The burgeoning “scandal” over how the IRS chose for review 75 applicants for tax-exempt status puts on full display an unfortunate tendency in journalism—to quote people accurately without explaining the underlying context. Yes, it is as wrong for IRS employees to select groups to scrutinize based on their names as it is for police to stop and frisk young people based on the color of their skin. Still, the facts here are not so black-and-white as with racial profiling.
There is a scandal in all of this—several, actually, and some are more significant than the one that is getting all the attention. As the story unfolds, here are some important points to keep in mind:
• Missing from much coverage is the relevant recent history—the role of the Supreme Court’s 2010 Citizens United decision and how it prompted a deluge of requests from new organizations seeking tax-exempt status under tax code Section 501(c)(4) as “social welfare” organizations—despite the fact that many of these are blatantly political operations.
• Congress requires the IRS to review every application for tax-exempt status to weed out organizations that are partisan, political, or that generate private gain. Congress has imposed this requirement on the IRS, and its predecessor agencies, since 1913.
• When it comes to 501(c)(4) organizations, what the IRS is supposed to do is draw a distinction between groups that are “primarily engaged” in politics and groups that really are primarily engaged in “social welfare”—somehow “promoting the common good and social welfare of the community.” It’s kind of mushy. Brad Plumer has a good explainer about this on The Washington Post’s Wonkblog.
• The first scandal here, meanwhile, is that the social welfare tax exemption is being used by existing 501(c)(4) organizations, including some very large ones, to promote partisan political interests—the very activity Congress has explicitly prohibited for a century. The New York Times, after a weak political piece on Saturday, had a clear and useful explainer about this on Tuesday.
• Also worth pointing out: None of the organizations that the IRS scrutinized as a result of the ill-considered screening-by-name regime was denied tax exempt status.
When the greed, recklessness, and illegal behavior on Wall Street drove this country into the deepest recession since the 1930s, the largest financial institutions in the United States took every advantage of being American. They just loved their country - and the willingness of the American people to provide them with the largest bailout in world history. In 2008, Congress approved a $700 billion gift to Wall Street. Another $16 trillion in virtually zero interest loans and other financial assistance came from the Federal Reserve. America. What a great country.
But just two years later, as soon as these giant financial institutions started making record-breaking profits again, they suddenly lost their love for their native country. At a time when the nation was suffering from a huge deficit, largely created by the recession that Wall Street caused, the major financial institutions did everything they could to avoid paying American taxes by establishing shell corporations in the Cayman Islands and other tax havens.
In 2010, Bank of America set up more than 200 subsidiaries in the Cayman Islands (which has a corporate tax rate of 0.0 percent) to avoid paying U.S. taxes. It worked. Not only did Bank of America pay nothing in federal income taxes, but it received a rebate from the IRS worth $1.9 billion that year. They are not alone. In 2010, JP Morgan Chase operated 83 subsidiaries incorporated in offshore tax havens to avoid paying some $4.9 billion in U.S. taxes. That same year Goldman Sachs operated 39 subsidiaries in offshore tax havens to avoid an estimated $3.3 billion in U.S. taxes. Citigroup has paid no federal income taxes for the last four years after receiving a total of $2.5 trillion in financial assistance from the Federal Reserve during the financial crisis.
On and on it goes. Wall Street banks and large companies love America when they need corporate welfare. But when it comes to paying American taxes or American wages, they want nothing to do with this country. That has got to change …
That’s what the Corporate Tax Dodging Prevention Act (S.250) that I have introduced with Rep. Jan Schakowsky (D-Ill.) is all about …
The Federal Reserve’s three waves of Quantitative Easing since 2008 show how easy it is to create free money. Yet this has been provided only to the largest banks, not to strapped homeowners or industry. An immediate $2 trillion in “cash for trash” took the form of the Fed creating new bank-reserve credit in exchange for mortgage-backed securities valued far above market prices. QE2 provided another $800 billion in 2011-12. The banks used this injection of credit for interest rate arbitrage and exchange rate speculation on the currencies of Brazil, Australia and other high-interest-rate economies. So nearly all the Fed’s new money went abroad rather than being lent out for investment or employment at home.
U.S. Government debt was run up mainly to re-inflate prices for packaged bank mortgages, and hence real estate prices. Instead of alleviating private-sector debt by writing down mortgages in line with the homeowners’ ability to pay, the Federal Reserve and Treasury created money to support property prices – to push the banking system’s balance sheets back above negative net worth. The Fed’s QE3 program in 2012-13 created money to buy mortgage-backed securities each month, to provide banks with money to lend to new property buyers.
For the economy at large, the debts were left in place. Yet commentators focused only on government debt. In a double standard, they accused budget deficits of inflating wages and consumer prices, yet the explicit aim of quantitative easing was to support asset prices. Inflating asset prices on credit is deemed to be good for the economy, despite loading it down with debt. But public spending into the “real” economy, raising employment levels and sustaining consumer spending, is deemed bad – except when this is financed by personal borrowing from the banks. So in each case, increasing bank profits is the standard by which fiscal policy is to be judged!
[…] So despite the fact that the financial system is broken, it has gained control over public policy to sustain and even obtain tax favoritism for a dysfunctional overgrowth of bank credit. Unlike the progress of science and technology, this debt is not part of nature. It is a social construct. The financial sector has politicized it by pressing to privatize economic rent rather than collect it as the tax base. This financialization of rent-extracting opportunities does not reflect a natural or inevitable evolution of “the market.” It is a capture of market structures and fiscal policy. Bank lobbyists have campaigned to shift the economic arena to the political sphere of lawmaking and tax policy, with side battlegrounds in the mass media and universities to capture the hearts and minds of voters to believe that the quickest and most efficient way to build up wealth is by bank credit and debt leverage.
As Bloomberg News reported Wednesday, Goldman finished the year with a flurry of regulatory filings revealing that 10 top executives, including CEO and Chairman Lloyd Blankfein and President and COO Gary Cohn would be paid a total of $65 million in restricted stock award 2012—ahead of schedule—enabling them to avoid higher tax rates in 2013. Goldman spokesman Michael DuVally declined to comment. And remember the eleventh hour deal struck by Congress to avoid the fiscal cliff? Goldman will indirectly get a piece of that as well. Section 328 of the bill extends tax-exempt financing for the ‘New York Liberty Zone,’ which includes the area around Goldman’ shiny new headquarters at 200 West St. Goldman already got $1.5 billion in ‘Liberty Bonds’ to help pay for the construction of its headquarters, according to this Bloomberg News investigation, and now it can be sure developers will have every incentive to build more fancy high rises to house Goldman’s workaholics as close to the office as possible. Not that they needed such incentives. Meanwhile, Congress couldn’t find the time to approve a $60.4 billion package to help genuinely distressed coastal neighborhoods in New York and New Jersey that have been wiped out by Hurricane Sandy.
Oh, thank god. I was hoping that in all the fiscal cliff hysteria someone would be looking out for the little guy:
General Electric,Citigroup, and other giant U.S. multinational financial companies are breathing a sigh of relief after Congress extended a key tax break though 2013 following the resolution of the Congressional budget battle that was resolved late Tuesday.
Known as the “active financing exception,” the provision allows U.S. financial multinationals to avoid paying taxes on interest income earned by foreign subsidiaries unless the income is repatriated into the U.S.
General Electric and Citigroup are among the top beneficiaries of the tax deal, since they are among the more active overseas lenders among U.S. companies. The provision saved GE about $3 billion in taxes in 2011, and it saved Citigroup about $1 billion each in 2010 and 2011.
The provision by itself should allow GE, Citigroup and other companies to keep their tax rate well below the statutory rate of 35 percent, according to corporate tax consultant Robert Willens, head of Robert Willens LLC.
A Citigroup spokeswoman declined to comment on the extension of the loophole. A General Electric spokesman declined to comment.
“This is a load off the shoulders of multinational financial organizations, particularly GE, since it gives rise to a substantial reduction in these companies effective tax rates,” Willens says.
[T]his deal, and Obama’s own agenda, have been informed by the G.O.P.’s delusions, to a tragic degree. As John Cassidy explains, Obama gave up a great deal, conceding that people making $450,000 a year were off-limits for rate increases. More outrageously, cuts to the already highly regressive payroll tax are being allowed to expire, meaning that they will rise from 4.2 per cent to 6.2 per cent. Obama didn’t even fight for them. In his statement Tuesday night, Obama described the bill as ‘preventing a middle-class tax hike’ that could have hurt families and sent the country back into a recession; that is true, but it allowed another middle-class tax hike that could have the same effect. He also said that middle-class families ‘will not see their income taxes go up.’ That is false, unless one goes along with the idea—and most of Washington does—that payroll taxes, which are on income and levied by the federal government, are not federal income taxes.
Amy Davidson, The Cliff ‘s Payroll Tax Hike and Obama’s Next Fight
A Washington Post article on how most Democrats have come to support the Bush tax cuts for the bottom 98 percent of the population, after originally opposing them, told readers:
“The Democrats were also correct in warning about the effect on the government’s debt. The tax cuts did more to fuel ballooning federal deficits over the past decade than any other Bush administration action — including the wars in Afghanistan and Iraq and the creation of a prescription drug benefit for seniors, according to the Pew Fiscal Analysis Initiative. And in coming years, the Bush-era tax cuts are projected to expand the deficit by trillions more.”
Actually the deficits were not ballooning until the collapse of the housing bubble crashed the economy in 2008. The budget deficit in 2007 was 1.2 percent of GDP and the debt to GDP ratio was falling. The Congressional Budget Office projected that it would stay in this neighborhood for another decade or so even if the Bush tax cuts did not expire. The reason that the deficit became large and the debt to GDP ratio started to rise was that the collapse of the economy cost the government hundreds of billion in tax revenue annually and led to hundreds of billions of additional expenditures for unemployment benefits and other programs to counteract the impact of the downturn.
While the Bush tax cuts may have been bad policy, in fact they were affordable in the context of an economy that was near full employment. If the collapse of the housing bubble had not sank the economy, there would be little issue about the sustainability of the debt.
“One problem with liberals in the tax debate is that they don’t realize just how little Americans actually get from the government. When the government doesn’t provide you with universal health care, a decent pension, good schools, or accessible and affordable public transportation, why should you want to pay taxes? The answer, of course, is not for Americans to pay less but for government to spend more. As Thomas Geoghegan explains here, ‘people are willing to pay taxes that they spend on themselves.’”
Ezra Klein is now reporting more details on what the impending fiscal cliff deal between Obama and the Republicans is going to look like: among other things, it includes cuts in Social Security benefits, and if this Dylan Matthews post from last week is correct, tax increases that would be slightly regressive in their effects (I’m not talking here, obviously, about the tax increases that would come from undoing some of the Bush tax cuts).
So that’s the deal: We raise taxes. And what do we get in return? Lower benefits. Genius!
[…] If there’s a master text for this moment, it’s Marx’s Eighteenth Brumaire. Not the over-cited first time as tragedy, second time as farce line, but his astonishingly prescient analysis of the reactionary behaviour of the French peasantry during the Bourbon and July monarchies. Though the 1789 Revolution and Napoleon had liberated the peasants from their landlords, the next generation of peasants was left to confront the agricultural market from small private holdings that could not sustain them. They no longer had to pay their feudal dues, but now they had to pay their mortgages and taxes to a state that seemed to do little for them. What the state did provide, under Napoleon III, was imperial spectacle. That wasn’t nothing, as Marx noted, for in and through the army the peasants were ‘transformed into heroes, defending their new possessions against the outer world, glorifying their recently won nationality, plundering and revolutionising the world. The uniform was their own state dress; war was their poetry.’ This Marx called ‘the imperialism of the peasant class’.
In Marx’s analysis we see the populist underbelly of the debt crisis, indeed of the last four decades of the right-wing tax revolt, from Howard Jarvis’s Proposition 13 of 1978, which destroyed California’s finances by putting strict limits on property tax increases, to the Tea Party. Liberals often have a difficult time making sense of these movements – don’t taxes support good things? – because they don’t see how little the American state directly provides to its citizens, relative to their economic circumstances. Since the early 1970s, with a few brief exceptions, workers’ wages have stagnated. What has the state offered in response? Public transport is virtually non-existent. Even with Obama’s reforms, the state does not provide healthcare or insurance to most people. Outside wealthy communities, state schools often fail to deliver a real education. In such circumstances, is it any wonder ordinary citizens want their taxes cut? That at least is change they can believe in.
And here Democrats like Obama and his defenders, who bemoan the stranglehold of the Tea Party on American politics, have only themselves to blame. For decades, Democrats have collaborated in stripping back the American state in the vain hope that the market would work its magic. For a time it did, though mostly through debt; workers could compensate for stagnating wages with easy credit and low-interest mortgages. Now the debt’s due to be repaid, and wages – if people are lucky enough to be working – aren’t enough to cover the bills. The only thing that’s left for them is cutting taxes. And the imperialism of the peasants.
Ahead of negotiations over the so-called ‘fiscal cliff’ and what promises to be another fight over raising the debt ceiling, 63 CEOs representing the largest U.S. corporations, including several Wall Street firms, launched a campaign to supposedly ‘fix the debt.’ However, this campaign calls for additional corporate tax cuts by switching the U.S. to what’s known as a ‘territorial’ corporate tax system, along the lines of that proposed by Mitt Romney. According to a report by Institute for Policy Studies, the corporations involved could gain up to $134 billion in windfalls if Congress approves such a system, which exempts foreign earnings from the U.S. corporate income tax.
A territorial tax system actually rewards businesses that offshore jobs and investments. Corporate tax rates are already at a 40-year low of just 12.1 percent. Revenue from corporate taxes has plunged, despite a 60-year high in corporate profits.
Political watchdog and secularist groups are asking the U.S. government to investigate whether Catholic bishops and a Christian evangelical group headed by preacher Billy Graham should lose tax breaks for telling followers how to vote in this year’s election.
Sen. Chuck Schumer (D-N.Y.), who has referenced the CRS report, told the Times, “This has hues of a banana republic. [Republicans] didn’t like a report, and instead of rebutting it, they had [the Congressional Research Service] take it down.”
This is more important than may even be apparent at first blush.
For those unfamiliar with the Congressional Research Service, this is effectively Congress’ own think tank. It’s non-partisan, and it’s generally counted on to provide lawmakers with the most reliable and accurate information available.
Critical to the work CRS researchers and scholars do is the understanding that their scholarship is free of partisan influence — they provide accurate reports and leave it to policymakers to act as they see fit.
But in this case, the CRS presented Republicans with inconvenient truths.
That could soon be the law of the land in Pennsylvania, where the state legislature has passed a bill that would, as Philadelphia City Paper blogger Daniel Denvir describes it, “allow companies that hire at least 250 new workers in the state to keep 95-percent of the workers’ withheld income tax.” These workers will essentially be paying their employers for the privilege of having a job. Some have called this “corporate socialism,” but it also calls to mind an even older economic model that was once popular in Europe – except back then, the bosses were called lords. It’s a more modern innovation in the U.S., but combined with increased political pressure from employers and a crackdown on workers’ rights, it all adds up to feudalism, American-style.
The Pennsylvania bill is just the most recent example of state income taxes being turned into employer subsidies. It’s already the law of the land in one form or another in 19 states, and according to Good Jobs First, it’s taking $684 million a year out of the public coffers. The theory is that this will boost job creation. But the authors of the Good Jobs First report note, “payments often go to firms that simply move existing jobs from one state to another, or to ones that threaten to move unless they get paid to stay put.” In other words, it’s more like extortion than stimulus. With state governments facing a projected $4 trillion budget shortfall and continuing to cut social services and public sector jobs, they can hardly afford to be wasting money on companies that already have plenty and have no intention of putting it to good use. And the more governments turn over their privileges to businesses, the more the distinction between the two becomes blurred.
But if corporations have state governments over a barrel, they have their employees stuffed inside the barrel and ready to plunge down the waterfall. As I’ve noted before, some conservatives view all taxation as theft, but there’s surely no better term for what happens when employers promise their workers a certain wage or salary and then pocket some of the money for themselves. When you pay taxes to the government, you get something in return, whether it’s a school for your kids or a road to drive on or a firefighter to rescue you from a burning building. When you pay taxes to your boss, you… well, you give your boss your money. Your only reward is that you get to continue to “work the land,” so to speak. The lords didn’t consult with the peasants on which tapestries they should buy with the money they collected from them.
Mike Konczal has an excellent rundown of recent arguments about the fairness of the capital gains tax. Konczal titles his post “Is Taxing Capital Income Fair?” To me, there is a more interesting question that precedes the one being asked here, and that is: is capital income fair?
Save your money, you are told, or invest it, and it will just magically increase in value. Buy a private pension scheme for a fraction of your weekly earnings, and when you retire you can have a lavish, hedonistic lifestyle that would make Mitt Romney blush with noble envy. Better yet, save enough money to use as start-up capital, become a capitalist and one can, with sufficient nous, acquire enough dough to get the Kardashians’ telephone number. Something very nebulous and mystical about the process of abstaining from immediate consumption, and entering this money into circulation as money-capital, causes it to produce a ‘surplus value’, above and beyond what was originally invested.
Move your money from one account into another account, and watch it just increase somehow. Your money works for you! Of course, money cannot work. It’s pieces of paper or records in computers. It does nothing. Now people can work and in so doing create products and services that are very valuable, but pieces of papers and records in computers cannot. The discussion of how money in the account leads to more money in the account is almost never had. When we start having that discussion, the morality of capital gains becomes very suspect. [continue]