Tag Archives: carried interest

The Incredible Tax Bill

For once the President* found the precise word.  The recently enacted tax bill is incredible, and so is the President*.

There are some elements of the tax plan which, indeed, are genuinely incredible.  Here are a few —

 The tax plan is predicated on what amounts to economic mythology/ideology, and it is NOT grounded in empirical evidence.  Trickle Down economics is and has always been a theory in search of some evidence, and not a result of the collection and analysis of actual economic data.  The following summation is as good a point at any to discuss the reality of this manufactured ideology:

“The harsh reality is that while this story has been told for – sometimes very eloquently for 30 years, now – we can look back to President Reagan’s tax cuts in 1981. There’s never been a documented case in which it actually worked. The problem is that every time we’ve enacted tax cuts in the last 30 years that have been based on this premise, we’ve had to backpedal as a nation. We’ve had to undo them. Sometimes, as in the case of the Bush tax cuts of 2001, it’s taken a decade of pitched battle for Congress to realize in a bipartisan way that they really had just dug the hole too deep.”

The tax plan benefits approximately 83% of the nation’s income earners, and does little to help the remainder.

“By 2027, more than half of all Americans — 53 percent — would pay more in taxes under the tax bill agreed to by House and Senate Republicans, a new analysis by the Tax Policy Center finds. That year, 82.8 percent of the bill’s benefit would go to the top 1 percent, up from 62.1 under the Senate bill.”

And even in the first years of the bill’s implementation, when it’s an across-the-board tax cut, the benefits of the law would be heavily concentrated among the upper-middle and upper-class Americans, with nearly two-thirds of the benefit going to the richest fifth of Americans in 2018.”

Let’s get realistic about this point.  Nevada has a total population of 2,998,039; with a median home owner value of $191,600.  The median household income is $53,094.  The per capita income is $27,253.   We’ve covered Nevada tax filers previously, with the following result:

1,350,730 Nevadans filed income tax returns in 2015.   27.21% of the Nevada filers reported adjusted gross income between $25,000 and $50,000.  13.5% of filers reported AGI between $50,000 and $75,000. 8.15% reported AGI between $75,000 and $100,000.  Another 10.22% reported an AGI between $100,000 and $200,000.  From this point on the percentage of filers by category drops, those reporting AGI between $200,000 and $500,000 were 2.48% of the filers; those reporting AGI between $500,000 and $1 million were 0.43%, and those reporting over $1 million AGI made up 0.26%.

It doesn’t take any form of complicated arithmetic to discover that giving tax breaks to the top tier income tax filers doesn’t apply to all that many people in the state of  Nevada (or anywhere else for that matter.)  While the definition of  “middle class” seems to vary, the most commonly accepted definition by income asserts  it is  those households  earning between $46,960 and $140,900 annually.  Nevada’s median income ($53,094) fits within that range.   The majority of the benefits included in the current tax scheme do NOT accrue to the majority of Nevada’s income tax filers.

And then there’s the CBO analysis:

“According to the CBO’s calculations, individuals in every tax bracket below $75,000 will experience a year in which they record a net loss — meaning they’ll pay more in taxes, experience diminished services, or both — by 2027.  The lowest income groups will face significant overall losses, and those making between $10,000 and $20,000 a year will face the biggest losses. The CBO estimates that in 2027, taxpayers from this bracket will see an overall loss equivalent to $788.10.”

If ever there was an example of Reverse Robin Hood, this tax scheme would serve nicely.  This is a middle class tax cut only if the middle class is defined in extremely illogical ways — as if $250,000 AGI was anywhere in the “middle.”

The tax plan make corporate tax cuts permanent and individual/family tax cuts temporary.  This is a recipe for disaster in 2027 when someone is asked to pony up the difference between realistic spending and unrealistic assumptions about economic growth.

The tax plan is underpinned by the assumption corporate tax cuts will yield increased wages and increased employment.   A common Republican argument of the moment is that our recovery from the last recession was sluggish, and tax cuts would have made it better.  Another argument could as easily be made:  The recovery was not as robust as it could have been because Republicans refused to enact the kinds of stimulus spending that would have both improved our national infrastructure and boosted consumer expenditures.  Republicans screamed “deficit spending” and “national debt” to the heavens, a tune they now seem to have forgotten as they vote in favor of a $1.4 trillion deficit.

The tax scheme also ignore the obvious.  How many times in this modest little blog have we said: There is ONE and ONLY  ONE reason for any firm to hire anyone at any time — a business only hires personnel when the staffing levels are insufficient to meet the demand for goods or services with an acceptable level of customer/client satisfaction. Regular readers should be able to recite this from memory by now.

We’ve also mused about other ways corporations spend their windfalls — mergers and acquisitions, increased dividends, stock buy-backs, increased investment in financial revenue streams, etc.  It’s not like wage increases and plant expansion are the only options.  In fact, for corporations, especially those for whom  ‘shareholder value” is the driving focus, increasing wages and capital expenditures is the last likely option.  Shareholders are focused on getting a maximum return on their investments and this is not enhanced by increasing labor costs.

The tax plan is riddled with benefits for the wealthy that defy common sense.  For example: Carried interest, increasing the estate tax exemption (Fun Fact: Of the 5,460 estates slated to pay the estate tax this year only 80 of them are small businesses or farms.)  More examples?  There’s the alternative minimum tax which was enacted  to address a concern which may be resurrected by this tax bill:

“Congress enacted the AMT in 1969 amid widespread outrage that many wealthy people paid little or nothing to Washington thanks to clever use of loopholes. But because income thresholds for being subject to the tax weren’t indexed to inflation (until 2012, which didn’t make up for the decades of lost ground), many middle-class people got sucked into paying it. ”

The tax plan is only part of an overall plan to Kill The Beast.  Or, make government so small it could be drowned in a bathtub?  Those who aren’t convinced by now that the next move by this Norquistian Congress is to go after Social Security, Medicare, and Medicaid haven’t been listening to GOP leadership.   Expect the drumbeat of commentary on “entitlements” to increase by leaps and bounds — We have a Huge Deficit! (Which they created) and now We have to cut government spending.  Remember: They are called entitlements because you are entitled to the benefits you’ve been paying for with your payroll taxes all along.

Pro Tip:  This assessment of voters was made in 2006, and not all that much has changed since –

“Regular voters also are older than those who are not registered. More than four-in-ten of those ages 50 and older (42%) are regular voters, about double the proportion of 18-29 year-olds (22%). Among those between the ages of 30 and 49, more than a third (35%) reliably go to the polls ­ a fact that is consistent with previous research that found voting is a habit acquired with age.”

Now, who is most likely to be quite concerned with saving Social Security and Medicare? There’s a reason  Social Security and Medicare form the third rail of American politics.

A final point.  The Republicans have given away their cards.  When Democrats called for increased spending on health programs, Republicans pointed to the deficit. When Democrats called for increased infrastructure spending, Republicans pointed to the deficit.  Now, the deficit (all $1.4 trillion of it) is the responsibility of the Republicans.  They’ve given away the revenue.  Now the Democrats have the Tax the Corporations card in hand.  And who among the GOP wants to run on a platform of saving those cash-hoarding multi-national corporations?  Good luck with that.

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Filed under Economy, Nevada economy, Politics, Taxation

What Big Victory?

There’s a steady drum beat of pundits and politicians telling me the passage of the TaxScam is a great, wonderful, awesome, fabulous, stupendous, magnificent piece  of legislative action.   Okay, I am certainly not the brightest bulb in the great chandelier, but I’m no dim candle either, and I can tell the difference between tax reform and a tax heist giveaway, handout, bequest, benefaction, and contribution to the top income earners when I see it.  Further, I am truly tired of pounding out the fact-of-life:  Trickle Down Economics is a HOAX.

What the Congress is voting on today isn’t a tax reform bill, it is purely and simply the enaction of economic mythology and political ideology.  There is much economic theorizing asserting the efficacy of tax cuts toward encouraging economic growth, but the numbers (those pesky facts) haven’t substantiated the claim, and the recent example of Kansas offers a real time look at some very dismal prospects.

Making the tax system more rational isn’t best served by a code that includes the Corker Kickback, exceptions for private airplanes,  golf courses, and doesn’t incorporate provisions for exempting state and local taxes.   And, we’ve covered the Carried Interest issue before.   The advice from the EPI back in January 2014 still holds:

“These investment advisors and hedge fund managers can take advantage of this tax structure because they are often compensated through a scheme that, in part, pays them according to the returns on the fund. The industry standard for hedge fund managers is “two and twenty,” which is shorthand for an “overhead” fee of 2% of capital under management plus carried interest (often called a “carry”) of 20% of the returns on the fund. Thus a $100 million fund earning 20% would pay its fund manager $2 million for overhead and $4 million in carry. The carry portion of their compensation is treated under the tax code as capital gains for the fund manager and is taxable at the much lower capital gains tax rate of 15%.” [EPI] (emphasis added)

However, rest assured Nevada’s Republican members of the 15th Congress will vote in favor of retaining the carried interest loophole, and other egregious portions of the Trump Family Property and Legacy Protection Act.  Paris Hilton’s wealth will be preserved.  And for this we may now expect an onslaught on “spending” as in Republican attempts to dismantle Social Security, Medicare, and Medicaid.

As the Republicans hiss out “entitlements” as if the word was a synonym for undeserved welfare, most Americans are quite aware they’ve been paying into Social Security — yes,  to restate the obvious, people are entitled to receive their Social Security benefits — they’ve been paying for them all along.

The point will come when the GOP will cry out, “Oh, we have to cut government spending, because Social Security is going broke! Medicare is out of control.  Medicaid will bankrupt the nation — look at the national debt!”   Really — the way to fix these issues is to re-visit and revise the mess made in the 15th Congress, repeal the TaxScam, and do some revisions targeted at helping middle income Americans.

Some suggestions:

Enact tax cuts 80+% of the benefits go to working middle and lower income Americans who will actually go out and spend the benefits on washing machines, cars, groceries, rent or home mortgages, and who support our economy.

Close the carried interest loophole.  It was never a good idea and it certainly isn’t now.

Enact tax reforms that address the modern economy — not the horse and buggy days.  Support solar, wind, and alternative energy sources and research.  One of the fastest growing jobs in the US today is “wind turbine technician.”  Continuing to subsidize fossil fuels is tantamount to protecting the buggy whip factory owners.   Just to hammer the point a bit further:  “Increases in Job Opportunities:”  Solar Photovoltaic installers  — 105% increase; Wind Turbine Technicians — 98%; Home health aides — 47%; Personal Care aides — 37%; Physician Assistants — 37%; Nurse Practitioners — 36%; and interestingly enough Bicycle Repair Specialists — 29%.

Forget the territorial tax regime — all that does is incentivize corporations to move their operations overseas.

This would be a start.  There’s nothing simple about a tax code — there never was and there never will be.  Piling up stacks of paper to illustrate the density of the code isn’t instructive, all it demonstrates is that we have an extremely complex economy.  We use taxation as a lever to encourage or discourage certain decisions.   In this instance we are encouraging the behavior of hedge fund managers (notoriously short term thinkers) and multi-national corporations.  This didn’t work so well in 2007-2008 and it surpasses all reason why anyone would think a repetition would have any different result.

But we can count on Senator Dean Heller and Representative Mark Amodei to march right in line with the GOP leadership…straight into the next bubble, the next crisis, and the next recession — only this time the resources of the federal government will be depleted in the face of adversity.  In slightly less modest terms, it’s a recipe for more debt which will eventually lead to the necessity of incurring even more debt.

And they’re still coming after Social Security and Medicare.  Be prepared.

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Filed under Economy, Politics, Taxation

More Than You Probably Want To Know About Carried Interest

banker 3One of the more controversial parts of the U.S. tax code concerns “carried interest.”

Definition –  The standard definition can be found in Investopedia, and goes as follows:

“A share of any profits that the general partners of private equity and hedge funds receive as compensation, despite not contributing any initial funds. This method of compensation seeks to motivate the general partner (fund manager) to work toward improving the fund’s performance.”

The statement serves as both a definition and a rationale for the compensation format for hedge fund managers.   So, first we need to know how hedge fund managers are paid.

Compensation – The most common formula is called “2 and 20.”  This combines the ‘management’ fee and the ‘performance’ fee.   The fund managed takes 2% of the annual assets and 20% of the gains over a specified base, which in financial-speak is often designated a “hurdle rate.”   The 2% is relatively easy to understand,  the management gets 2% of the assets under management.  The hurdle rate is a bit trickier to explain.

Think of the hurdle rate as a benchmark.  Forbes (Sham Gad) provides a simple hypothetical example of hedge fund operation (with slightly different arithmetic)  and includes a brief mention of how these benchmarks are applied.  Let’s try to make it even simpler (at the risk of obfuscating some of the more esoteric parts of the system.)

Desert Beacon forms an an investment partnership, DB is the fund manager and general partner.  The other members are limited partners.  The limited partners contribute the money, and DB as the general partner, manages it.   The Forbes example incorporates a very common formula — Desert Beacon drafts an operating agreement to which to limited partners sign on.  The agreement calls for DB to get 25% of the profits 0n the investments over 5% per year.   Once all the agreements are signed, and the money is transferred into the DB account, DB calls the broker and buys “stuff.”  The 5% is the “hurdle rate.”  Why?

Because that first 5% belongs to the investors (limited partners.)  Anything above the 5% “hurdle,” gets split — DB gets 25% and the limited partners (investors) get their split of the remaining 75%. (1)

Thus, it’s believed that the more profits generated by the investments made by DB’s fund, the more diligent DB will be about making wise investment decisions.  After all, the more profits over the hurdle rate, the bigger that 25% piece of the pie is going to be — because the pie is bigger.  For an explication of how the arithmetic works out, refer back to the Forbes Magazine example.

Taxation – The key here is to remember that hedge funds are partnerships.  (2) The following is one of the clearest explanations I’ve found so far of the basis structure of hedge funds:

“Hedge funds are typically structured as limited partnerships (LPs) or limited liability companies (LLCs). Both LPs and LLCs are taxed as partnerships by default, which means that they are pass-through vehicles for tax purposes. This means that there is typically no tax at the entity, or fund, level and investors will be distributed their proportionate share of the fund’s gains and losses for tax purposes. Investors will report these gains and losses on their individual tax returns and will pay tax on items of income and gain according to the character of the income or gain reported on a K-1 form provided by the fund.”  [ILG]

Catch that?  The Hedge Fund itself is a “pass through” vehicle.   The profits are divided up according to whatever formula was agreed to in the operating agreement, and investors report this income on their individual returns.

And here is where the fun begins.

Part of the problem is that we’ve created an artificial categorization of what constitutes labor.  We all know what income is … it’s earning from work, labor.  Work/labor is landscaping a yard, building automobiles, supervising children in a day care center, providing legal advice and representation, selling insurance policies, and providing consulting services running the gamut from “life coaches” (whatever that might be) to giving financial advice.

Let’s go back to the operating agreement, and assume it’s the common “2 and 20” format, and then notice the problem with the current system as described by the Economic Policy Institute, because “Investment Advisers” are different: (3)

“These investment advisors and hedge fund managers can take advantage of this tax structure because they are often compensated through a scheme that, in part, pays them according to the returns on the fund. The industry standard for hedge fund managers is “two and twenty,” which is shorthand for an “overhead” fee of 2% of capital under management plus carried interest (often called a “carry”) of 20% of the returns on the fund. Thus a $100 million fund earning 20% would pay its fund manager $2 million for overhead and $4 million in carry. The carry portion of their compensation is treated under the tax code as capital gains for the fund manager and is taxable at the much lower capital gains tax rate of 15%.” [EPI] (emphasis added)

It’s the $4 million we’re looking at.  Instead of being taxed as income earned from ‘management’ (the 2%), the 20% is taxed at a lower capital gains  rate, 15%.     If DB were the administrator of a pension fund, or a trust fund, or an endowment fund then the same tax rate on my income as any other financial manager would apply.  However, because I am a Hedge Fund manager, doing essentially the same kind of labor/work as the endowment fund manager,  I get that bountiful 15% rate.

The British have about had their fill of this kind of practice, and as of December 6, 2013 Reuters reported that the current government is seeking ways to close hedge fund loopholes.  [Financial Times, May 26, 2013]


Recall that in the original definition, that  tax break for the hedge fund manager was supposed to be an incentive for good investment management.  If this is the case, then why is an endowment manager at a major university, or a pension fund manager for a labor union or corporation, or an investment adviser for a small business not allowed the same “incentive?” Don’t we expect ALL of them to provide the best management possible for endowment, pension, and trust funds?

If the answer to this is, ‘because the hedge fund manager takes on more risk,” then we could properly ask — isn’t the risk factored into the hurdle rate?

Unfortunately, the appearance the average person is left holding is that the hedge fund managers have rigged the game.  Perhaps this is one of the reasons t he message from Senator Elizabeth Warren (D-MA) resonates with so many Americans?

“People feel like the system is rigged against them. And here’s the painful part: they’re right. The system is rigged. Look around. Oil companies guzzle down billions in subsidies. Billionaires pay lower tax rates than their secretaries. Wall Street CEOs—the same ones who wrecked our economy and destroyed millions of jobs—still strut around Congress, no shame, demanding favors, and acting like we should thank them.”  [HuffPo]


(1) For those who wish to get deeply into the weeds, here are a few articles concerning how hurdle rates are established:   Aswath Damodaran, “The Investment Principle, Estimating Hurdle Rates,” NYU, Edu. (pdf)  PWC, “Approaches to Calculating Hurdle Rates,” December 11, 2011. (pdf)  Meier and Tarhan, “Corporate Investment Decision Practices And the Hurdle Rate Premium Puzzle ,” Loyola University, (pdf)

(2) The Investment Law Group is the best place to start for further information on the taxation of hedge funds. This is what a  K-1 Form looks like. (pdf)

(3) Googling “hedge fund loophole,” will yield a plethora of articles and posts, as in 544,000 in 40 seconds.   Start with “Tax Breaks for Billionaires,” from the Economic Policy Institute, July 24, 2007.   See also: Nicholas Kristof, “Taxes and Billionaires,”  New York Times, July 6, 2011.   Henry Blodget, “The Hedge Fund Tax Loophole Is Outrageous,” Business Insider, January 21, 2012.  Center for American Progress, “Congress Should Close the Hedge Fund Loophole, December 18, 2012.

Better still the hedge fund managers have discovered all manner of other tricks.  ZeroHedge caught how “Goldman Sachs Quickly Found the Volker Rule Loopholes,” and Forbes noticed the same thing.

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Filed under Economy

Bait and Switch Political Economy

Free CheeseSo, why are we really stuck in the Silli-quester?  The one option that was supposed to be so distinctly unpleasant and irrational that both major political parties would eschew any connection to it and thereby be inclined to adopt compromise measures?  Bait and Switch.

Why are the punditocracy chattering on about how both sides should exercise some political rationality (if that isn’t an oxymoron) and move to the discussion about serious economic needs, such as job creation (without all the inanity of trickle down hoax-isms) and debt stabilization?  Bait and Switch. Why Bait and Switch?

Beneath all the chatter are some very different world views, political ideologies, and priorities.  In an ideal world there would be less reason to discuss who is to blame for the economic mess in which we find ourselves, and more reason to sit down and talk about how we (1) encourage economic growth and (2) stabilize our indebtedness.  This obviously isn’t a perfect world.

It’s going to take some good old fashioned rational discussion in a FACT based universe to get out of this muddle.  The facts are unpleasant on both sides of the polarized political flanks, but they do need to be the main topics of conversation before we can get out of the Bait and Switch model.

The Bait

This is all about stabilizing the national debt.  Yes, and no.  Those who are truly of sound mind and reasonable thinking recognize two things: (a) We have a situation in which health care costs are driving up federal expenditures just as they are taking a larger chuck out of family finances; and (b) our tax laws need some reform — real reform — not merely another excuse to reduce taxes on the economic elite who are more inclined to indulge in speculation than in the less profitable but more productive investment in industrial and commercial development.   The third fact of life is that we engaged in not one, but two wars, an activity designed to suck the sustenance out of any consumer based economy.

The Switch

This is all about the national debt.  Is it? Or, is it cover for indulging in the enaction of Austerity economics which calls for the reduction of government spending without increasing government revenue?  Consider the vehement opposition of the Tea Party caucus of the House GOP to any suggestion that we need to enhance revenue to reduce and stabilize the national indebtedness.  If this group were truly speaking to the unsustainability of our current debt trajectory then revenue increases would be a logical portion of the debate.  However, it’s not.  The debt level becomes the bait, and the unwillingness to even consider revenue increases signals that their real object is what it has always been — an adherence to the mythology that government (even a government trying to serve the needs of 330 million people) is Too Big and needs to be restricted.  As usual, Robert Reich has summarized the problem succinctly:

“Tea Party Republicans are crowing about the “sequestration” cuts beginning today (Friday). “This will be the first significant tea party victory in that we got what we set out to do in changing Washington,” says Rep. Tim Huelskamp (Kan.), a Tea Partier who was first elected in 2010.

Sequestration is only the start. What they set out to do was not simply change Washington but eviscerate the U.S. government — “drown it in the bathtub,” in the words of their guru Grover Norquist – slashing Social Security and Medicare, ending worker protections we’ve had since the 1930s, eroding civil rights and voting rights, terminating programs that have helped the poor for generations, and making it impossible for the government to invest in our future.”

These are the people who took President Ronald Reagan’s message to heart, “The government is the problem,” and then took the philosophy further than that former President ever considered.  The radical right wing of the Republican Party has created an environment in which even the Speaker of the House can’t get legislation to the floor, or must break his own “Hastert Rule” to get anything passed.  There may be a core of rational Republican members of Congress who might give thought to compromising and indulge in some serious discussions about government spending, taxation, and infrastructure investment — BUT each one of them sits beneath the Damocletian Sword of a primary challenge from some candidate even more conservative than themselves.

Real Problems Should Have Realistic Solutions

While it would be nice to assume that social safety net programs such as Medicare and Medicaid are sustainable in the present context, that really isn’t a reasonable conclusion.  Recognition of the problems associated with maintaining an acceptable level of service to Medicare beneficiaries is essential.

The solution presented by Rep. Paul Ryan to privatize the Medicare system and transform it into a coupon-care or voucher program doesn’t solve the problems any more than calling for the program to continue without further improvements.   The real problem is the rising cost of health care delivery, and until we can address how to reduce the costs increases the programs for health care assistance will be financially unsustainable.

Those who have not yet read Steven Brill’s excellent piece in Time magazine should do so immediately.   Here’s an essential part of the reporting:

“When you look behind the bills that Sean Recchi and other patients receive, you see nothing rational — no rhyme or reason — about the costs they faced in a marketplace they enter through no choice of their own. The only constant is the sticker shock for the patients who are asked to pay.  Yet those who work in the health care industry and those who argue over health care policy seem inured to the shock. When we debate health care policy, we seem to jump right to the issue of who should pay the bills, blowing past what should be the first question: Why exactly are the bills so high?”

Nailed It!  And Brill goes on to explain or describe the basic issues involved, such as the inflated prices for common products, the perverse economics of medical technology, bills to match the catastrophic nature of the illness or injury, and the handcuffs on Medicare.

Tea Party Caucus radicals would have us believe there is no middle ground between transforming the Medicare program into a privatized voucher system and turning Medicaid into a parsimoniously funded block grant program and Socialized Medicine.  This is not the case.  It’s certainly not the case when we examine what happens in the health care market, when “insurance isn’t insurance” and chargemasters determine “opening bids” for costs.  Health care cost containment is the essential issue — we should be asking, as Brill suggests, not who should pay, but how much should be paid — by anyone, public or personal.

The Affordable Care Act has some features which will reduce the costs of medical services and treatment, but it is not the answer to the dilemma of how to fix a “broken market.”  Ideological squabbling over Repeal or Not To Repeal is a waste of time, and of time which would be better spent trying to solve the Gordian Knot of health care cost containment.

There are two things, often suggested, and in the past often done, which would alleviate some of the problems associated with Medicare and Medicaid funding. First, we could allow the Department of Health and Human Services to negotiate prices for prescription medication. Secondly, we could get serious about regulating and rationalizing the pricing structures of hospital and medical services.

The inclusion of Social Security “reform” in the Silli-quester debate is informative,  since the program is self funding and doesn’t add to the national level of indebtedness, the only reason for incorporating it into the “entitlement” discussion is to cut it — as radical right wing adversaries have wanted to do since it was enacted during the Depression.  We could, for example increase the liability cap above the current $113,700 in income for the Social Security program. There’s a boatload of difference in the financial resources of a family with an annual income of $1,113,700 and a family with annual resources of $113,700.  Surely those in the upper 0.1% of the income pyramid could afford to pay in a bit more?

The use of the Chained CPI isn’t a popular suggestion, but the chains may not be shackles.

“While no one knows what a full elderly CPI will show, we do know that switching the COLA to a chained CPI will reduce lifetime Social Security benefits by an average of about 3 percent. This doesn’t raise a huge amount of money, but it would be a big hit to seniors, 70 percent of whom rely on Social Security for more than half of their income.” [CEPR]

The problem, of course, is that elderly people don’t purchase items that show up in the inflation calculations (cars, electronics, etc.) as often as younger people; but, they do spend on housing and health care. (See health care cost containment above).   There is nothing essentially wrong with discussing the Chained CPI if it can be done reasonably.  For example, could the index be adjusted to account for the variance in inflation associated with the consumption patterns of elderly individuals?  Or, if we can achieve some kind of stable economic growth would the reductions in benefits associated with the Chained CPI be mitigated?  Bellowing, “Social Security is a Ponzi Scheme,” or “There won’t be anything left for Junior,” isn’t the way to start a discussion about these details any more than the absolute “Don’t Touch Social Security”  in any way, shape or form is on the other hand.   Note that both the Medicare and the Social Security inflation adjustment issues are related to the bug-bear of health care cost containment?

It’s not just our population that’s aging. So are our bridges, highways, parks, and other public facilities.  We have aging public building that could lower their utility costs with upgrading, and we have aging public structures which should be replaced.   And, then there are schools:

About one-fourth (28 percent) of all public schools were built before 1950, and 45 percent of all public schools were built between 1950 and 1969 (table 1).Seventeen percent of public schools were built between 1970 and 1984, and 10 percent were built after 1985. The increase in the construction of schools between 1950 and 1969 corresponds to the years during which the Baby Boom generation was going to school. [NCES]

Not to put too fine a point on it, but after 60 years most school buildings need so much renovation that they aren’t functional and most are abandoned.

Since we probably can’t build everything at once, how about focusing on roads and bridges?  Various suggestions have been made concerning upgrading American infrastructure, and if we want to have a serious discussion about this topic we might begin with the obvious — crumbling roads and bridges.  Why not allow the U.S. Treasury to issue some long term bonds (30 year) expressly for the purpose of addressing transportation infrastructure needs?  This could be a win-win proposition.  The bondholders have a safe haven investment which is interest earning, the public gets better roads and bridges, and if we must have a “pay for” element we could consider increasing fees or use taxes by a minimal amount, again expressly for the purpose of paying off the bondholders.

These kinds of suggestions deserve more attention than they are getting, but they will not get serious consideration until ideologues stop screeching “the government can’t create jobs,” or “we can’t increase taxes any taxes any time,” as the bridge slowly crumbles beneath us.   The bond issuance idea deserves a serious moment — the public assets values increase, the bonds earn interest for the investors, and everyone’s safer.   Little wonder then that the AFL-CIO and the U.S. Chamber of Commerce are both supportive of infrastructure investment.   Short term, the construction sector of the economy gets a boost; long term the investors and the public benefit from the proposal.

Taxing Issues

We do need tax reform.  What we don’t need is one more scheme to shift the burden of financing government from the economic elites to working men and women in America.  Yes, that would be the old Flat Tax canard.   In case Speaker of the House Rep. John Boehner would like to find the President’s plan for revenue and budget stability it’s located in plain sight right here.  The proposal includes one tax reform that should be given some attention.

The President proposes that itemized deductions be limited to 28% for wealthy individuals.   What should be on the table in addition to this suggestion is the variance in the way we tax earnings.  As former FDIC Chr. Sheila Bair has noted, “Why does a hedge fund manager pay lower tax rates than a shoe store manager?”  Good question. Additionally, no one has yet put forth a credible argument (complete with some hard data) to sustain the idea that the investors are really “job creators,” but factory and office  managers definitely are those making staffing and hiring decisions.   We might also give some time to the issue of allowing corporations to indefinitely defer taxes on profits made overseas.

Republicans in the 2012 campaign season often spoke of closing loopholes, however vaguely those were described.  Let’s get specific.  Why are there loopholes for corporate jets? For yachts?  For highly profitable oil corporations?   Both sides of the aisle might want to talk about the possibility that if a sufficient number of these loopholes were closed then perhaps the overall rates could be reduced?

In short, if we are truly looking toward stabilizing our national debt, as opposed to merely trying to drown our government in a bath tub,  there are rational ways to do it — but in order to accomplish that we need to have some rational discussions about the route we choose.  Bait and Switch is never a good starting point, but abatement in the hyperbole and switching to a more reasonable level of civic discourse would be an excellent place to begin.

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Filed under Congress, Economy, Politics, Taxation

Nevada Roundup and other matters with bonus charts

It’s been too long since the last roundup of Nevada blogs and commentary.  There are some good items and pearls of wisdom to be had from the following posts.  See Nevada Progressive for a description of the New And Improved Bi-Partisan Senator Dean Heller — lest we believe that the Senator is “evolving.”  There’s also a cogent bit of election analysis available from The GleanerSteve Sebelius recounts the Heartbreakers.   Blue Lyon adds a pertinent note on the Senatorial race.  Buzzlzarwnd  adds some more information on the 2012 results.

Speaking of things Congressional, The Nevada View offers an explanation of the components of the national debt in a short video.  More on the Fiscal Cliff (or gentle slope) from Vegas Jessie.  This would be a good time to review a previous post from On My Blotter about the arguments for extending tax cuts for middle class Americans.   There’s a highly recommended read on using the GDP as an indicator of economic health from the Nevada Rural Democratic Caucus blog.   And, there’s a timely reminder that the Congressional Republicans are holding tax cuts from middle income families hostage in order to secure tax cut extensions for millionaires and billionaires from The Gavel.

Click on the chart to go to the President’s address on extending middle class tax cuts.  (Video)

The CBPP provides another perspective on this subject, illustrated by this chart indicating that tax cuts for the very wealthiest among us are NOT a way to economic recovery.

Oh, and by the way — the tax issue Wall Street doesn’t want to talk about (carried interest) is coming to the fore, read more at Business Insider.

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Filed under 2012 election, Congress, Economy, Heller, Nevada politics, presidential race, Taxation

A Very Un-Average American Family: Romney and the Plutocrats

Let’s look at this graph again.   The average family income of those in the top 0.01% is $23,846,950.   The average family income for families in the top 0.10% is $2,802,020.  An average family in the top 1.0% has $1,019,089 in income.   The “recovery” has been very good to the people in these economically elite categories:  During the 2009-2010 recovery period 93% of the gains were captured by the top 1%.  That would be the three columns on the left hand side of the graph.

Of these gains 37% went to the top 0.01% — that would be the 15,000 Americans with incomes of $23.8 million annually. There are 314,583,369 people in this country.

So why would this happen?

(1) The individuals in the top 0.01% have the resources to hire battalions of accountants, and the wherewithal to utilize offshore accounts, tax havens, and to keep production and profits off shore to minimize tax obligations.  Sound familiar?  Could this be part of the reason we’ve not seen the Romney tax returns for the past 12 years?  The partial information released to date indicates the use of off shore accounts in Bermuda and the Cayman Islands, the investment in offshore industries, “gifting” of stocks in offshore companies for tax reduction purposes, and the use of “blockers” to manipulate tax liabilities.

(2) The individuals in the top 0.01% avail themselves of “carried interest” accounting treatment to reduce the tax liability on their income by calling it “capital gains.”   Former Reagan Administration adviser Bruce Bartlett remarks:

“A key reason for Mr. Romney’s low tax rate is that a very substantial amount of his income comes from capital gains – 51 percent in 2011 and 58 percent in 2010. Capital gains, no matter how large, are taxed at a maximum rate of 15 percent, whereas wage income can be taxed as much as 35 percent by the income tax plus taxes for Medicare and Social Security. The latter two are not assessed on capital gains.”

The way the loophole works relates to the peculiar method in which money managers are compensated. Typically, they receive a fee of 2 percent of the gross assets under management, much of which comes from employee pension funds, plus 20 percent of any increase in value.

Thus, on $1 billion of assets the managers would automatically get $20 million that would be taxed as ordinary income. If the assets increased 10 percent to $1.1 billion, they would get another $20 million. For tax purposes, this additional $20 million would be treated as a capital gain and taxed at 15 percent.  [NYT]

Little wonder the hedge fund managers were often among the top 0.01%.   Equally, little wonder that money management corporations like Bain Capital were among the Winners.

(3) The financialist plutocrats defend their loopholes, like the carried interest loophole and the reduced rates on capital gains and dividends, quite well in the halls of Congress.   Note that the Romney Campaign is NOT calling for the restriction of these loopholes and preferential treatment.  In fact, they are calling for the maintenance of low capital gains and dividend rates, and the elimination of the estate tax.

What would a potential Romney Administration do to reduce loopholes?  There’s always the home mortgage interest deduction?  The educational expense deduction? Deductions for medical expenses?  If it were suggested these be eliminated there would be significant opposition.  So, they aren’t being suggested — however, they are the only ones “large” enough to make a dent in the federal debt.

In short, what candidate Romney is suggesting is a government of the plutocrats, by the plutocrats, and for the plutocrats.  It is a financialist’s wet dream. An average American family’s nightmare.  It is, indeed, the Bush policy on steroids: Deregulation, Globalization, and Trickle Down Supply Side Voodoo Economics.

What happened the last time we tried de-regulation of the financial markets? What happened when we tried Trickle Down economics from 1980 to 2007?

The financialist plutocrats did well — the rest of us not so much.  The 2012 election clearly delineates  the interests of the top 0.01% and the other 99.99% — Governor Romney is doing a good job of representing the interests of his cohorts in the 0.01%.  Perhaps we’d like a President for the remaining 99.99% of the U.S.

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Filed under 2012 election, Economy, Republicans, Romney

My Country T’is All About Me: The Romney Tax Plan – Who In Nevada Would Benefit?

Background Information: Of the 1,263,928 individuals who filed tax returns for 2010 from Nevada 21,187 reported adjusted gross incomes of more than $200,000 but less than $500,000.  3,778 reported income between $500,000 and $1,000,000 and only 2,372 reported incomes above $1,000,000.  [SOI tax]  A home-made pie chart of the returns yields this:

For those who prefer numbers:  2.07% Nevadans reported little or no income; 38.84% reported adjusted gross incomes under $25,000; 27.39% reported AGI between $25,000 and $50,000.   13.61% reported AGI between $50,000 and $75,000 for 2010.   7.64% reported AGI between $75,000 and $100,000.  8.28% reported adjusted gross incomes between $100,000 and $200,000.   Now the percentages start to drop dramatically.

1.68% of Nevadans reported income ranging from $200,000 to $500,000; and, 0.30% had AGI’s in the $500,000 to $1,000,000 range.  Only 0.19% reported income above $1,000,000 in 2010.  [SOI IRS] 2.17% of total filers from Nevada were in the over $200,000 AGI categories.

The historical tables from the Internal Revenue Service don’t break out the numbers from the top 0.19% into millionaires and billionaires.    Please notice that we aren’t discussing the top 1% at this point, but the top 0.19% because those in the top 1% aren’t necessarily the same people who are enjoying the perks and benefits of tax breaks and havens of the ultra-rich.

“The top 1 percent includes people who made many hundreds of millions of dollars and perhaps some with incomes of more than $1 billion, official government data will show when it is released in two years.

Economically, those just entering the top 1 percent have nothing in common with those in the top tenth of the top 1 percent. Someone at the entry point for the top 1 percent would need 29 years to make $10 million, and more than 2,900 years to make $1 billion.

The point is that while all those in the top 1 percent are certainly well off, the vast majority still go to work every day.”  [Reuters 2011]

Thus in Nevada only 0.19% of all income earners in 2010 had income which put them in the “over $1,000,000” category, but it is entirely possible that many of these filers rely on income from medical practices, legal offices, or other remunerative employment which still doesn’t mean they have the luxury of sitting back and “clipping coupons.”   Nationwide, as of 2008 a person in the top 0.10% ($5.2 million and $7.5 million) could simply invest in the bond market and maintain an income categorized as within the top 1%. [Reuters] Between capital gains and carried interest these people are doing very well.

Capital Gains

“Income and wealth disparities  become even more  absurd  if we look at the top 0.1% of the nation’s earners– rather than the more common 1%. The top 0.1%–  about 315,000 individuals out of 315 million–  are making about half of all capital gains on the sale of shares or property after 1 year; and these capital gains make up 60% of the income made by the Forbes 400.” [Forbes]

And are these people the Job Creators? Probably not. An investment manager explains:

The higher we go up into the top 0.5% the more likely it is that their wealth is in some way tied to the investment industry and borrowed money than from personally selling goods or services or labor as do most in the bottom 99.5%. They are much more likely to have built their net worth from stock options and capital gains in stocks and real estate and private business sales, not from income which is taxed at a much higher rate. These opportunities are largely unavailable to the bottom 99.5%.

Some will fall into the private equity category within the aforementioned “investment industry.”

Carried Away With Interest

Carried interest is defined asA share of any profits that the general partners of private equity and hedge funds receive as compensation, despite not contributing any initial funds. This method of compensation seeks to motivate the general partner (fund manager) to work toward improving the fund’s performance.”

We can combine the capital gains and the carried interest in this post because carried interest is classified as a capital gain and is taxed at the 15% rate.  A pertinent question might be raised here — if the whole purpose of the lower tax rate for carried interest is to encourage the hedge fund or private equity manager to “improve the fund’s performance,” then WHY do they need THAT much encouragement to do what they were supposed to do in the first place — increase the ‘value’ of the fund?
This situation is well past the “time and a half” for most worker’s extra efforts, and well beyond the Christmas Bonus in the secretarial pool.  It’s super-charged merit pay on steroids.  It’ s also very popular in some quarters.
So, what is the Romney campaign promising?  An across the board 20% cut in marginal rates, maintaining the current rates on interest, dividends and capital gains (15%), eliminating taxes on capital gains for those earning less than $200,000, and repealing the estate tax and the alternative minimum tax. [Romney]   How he intends to make up the revenue differences and not run up the deficit remains a mystery. [TPM]
Who benefits?  The Tax Policy Center runs the numbers on the 20% reductions:
Who benefits from low capital gains taxes?   The chart is going to look familiar:

How about the repeal of the estate tax?  Remember, the first $5.2 million in the estate is exempt.   This would save the top 0.1% a tidy $15 billion.  [CSM]  The latest figures from 2010 indicate that only 0.5% of estates in Nevada owed any federal estate tax. [CTJ pdf]

Cui Bono?

Beyond being a pig in a poke in which how all the generous tax cuts might be paid for remains something confined to former Governor Romney’s quiet rooms,  the Romney tax plan is of primary benefit to those 0.19% of Nevadans in the upper income brackets — and not really all that generous to the working members of that classification.   It is especially generous to those in the investment industry who are already doing quite well.  And, it would only benefit about 0.5% of the estates in Nevada.

The plan is an excellent illustration of the bespoke attitude of the top 1% of the top 1% wherein resides the “I got mine, now you try to get yours…” condescension toward the American middle class.

Read more:  Robert Lenzner, “The Top 0.1%,” Forbes, November, 2011.   G. William Domhoff,UCSC,  Who Rules America?, January 2012. G. William Domhoff, “Wealth, Income, and Power,” WRA, March 2012.   Katz & Louis, “…Carried Interest,” Bloomberg News, July 2012. Saez,”US top marginal rate,”  UC Berkley, tables (pdf)  Tax Policy Center, “20 Percent Reductions,” November, 2011.   Shalin, “Income Distribution in Nevada,” UNLV, 2011 (pdf)   Tax Policy Briefing Book, Tax Policy Center, “What is the effect of lower tax rates..,” June, 2011.   R. Williams, “Romney’s Tax Plan Really Does Favor The Rich,” Christian Science Monitor, January 2012.   Policy Basics, The Estate Tax, CBPP, June 2010.    Center for Tax Justice, 2011 Estate Tax by State, November 2011.

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Filed under Economy, Nevada economy, Romney, Taxation

Carried Away With Interest: The Romney Returns

Message to Willard Mitt Romney, who if memory serves has been running for the presidency for at least the last six years: We don’t get it both ways.   Romney releasing tax returns for 2010 and 2011, and then piously announcing that when the taxes are added to the income tax paid he’s “donated” 40%+ of his income — doesn’t cut it.  [HuffPo] I don’t know how Mr. Romney’s battalion of accountants calculates his returns but my accountant subtracts my charitable donations from my tax liability.  It’s called a deduction.  Most kitchen-table tax preparers are familiar with the concept.  Last time I checked charitable contributions are fully deductible if the gift amount does not exceed 50% of a filer’s adjusted gross income.   So, if the charitable donations are deducted from Mr. Romney’s liability he doesn’t get to “add them back in” when it is politically convenient to do so.

Out. Of. Touch.

My itemized returns don’t run to 547 pages either.  But then, I didn’t get $7 million from Bain Capital in carried interest, i.e. profits earned by managing someone else’s money — the investor gets the risk, Mr. Romney gets a nice chunk of the money. [NYTimes]

The next question that comes to mind is:  Since when are taxes considered ‘donations?’  I am not ‘donating’ anything to the government.  I am required to pay taxes, and my local taxes pay for the county roads on which I drive, the television district which translates signals, the library from which I borrow books, the school district in which our kids are educated…  I pay state taxes every time I make a purchase, and I calculate my federal tax liability every March.  The payments are not voluntary contributions to the maintenance of roads, schools, and water districts.  They are my share of the cost for keeping up everything from the U.S. military to the pavement on my street.

Out. Of. Sight. Out. Of. Mind.  Surely, in the last half dozen years of campaigning Mr. Romney’s advisers have inveighed against their candidate sounding like Mr. One Percent — it doesn’t look like their admonitions have penetrated the 1% shell which protects Mr. Romney from the hoi polloi.

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Filed under 2012 election, Romney, Taxation

Carried Interest to the Bank

As the plot thickens around the tax returns of presidential candidate Willard Mitt Romney, the term “carried interest” will be bandied about more often.  It describes a tax break for the ultra-wealthy economic elite not available to such firms as John’s Local Carpentry or Lewis’s Landramat.

One of the best explanations comes from The Atlantic:

“Managers of private equity firms like Romney are often paid under an arrangement in which they receive both a set fee for their management, as well as a share of the profits that the firm makes for investors. While their management fees are taxed at normal income tax rates, the share of investor gains that go to a private equity manager (called “carried interest”) are treated as capital gains, and thus taxed at a top rate of 15 percent. (Hedge fund managers and partners in real estate ventures also benefit from receiving carried interest.)

The argument for a lower capital gains rate is that it encourages investment. Whether that’s true or not, private equity managers are allowed to pay the capital gains rate on the profits they make managing someone else’s money, not for any risk that they take themselves. Treating carried interest as capital gains is an unjustifiable tax break that needs to be eliminated.”  (emphasis added)

It’s the part after “not” that should be of interest to most taxpayers.  If the private equity managers were risking their own treasuries in the investment process, then the capital gains taxation rate might make a little sense.  However, their profits are made by managing Other People’s Risk — not their own.

But, but, but…if carried interest were to be taxed as the income it is wouldn’t private equity investment dry up, blow away, and depart the investment field?  Not likely.  The actual sources of the wealth under management, wealthy individuals, pension funds, etc. still need to put their funds somewhere in order to earn interest.

But, but, but…doesn’t private equity investment represent the best form of capitalism because of the “sense of ownership” implied?  Not likely.  Remember, the entire purpose of firms like Bain Capital, and 19 other extremely lucrative operations, is to get the best return FOR THE INVESTORS.  Not the company operations, not the company mission, not the company’s infrastructural environment — BUT FOR THE INVESTORS.

If the needs of the investors are absolutely paramount, then employee benefits are of little or no interest, employee wages and salaries are of little or no interest, the tax environment is of no interest except to see taxation reduced, and the Investors can easily expect the Little People to carry the burden for providing local services like police and fire protection while their concerns (earnings) are held inviolable.  This is a recipe for short term gains and long term losses.

And, and, and, what do we call it when one sector of the economy — which is only concerned with the manipulation of financial paper and the earnings thereon — becomes the raison d’etre for the entire economy?  Financialism.

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Filed under Romney, Taxation