in San Francisco at rflinn@bloomberg.net ; Serena Saitto in New York at ssaitto@bloomberg.net ; Tim Mullaney in New York at tmullaney1@bloomberg.net

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Obama to `Spread the Wealth Around’ as Health-Care Bill Imposes New Taxes

March 22, 2010

By Ryan J. Donmoyer March 22 (Bloomberg) — President Barack Obama said on the campaign trail in October 2008 that he wanted to “spread the wealth around.” With Obama on the verge of signing sweeping health-care overhaul legislation, he’s about to do just that. High-income investors would pay higher Medicare taxes, tax breaks for out-of-pocket medical deductions would be curtailed, and it would cost insurance companies more to pay executives millions of dollars. Those levies will help fund expansion of Medicaid services for the poor and subsidize health insurance to cover millions who don’t currently have benefits. “It’s very clear that taxes are levied on the wealthy and the benefits will spread across the entire income distribution, with a lot going to expanded Medicaid distribution and expanding health insurance,” said Roberton Williams , an economist at the Tax Policy Center , a Washington research institute backed by the Urban Institute and Brookings Institution. “One couldn’t claim he didn’t keep that promise” to “spread the wealth around.” In all, the bill would generate $409.2 billion in additional taxes by 2019, according to an analysis by the congressional Joint Committee on Taxation, a nonpartisan agency. The bill also imposes about $69 billion more in penalties for individuals and businesses who don’t meet mandates to buy insurance, according to the Congressional Budget Office , another nonpartisan agency. Higher Medicare Taxes Most of the revenue would come from higher Medicare taxes on about 1 million individuals earning more than $200,000 and about 4 million couples filing jointly who make more than $250,000. The legislation would for the first time apply Medicare taxes to investment income received by these households beginning in 2013. The 3.8 percent rate would apply to unearned income such as realized capital gains, dividends, interest, rents, and royalties. It wouldn’t apply to other income subject to income taxes, including interest from municipal bonds and retirement accounts such as 401(k) plans until funds are withdrawn. Obama’s budget proposes to allow the existing 15 percent tax rate on dividends and capital gains to rise to 20 percent in 2011 for the same high-earners. Layering a 3.8 percent Medicare tax on top of that would mean a new top rate on dividends and capital gains of 23.8 percent. The top tax rates on interest and rental income would rise to as high as about 44 percent, assuming other Obama tax increases on high-earners are enacted. The bill also increases the individual’s share of Medicare tax currently imposed on salaries starting at $200,000 for individuals and $250,000 for couples to 2.35 percent, from 1.45 percent currently. Cost to Couples The combination of the new Medicare taxes and Obama’s budget proposals, if they were in place this year, would cost a married couple with a household income of $5 million an extra $287,100 in taxes, according to analysis by the consulting firm Deloitte Tax in Washington. The Medicare taxes superseded an earlier Senate proposal to tax high-value employer-provided insurance coverage, dubbed “Cadillac plans.” That 40 percent excise tax was delayed until 2018, when it would begin to apply to benefits over $10,200 for individuals and $27,500 for couples. Those thresholds would be indexed to inflation, which grows at a slower pace than the cost of health care, meaning more employers would likely face the levy over time. Other provisions likely to affect higher-income individuals would scale back tax preferences associated with paying out-of- pocket medical expenses. Starting in 2013, Americans under 65 won’t be able to deduct medical expenses until they exceed 10 percent of income, up from 7.5 percent now; retirees would keep the lower threshold. Savings Accounts The bill in 2011 places new restrictions on what can be purchased using special savings accounts funded with pre-tax dollars including health savings accounts. Improper withdrawals from the accounts also would be hit with a new 20 percent tax. And the legislation for the first time would place a $2,500 limit on what can be contributed to employer-sponsored flexible spending accounts, another type of account funded with pre-tax dollars that can be used to pay for medicines, co-payments, and other expenses. Employers currently set their own limits, typically between $3,000 and $5,000 in the absence of a government cap. This change would cost an average worker about $625 in tax savings, according to WageWorks Inc ., a San Mateo, California, company that administers 1.5 million accounts. Tanning Salons Consumers who frequent tanning salons would pay a 10 percent excise tax, and those who buy devices such as wheelchairs would pay a 2.9 percent excise tax. Drugmakers may pass on a $3 billion annual fee. Insurers would be denied deductions for executive pay over $500,000. Under the reconciliation bill, individuals who don’t purchase insurance would be subject to a fine of $325 in 2015 and $695 in 2016. Individuals may be subject to a charge equal to as much as 2.5 percent of their income in 2016, if the total is greater than the flat payment. Employers with 50 or more workers would pay $2,000 per worker if they don’t offer health insurance. The legislation offers a small business tax credit to help pay for employer- provided premiums. To contact the reporters on this story: Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net ;

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