- Return to Blogging
- Time to end redistribution upwards: minimum wage increases would boost economy and lift all boats.
- Does Lowering Corporate Tax Rates Create Jobs? Answer is a resounding "no"
- FATCA Agreement with France
- IRS will issue summonses for offshore bank account info
- Religious freedom, taxes, and corporatism--Part II
- Religious rights, taxes, and corporatism--whose rights are they? Part I
- Deficit Disorder Symptoms--via Naked Capitalism/New Economic Perspectives
- Carried Interest -- a tax privilege for the rich whose end time has come
- Time to Eliminate the Debt Ceiling
Most readers of this blog may be wondering what happened to create a long-term hiatus in entries on A Taxing Matter. Surely, you will say, it could not be for lack of topics, as inversions, FATCA, arguments about extenders and corporate tax and the Affordable Care Act have gone on and on, and the IMF's recognition that the so-called "washington consensus" is outdated is indeed a change. The upcoming election brings even more distortions in ads favoring candidates but funded by hidden money that allows the Money Bags to mislead and distort without reprisal, while enjoying tax-exempt status without any of that "public" nature of speech. And surely Piketty's book on Capitalism in the Twenty-First Century, alone, would be fodder for several posts. There's also the incredible forward march of same-sex marriage, and the resulting leveling of tax (and other) treatment of gay and heterosexual couples and families. And you would be correct that there's plenty to talk about. I've been keeping up with all these developments, and I've read Piketty word-for-word (a feat it is quite obvious many of the right-wing commenters have not accomplished). So lack of something to write about is most certainly not the reason for the long pause. To make a long and difficult story short--my husband died in January, and I have gone through an intense personal struggle to cope with life without my soulmate. The hard winter and too-short summer added their own tribulations, in the form of electrical outages, some basement water, and all those unexpected expenses that go along with weather-related problems, all of which must now be handled by me. I plan to resume regular postings now. There's plenty to write about, and I can't wait to start sharing my thoughts with you. Hopefully you'll also share yours in the comment areas. (But no ad hominem attacks--those, as always, will be deleted as soon as I spot them.)
No matter how much the business lobby complains about the "business costs" of increasing the minimum wage, legislators should look past that self-serving ideology and look at reality. Workers have contributed to increased productivity but received a stagnant to declining share of the income that comes from the increased productivity. IN the meantime, top-echelon managers and shareholders reap larger and larger benefits from the increased productivity provided by the workers. At the same time, much of the tax expenditure provisions in the Internal Revenue Code--from the charitable contribution deduction (and things like contributing appreciated assets from IRAs) to the mortgage interest deduction to the life insurance exclusion to the preferential rate on capital gains and the almost non-taxation of corporate dividends are hugely beneficial to the same top echelon in the income distribution, meaning that those provisions are aiding "redistribution"--just not the kind that is condemned by those on the right as a kind of socialism, since this redistribution is upwards and favors the rich. The result of the productivity gains going to the top while the Code embeds numerous tax expenditures that redistribute upwards as well is that the rich continue to get richer, while the middle class suffers and the poor lose out altogether in the vaguely disguised, racially tainted condemnation of those in poverty or near poverty for lack of "personal responsibility" or decorum or "entrepreneurial spirit". Fact is, those who have have been ripping off those who aren't in their elite social class for decades now, and it is getting worse, as they have recovered and more from the Great REcession, while those who lost homes and jobs are suffering on. Changing the tax provisions--most importantly by eliminating the capital gains preferential rate and by eliminating or reducing other tax preferences that highly favor the wealthy--and extending unemployment benefits while lifting the minimum wage--ideally to a level that approximates where it would have been if it had been increased regularly over time, but minimally to at least $12 an hour--are three key actions that need to be undertaken to restore a broadly sustainable economy that benefits everyone rather than a select few. Extending unemployment for those out of work for long periods and increasing the minimum wage are real job creators: those payments to the poor and near-poor will be spent as earned, pouring that money back into the economy and creating new jobs for the jobless. Time to have a frank discussion about the way "free market" ideology has corrupted our sense of social justice and distorted the economic reality by increasing the inequality gap. Time to move towards "democratic egalitarianism"--a recognition that there needs to be affirmative action to redress the tendency for the rich to influence legislators and media to slant bills and stories in their favor. All this is fairly well depicted in the "nation of moochers" cartoon, below, from http://s3.amazonaws.com/dk-production/images/64993/lightbox/moochers720.png?1389641385.
For years (decades, actually), the American pro-wealthy right has argued that lowering corporate tax rates will create jobs. That is the presumed purpose behind the push by Dave Camp to enact a tax reform package with lower corporate rates, and the reason that even President Obama has voiced (tepid) support for lower corporate rates. Baucus at Senate Finance and Camp at House Ways & Means are part of an oft-cited "bipartisan consensus" (though its never clear whether there really is one) for cutting corporate tax rates through "revenue neutral" corporate tax reform. This is a consensus which, if it does exist, has resulted from decades of corporate lobbying in Congress and near-absolute capture of the media on the issue, combined with the proliferation of robotic economics and "law and economics" faculties who scribble endlessly about the "economics" of corporate and capital income taxation, producing studies that suggest policy based on simplifying assumptions commonly used by economists that ensure that the outcome of their mathematical games should have almost no application in the real world. See, e.g., Ponnuru, Max Baucus's Self-Defeating Corporate Tax Plan, Bloomberg.com (Dec. 2, 2013) (indicating that "There’s bipartisan support for lowering the 35 percent federal corporate tax rate, which is among the highest in the developed world. Both parties see the rate as a burden for the economy because it pushes investors -- American and foreign -- to seek their returns in other countries. Economists argue that the tax therefore depresses wage growth in the U.S., a claim supported by numerous studies.") So in spite of those many "studies", I've argued frequently in the past that there is no there there--i.e., that lowering corporate tax rates will do nothing to create jobs. Instead, I've said, it will simply deliver an even higher profit margin to be skimmed off by the highest paid executives and, possibly, shareholders. The higher profit margins are unlikely even to be used to increase workers' shares of the corporate revenues through higher wages, a place where they could most help the economy other than new jobs created. Thus, the drive for "revenue neutral" corporate tax reform (cut corporate taxes, cut expenditures elsewhere to make up for the decreased corporate tax revenues) is just another example of corporatism as an engine of the modern form of US class warfare. The Center for Effective Government (formerly OMBWatch) has now done a study looking at the "job creation track records of 60 large, profitable U.S., corporations (from a list of 280 Fortune 500 companies) with the highest and lowest effective tax rates between 2008 and 2010." See Scott Klinger & Katherine McFate, The Corporate Tax Rate Debate: Lower Taes on Corporate Profits Not Linked to Job Creation, Center for Effective Government, Dec. 2013. It confirms that corporate tax cuts don't create jobs. The study, for example, found that a supermajority (22) of the 30 corporations paying the HIGHEST tax rates created 200,000 jobs between 2008 and 2012, while only 8 of those 30 had any reductions in the number of employees. IN contrast, the 30 profitable corporations paying no or very little taxes in that period had an aggregate loss of more than 51,000 jobs--half created a few jobs and half reduced jobs between 2008 and 2012. Here's the introductory text to the report: The American corporate tax system is badly broken. Some corporations pay a third or more of their profits in federal taxes, while others pay nothing at all. Still others legally claim large sums as refunds even though they’ve generated sizeable profits in the United States. The responsible corporations that pay their fair share of taxes – companies like Smuckers, Nordstrom, Hershey, and Automatic Data Processing – are helping to fund the schools, infrastructure, national parks, and public protections that benefit all Americans. And the taxes they pay don’t stop them from investing in their businesses and adding new jobs for U.S. workers. Many corporate leaders agree the U.S. corporate tax code is broken, but they argue that the core problem is that the tax on corporate profits (35 percent) needs to be lowered. Verizon’s CEO Lowell McAdam and 16 other CEOs who are members of the RATE Coalition wrote in a joint letter to the leaders of the House Ways and Means Committee and the Senate Finance Committee: “Our competitors in the OECD have lowered their statutory tax rates while the U.S. rate has remained relatively constant. This has resulted in an uncompetitive tax environment that discourages investment and job creation here at home…a lower corporate rate will boostinvestment in the U.S., bringing more American jobs, innovation and growth.” ... A 2013 study by the U.S. Government Accountability Office found that large corporations paid on average JUST 12.6 PERCENT OF THEIR 2010 PROFITS IN FEDERAL INCOME TAXES.1 Even when foreign, state, and local taxes were added in, the companies paid ONLY 16.9% OF THEIR WORLDWIDE PROFITS IN [ALL] TAXES in 2010. By contrast, small businesses pay an average tax rate on their profits of 19 percent, according to the Small Business Administration. U.S CORPORATE PROFITS AS A SHARE OF THE ECONOMY ARE AT A 50-YEAR HIGH, YET FEDERAL CORPORATE TAX COLLECTIONS AS A SHARE OF THE ECONOMY ARE NEAR A 50-YEAR LOW. Id. at 2-3 (emphasis added). Lowe's was an example of a relative high tax-paying company that created jobs: paying taxes at more than 36% and hiring more than 28,000 new employees between 2008 and 2012. In contrast, Verizon made enormous profits ($32 billion between 2008 and 2010), paid no taxes (receiving refunds of $951 million) and eliminated about 56,000 jobs between 2008 and 2012. The 58 firms that repatriated $218 billion in the 2004 "tax holiday" at very low profits saved $64 billion in taxes but then proceeded to eliminate 600,000 jobs. Not to mention that if corporations in 2012 had actually paid the corporate tax rate of 35 percent on their humongous $1.8 trillion in profits, the corporate tax receipts would have reached $630 billion instead of the $242 billion actually paid, resulting in a one-third reduction in the deficit. It should not be surprising that most Americans see the slide in corporate taxes relative to corporate profits as a problem--the lost revenue could go a long ways to preventing cuts to education and infrastructure spending or Medicare, Medicaid, and Social Security benefits. [A] brand new national survey by Hart Associates found that “by a remarkable nine-to-one ratio, voters want revenue generated by closing corporate loopholes or limiting tax deductions for the wealthy to be used for public investment and deficit reduction (82%), not to lower tax rates on corporations or the wealthy (9%). In other words, the public does not support “revenue neutral” corporate tax reform. Folks, it is quite clear that there cannot be a sustainable good-for-all economy if productivity gains constantly drift upwards (redistribution from the many to the few) as they have been in this country for the last two decades while at the same time tax policies "reward" the elite with lower taxes (another form of redistribution from the many to the few). One has to wonder just how tone-deaf Congress must be, to continue to listen to economists whose policies rest on mathematical silliness and the lobbyists for big corporations and their wealthy shareholders and managers, while ignoring the crisis in middle and lower-income America due to a stagnant minimum wage and the deftness of the elite in capturing all productivity gains. The tone-deafness has all the earmarks of a form of elitism--Congress is simply unable to understand the cacophony of the ordinary world and finds the neat equations of Chicago School economists, accompanied by the tender ministrations of corporate lobbyists and elbow-rubbing with CEOs and Board chairs, music to its ears.
On November 14, the US Treasury Department announced that it had signed an agreement with France relating to the implementation of the 2010 Foreign Account Tax Compliance Act (FATCA) law. That makes the 10th such agreement signed between the US and other countries to date, and helps move the law towards smoother implementation. The purpose of FATCA is to cut tax avoidance by increasing transparency--especially in the case of offshore bank accounts that have, in the past, served as key mechanisms for avoiding taxation. It requires U.S. financial institutions to withhold a portion of payments made to foreign financial institutions (FFIs) who do not agree to identify and report information on U.S. account holders. FFIs have the option of entering into agreements directly with the IRS, or through one of two alternative Model IGAs signed by their home country. The IGA between the United States and France is the Model 1A version, meaning that FFIs in France will be required to report tax information about U.S. account holders directly to the French government, which will in turn relay that information to the IRS. The IRS will reciprocate with similar information about French account holders. Id. Treasury officials praised the French government for its support in the effort to implement FATCA. "France has been an enthusiastic supporter of our effort to promote global tax transparency and critical to drafting a model of FATCA implementation," said Deputy Assistant Secretary for International Tax Affairs Robert B. Stack. "This agreement demonstrates the growing global momentum behind FATCA and strong support from the world's most important economies." Id.
The IRS got court orders permitting it to see information about taxpayers with undisclosed offshore bank accounts from US banks. In re the Tax Liabilities of John Does (SDNY No. 1:13-mc-00377 Nov. 12, 2013). According to BNA Daily Tax RealTime (Nov. 12, 2013 5:59pm), these orders will apply to Bank of New York Mellon, Citibank NA, JPMorgan Chase Bank NA, HSBC Bank USA NA, and Bank of America NA. Those banks will be "required to produce information about U.S. taxpayers with undisclosed accounts at the Bank of N.T. Butterfield & Son Ltd. and its affiliates. The Butterfield bank operates in the Bahamas, Barbados, Cayman Islands, Guernsey, Hong Kong, Malta, Switzerland, and the U.K."
In Part I, I outlined some of the many ways in which the U.S. provides favorable treatment to religious institutions and/or their representatives, including income exclusions from the federal income tax for ministers that are unavailable to any other occupation. In this Part II, I want to consider how the corporatization of religion relates to increased politicization of religious fundamentalism in recent decades and the religious right's incessant push to influence public policies. Then in Part III I will return to the uneasy juncture of religious freedom claims and taxation. A caveat. It is sometimes easy to mythologize the past, to see it in more favorable light than the present merely because of the filter of time that removes more garish problems. Sometimes I think that is the way we see the role of religion in political life. Certainly there is no rosy past where there was a perfect separation of church and state, where religious views were considered to be private matters not suitable fodder for public consumption. There appears to have always been an awareness, at least, about a candidate's values and religious beliefs, most of the time. Certainly, most candidates--even those that we may suspect were not active members of a religion--have been willing and able to call on "God" to bless the country. Think about Abe Lincoln as described in this US News article (Dan Gilgoff, Abraham Lincoln's Religious Uncertainty, US News, Feb. 12, 2009). Though he grew up in a religious family and read the Bible (one of the few books the family had) and quoted from it liberally throughout his life, he never joined any church. It's not clear that he actually practiced a religion, though he probably would satisfy what we think of as "spiritual" these days. Early on, he was so clearly non-affiliated that he faced some faith-based attacks (some considered him an atheist as a youth). But he started attending church services (still not joining) after his son died in 1850 and, in the last 15 years of his life, he often spoke of some concept of God, though what he thought that meant was clearly uncertain. Maybe a lot of what seemed to be the country's ease and less attention to the particular religious affiliation of political leaders prior to the more recent marked visibility of religion in political contests was because most candidates and officials were assumed to be some kind of Protestant Christian, with the particular variant not mattering too terribly much when all was said and done. Remember Kennedy's candidacy in 1960, and the real concern that his Catholicism might cost him the election. The US was considered a predominantly protestant-Christian country, and there was considerable discussion in the media about whether Catholic politicians are bound to follow Catholic doctrine in making policy decisions. Kennedy money likely played a role in quieting the concerns, as the smiling Jack (often with Jackie) was pictured on magazine covers on a routine basis throughout Jack Kennedy's political career. See, e.g., Life cover featuring JFK, Jackie and Caroline (April 21, 1958); Life cover featuring JFK and Jackie (Aug. 24, 1959); Life cover featuring JFK and Hubert Humphrey (Mar. 28, 1960); Look cover featuring Jackie Kennedy in October 1960; Look cover featuring JFK, Jackie and Caroline in February 1961. Familiarity makes the boogie-man seem not so scary. But in addition to getting good PR, Kennedy openly addressed the concerns about separation of religion and state during the presidential campaign in his famous speech on his religion, convincing some who had expressed earlier doubts. What is particularly notable about that speech is his claim that it was how he viewed the country's future, and not his particular religion, that should be of interest to voters. Also quite notable is his expression of what freedom of religion meant to him. These [concerns outlined above] are the real issues which should decide this campaign. And they are not religious issues — for war and hunger and ignorance and despair know no religious barriers. But because I am a Catholic, and no Catholic has ever been elected president, the real issues in this campaign have been obscured — perhaps deliberately, in some quarters less responsible than this. So it is apparently necessary for me to state once again not what kind of church I believe in — for that should be important only to me — but what kind of America I believe in. I believe in an America where the separation of church and state is absolute, where no Catholic prelate would tell the president (should he be Catholic) how to act, and no Protestant minister would tell his parishioners for whom to vote; where no church or church school is granted any public funds or political preference; and where no man is denied public office merely because his religion differs from the president who might appoint him or the people who might elect him. I believe in an America that is officially neither Catholic, Protestant nor Jewish; where no public official either requests or accepts instructions on public policy from the Pope, the National Council of Churches or any other ecclesiastical source; where no religious body seeks to impose its will directly or indirectly upon the general populace or the public acts of its officials; and where religious liberty is so indivisible that an act against one church is treated as an act against all. Id. What is interesting in this speech--one that was designed to address what was perceived as a political weakness-- is that Kennedy considered himself to be e_xpressing the predominant American view about separation of church and state, when he said:_ "no protestant minister would tell his parishioners for whom to vote"; "no church or church school [should be] granted public funds or political preferences" and "no religious body [should seek] to impose its will directly or indirectly upon the general populace or the public acts of its officials." Id. The fact that Kennedy was elected suggested that the country had finally grown well beyond the colonizers' centuries'-old religious straitjacket where colonies killed or converted native populations in the name, e.g., of a state-led Church of England or Catholic Pope and the Civil War era's constant (and inconsistent) invocation of God as favoring North or South in the political and military strife. But beginning around the 1970s, dogmatic religious ideologues became stronger players in the country's political life. That has included overt attempts to breach the wall of separation that Kennedy had endorsed, including trying to reinstate prayer in schools and city councils (note the current court case on a city council prayer practice); finding various ways to use public money to support private religious schools (through the use of vouchers); and fighting for exemptions from generally valid legislative enactments to allow religious institutions the ability to not comply with the law (including ability to discriminate against employees; ability to prevent employees from having access to the same health care services available to others; etc.). The increased politicization of religion grew in the US with the corporatization of the religious message. So-called Christian businesses expanded from a few small Bible and music stores to national corporate-driven mass-marketing of popular Christian recording stars, media empires, and merchandising empires. The birth of the megachurches, often with their own suburban malls and church-run schools, created the kind of deep pockets that supported political campaigning in earnest, with leaflets and radio programs pushing "values" candidates. See, e.g., Keilholz, The Megachurch Juggernaut (Mar. 2008). Religous private and charter schools, and home schooling by fundamentalist religionists, insured that young children wouldn't be exposed to other ideas and could be brought up as fervent followers of the religous dogma. Pat Robertson's religio-poltical empire developed, with the 700 Club and the Christian Broadcasting Network. Robertson's 1988 presidential run freely merged politics and religion (often expressed in terms of "values" campaigning). Fundamentalist groups increasingly pushed for religious views to be expressed at schools, in the public square, in courtrooms, as controversies ignited over creationism and so-called intelligent design doctrines being taught instead of, or alongside, scientific theories of evolution, as schools and city councils (especially in the South) continued to allow prayers (mostly Christian), and courtrooms displayed the Ten Commandments. We started hearing the religious view that fundamentalists' religious freedom was violated when they--or businesses they owned or churches they were associated with--were "forced to conform" by not being able to mandate their views of values for all of society. We started to get the claim that the country was practicing religious discrimination if it did not allow religious institutions- or even businesses owned by religious institutions or even businesses owned by religious individuals--to exercise purported entity religious freedom rights (or their managers/owners religious freedom rights) to practice in whatever way they wished, even if it meant that the organization's employees' (who weren't necessarily co-religionists with the managing religious institution or commercial enterprise's religious owner) could not have the same religious freedoms as other Americans. Bill Clinton signed the Defense of Marriage Act (commonly called DOMA), an egregious piece of discrimination against gays and lesbians that was pushed for by fundamentalist Christian religious organizations. California overturned its Supreme Court decision allowing gay marriage, in an initative funded by groups such as the Mormon Church. George W. Bush instituted a "faith-based initiative", creating a government post intended to further the expansion of religious institutional involvement in government programming. The vast majority of the religious recipients of federal monies to run prison programs and similar activities were Christian-protestant organizations. Although not supposed to proselytize with the funding, proselytization has been a critical part of many of the programs. And Americans have been bombarded with religious dogma and slogans in the context of political grabs for attention. So the endless claims that the US wages a "war on Christmas" when holiday songs replace religious carols in public school muscials or when Rudolf the red-nosed reindeer and Xmas trees are required to be placed alongside nativity scenes on the public square. Google the term and you get 547 million results, including the silly new book listing Sarah Palin, failed half-term Alaska governor and religio-political Tea Party fave, as author. (See, e.g., David Edwards, Palin links 'zealot-like' atheists with 'war on Christmas' and slavery with government debt, The Raw Story, Nov. 11, 2013. Please don't buy Palin's book. You already know what it says. And you already know the idea is wacky. Fundamentalists purport to be spreading "freedom" by attempting to force everyone to live by their own "values" and rules. After all, if you ask any atheist, you will be reminded that Rudolf and Xmas trees are just cartoonish manifestations of fundamentalist Christianity and no diversification of the holiday display at all. And adding a Kwanza song to the roster of carols or Bach's rousing Hallelujah Chorus in a setting replete with red poinsettias, "Christmas" lights, and boughs of balsam fir is a minor diversification, at best.) Mitt Romney and Barack Obama both faced questions about their particular religious faiths. Romney, who would have been the first Mormon president, had to deal with the long history of concerns about Mormonism, from the massacres sanctioned by Brigham Young to the polygamy actively pushed by the church until it finally succombed to outside cultural and legal pressure to end it (though polygamy is still practiced by split-off sects). Obama faced "guilt by association" attacks for the stridently expressed views of Rev. Wright, a prominent black minister of a church he attended in Chicago, and "guilt by reason of family" for being born into a racially mixed family that led to him spending part of his youth in a Muslim country around Muslim relatives. See, e.g., this snopes.com piece setting out and then debunking the claims that Obama was Muslim. The continuing attacks on President Obama related to "values" pushed by fundamentalists religionists in the TEa Party/ GOP coalition. And all those megachurches with megamalls bringing in millions for ministers led to another entanglement of church and state, as government investigators needed to see whether in fact these were just religious scams leading to the private inurement of the purported ministers out of the church businesses. An investigation by the _New York Times_ into megachurches and their off-shoot companies reported: “Business interests are as varied as basketball schools, aviation subsidiaries, investment partnerships, etc...” The branding of faith with those quaint, little symbols (in lieu of a pesky, troublesome cross) is representative of a shift into commercialism in the battle for Christian market share, now made manifest in evangelical-corporate empires. Says _Business Week_: “All this growth, plus the tithing many evangelicals encourage, is generating gushers of cash. A traditional U.S. church typically has fewer than 200 members and an annual budget of around $100,000. The average megachurch pulls in $4.8 million.” Megachurch and televangelist ministers gross enormous salaries. Much of the millions raked in are generated by books, iTunes, and DVDs. But how much is going back into the ministry, considering that, were it not for thousands of devoted followers, most of these [mega]ministers would reside in relative obscurity? According to the _Washington Post_ the Senate Finance Committee has recently announced an investigation into at least six Word of Faith ministers. Megachurch pastors and televangelists alike—Joyce Meyer, Kenneth Copeland, and Benny Hinn among them—are subjects of a probe following reports of unrestrained spending on ministries and private estates. After allegations involving the purchase of “such amenities as private jets and Rolls-Royces” reported the_Post_, GOP Iowa senator Charles E. Grassley has “asked for credit card records, clothing and jewelry expenses, and any cosmetic surgery expenses” as part of the congressional query. Id.(Juggernaut). The current state of affairs is that i_n spite of_ the long tradition in this country of religious freedom for individuals--made possible by the Constitutional provision but more broadly by the underlying concepts that the state should not support or fund religious activity and that religious institutions should not be involved in political affairs--_it is now politically expedient for_ a candidate for major political office to publicly claim that s/he ascribes to Christianity. Similarly,fundamentalist Christian religious organizations, in particular, demand increasingly broad exemptions from generally valid U.S. laws under the claim that such laws impinge on the (institutional) religious liberty. And religious individuals even claim that their personal religious freedom should allow them to cause their commercial enterprises to discriminate against the religious freedoms of their enterprise's customers and/or employees. And some courts are even falling for that wacky argument that allows a business owner's personal religious freedom to use the business to deny religious freedom to any number of customers and/or employees. See D.C. Circuit Backs Faith-Based Challenge to Contraception Mandate (discussing Gilardi (D.C. Cir. Nov. 4, 2013) (religious belief of owner of business allows business to discriminate against employees, so health care law contraception mandate cannot be enforced)). And the need for courts to consider these issues (because of the many suits filed by fundamentalists seeking to overturn generally valid laws as applicable to them) and for government entities to investigate religious enterprises (because of the expanding potential for violation of the rules for tax-exemption and tax exclusions) amounts to an unfortunate entanglement of religious affairs with the state and the state with religious affairs, and the consequent unfairness of the combination of tax exemption with religious exemptions from generally valid laws. More on that issue in Part III.
The United States has a tradition of separation of church and state that goes back to the founding discussions that concluded that it would be inappropriate to establish a state religion because individuals should be at liberty to believe or not believe. Unlike England, for example, where the head of state is the head of the Church of England, with resulting deep entanglement of resources and politics. Or Germany, for another example, where the state collects taxes on behalf of certain state-approved mainline religions from those religions' participating members. So the United States does not officially approve any religion, nor does it collect revenues on behalf of those religions, nor does it determine religious policy. On the tax front, institutions organized for a religious purpose are eligible for 501(c)(3) status and hence exempt from the income tax. Like other 501(c)(3) organizations, contributions to any church is deductible to contributors, and none of those churches are required to disclose their contributors. Yet in spite of this long tradition of separation of church and state, our tax code and many of our politicians, many religionists, and too many of our Supreme Court's interpretations of the constitutional right to religious freedom blur the line between church and state. Politicians tend to invoke their religious beliefs as the basis for their actions, something that should worry anyone who is firmly committed to church-state separation because of the implicit endorsement of theocracy that such statements imply. See, e.g., Leonard, The end of page views and Michele Bachmann's Rapture, Salon.com (Oct. 9, 2013) (noting GOP Rep. Michele Bachmann's recent statements about the "rapture" in connection with the government shutdown); RaptureReady website (proclaiming that "Christians have a constitutional right...to demand that Christian values be reflected in American society" and urging Christians to "Vote Republican"); Kentucky School Prayer Petition (Kentucky chapter of American Family Association pushing for government-sponsored religion in public schools) and see Americans United, Prayer Panacea? Ky Group Says INsp8irational Messages in Public Schools will solve several ills (Aug. 2, 2013) The federal income tax code provides considerable support to religions, mostly through the exemption for charitable enterprises under section 501(c)(3) and the deduction for charitable contributions to such enterprises under section 170, but also in other ways. * The difficulty of providing a clear definition of an organization organized for religious purposes necessary to qualify for 501(c)(3) status invites abuse. We allow almost any organization to claim to be a religious institution and hence exempt from the income tax--apparently even if every member of the purported congregation is a part of the minister's extended family. The case of Scientology --with its sci-fi origins and its payments for various levels of achievement in the church hierarchy raises considerable concerns about what "counts" as a religion and whether institutions can be created as religions with the purpose of achieving tax avoidance and perhaps even exemption from some otherwise generally applicable rules. * Religious institutions granted 501(c)(3) status aren't supposed to use their status to promote particular political candidates, but nonetheless many do--in fact, a number of ministers of prominent Christian churches have engaged in overt challenges to the prohibition by preaching in favor of, or against, particular candidates from the pulpit and distributing political campaign materials, essentially daring the IRS to enforce the law. Compare, e.g., The Raw Story, Dolan, IRS faces lawsuit for failing to enforce church electioneering ban (Aug. 20, 2013) (discussing Freedom From Religion Foundation lawsuit against IRS regarding churches defying electioneering ban) with Godfather Politics, 1400 Pastors Defy IRS Trheat of Tax-Exempt Revocation (Oct 8, 2012) (discussing the action from the perspective of religious activists). * Religious institutions granted 501(c)(3) status (we'll call all these "churches" for simplicity's sake) are supposed to pay tax on certain business activities that they carry on that generate "unrelated business taxable income" (UBTI), but aren't required to pay taxes on business-like activities regularly carried on by the church that are considered directly related to achieving the church's exempt purposes. See IRS Publication 598. A church could, for example, run a restaurant in which it claims to provide job-training to homeless or unemployed people and avoid tax on any income generated by the restaurant business (which can be substantial) or conduct a gift shop on the premises and avoid any tax on the provits, so long as the items sold are related to the church's mission--and that will generally include all kinds of things such as religious texts, religious icons, artwork depicting the church building or similar imagery, greeting cards with religious text and imagery, games with religious imagery, etc. This is a significant tax-expenditure subsidy to religious institutions. Even if that kind of tax-subsidized competition with regular commercial enterprises doesn't strike the reader as problematic, surely the potential for abuse is a problem. Megachurches may build the equivalent of amusement parks and shopping malls with multiple types of busineses generating substantial revenues and competing with taxable enterprises in the region (Brentwood Baptist Church in Houston Texas was the first to house a McDonald's franchise on its property), yet perhaps avoid the unrelated business income tax on the revenues because they claim that their employees are being provided training for future jobs in an religion-soaked atmosphere that is considered part of the church's religious purpose, even though most employees are long-term employees and few homeless or poverty-stricken individuals are involved. Most churches that operate media companies or franchises of commercial businesses likely do so through for-profit subsidiaries, but the potential is certainly there for abuse. * The tax code (in section 107) provides privileged income tax treatment for church ministers: housing or rental allowances (including the fair market rental value of furnishings, utilities, garage, repairs and other expenses directly relating to providing a home, as long as the total doesn't exceed reasonable pay for services) are excluded from the ministers' gross incomes for income tax purposes. See IRS Publication 517; Tax Topic 417. Rev. Rul. 63-156 even extended that exclusion to retired ministers. To be a minister for tax purposes, a person must be ordained; administer church sacraments; treated as a religious leader; conduct worship services and have management responsibilities. Note that a rather large group at a single church might well satisfy these requirements. * Clergy can opt out of Social Security, if the minister is conscientiously opposed to such benefits (or opposed on the basis of religious principles). See Form 4361. Part II of this series will discuss the intrusion of corporatism into the church-state separation doctrine.
Yves Smith over at Naked Capitalism has an insightful re-post today on the way the right in particular--and most in the media and public--talk about deficits and misunderstand the relative importance of failures to invest in physical and capital infrastructure (roads, education...) versus the relative unimportance of the US government deficit and national debt. See Attention: Deficit Disorder and the Real Crisis Ahead, Naked Capitalism (Oct. 29, 2013), reposting article with the same title by Fadhel Kaboub, New Economic Perspectives. Economic failure exists when (1) young people can't get jobs, (2) old people can't get health care and sufficient income to manage after retirement, and (3) everybody else can't manage well using potholed roads, unreliable energy distribution systems, casino-capitalism banks, and holding jobs in industries that treat CEOs (even those who stumble) like Gods and workers like peons. We already face situations (1) and (3) in most aspects of our lives. If the flat-world GOP politicians have their way in cutting benefits of Social Security and Medicare rather than increasing the payments expected from those who have made off like bandits under the reaganomics winner-take-all system that has exacerbated inequality and moved us into a have/have-not economy, we will soon face (2). When economic failure of that dimension exists, it is the ultimate burden to thrust upon the backs of our children and grandchildren. In our case, it would represent the result of our short-sighted instant gratification desire to harvest carbon-based energy come what may; "develop" coastlines (more and more for second or sixth homes for the ultra-rich) and wilderness and wildlife refuges for the wealthy few at the expense of most other people and the rest of the world's living beings; while "protecting" gigantic, too-big-to-fail multinational enterprises like the big banks, Big Pharma, Big OIL and Big IP from having their workers unionize and demand a fair share of the revenues that those very workers generate and "simplifying" the tax code so that it collects less revenue, particularly from the ultra well off. As Smith and the reposted article by Fadhel Kaboub make clear, most of the ballyhooing about deficits and debt represents a "deficit disorder" that pervades conventional narratives about government, private enterprise and the economy and displays a lack of understanding of modern monetary theory (link is to the "MMT Primer" at the New Economic Perspectives website) as applied to a sovereign state with its own currency, like the USA. Many Americans, ill-educated about finance or monetary systems, hold onto antiquated myths about government budgets, deficits, and debt, including: * governments should balance its budget the same way individuals and businesses must; * government spending crowds out private investment; * government deficits inevitably lead to high inflation; * government deficits just encourage more government waste and inefficiency * government debts burden future generations. These myths "blind us from seeing the real infrastructure and education deficits that are slowly destroying quality of life for generations to come." Id. And push ideological US policymakers into "a spending cuts frenzy aimed at balancing budgets and paying down the debt [in what may be] the biggest mistake of our generation." Id. Deficit hawks have been arguing for increasing the retirement age and reducing retirement benefits in order to solve the financing problem, while the deficit doves argue for increasing the social security taxable income to close the financing gap. Regardless of one’s political inclination and tax-burden tolerance level, solving the financing problem will only put vulnerable people at a greater disadvantage in the future and _will_ _not_ make the provisioning challenge go away. Ignoring the provisioning problem creates a shortage of goods and services which will lead to inflation when the more affluent members of society outbid the poor in a fierce competition for scarce medical services, prescription drugs, retirement homes, and elderly care services. The only way for society to offer a comfortable retirement to the elderly is by making sure that the workforce of 2032 is as skilled and productive as possible, and has access to the most up-to-date technological and logistical infrastructure, especially when it comes to medical services. The problem, however, is that such a sophisticated workforce can only be created if we invest in education, research and development, and public infrastructure today! This is exactly what we are not doing right now. Instead, we are slashing budgets for education and scientific research in the name of sound finance and fiscal responsibility. We can have all the money in the world in 2032, but it will not create a well-trained medical staff overnight, unless we recruit skilled workers away from other nations, which will shift the burden on the poorest countries that most desperately need their teachers, doctors, nurses, engineers, etc. Deficit Disorder and the Real Crisis Ahead The US will face continuing decline of the economic standard of living for ordinary Americns unless politicians on both sides of the aisle recognize the high cost of failed public investment and the relatively low risk of the government debt and deficits that can accelerate that investment. There's no indication that the anarcho-libertarians like Rand Paul or the Koch-funded Tea Partyites are even trying to understand this problem. It will be up to the more reasonable amongst the politicians to ensure that those extremist figures are pushed to the sidelines so that real public investment can proceed. That public investment should be accompanied by a more justice-oriented mode of federal taxation. Priority should be on increasing revenues and decreasing the staggering inequality that is quickly reducing the American middle class to a past dream by increasing the number of income tax brackets and the rates, eliminating the capital gains preference, and reinstating an estate tax with substantial bite.
I should have written about this long ago, but a recent "dealbook" by my former colleague Steven Davidoff, A Chance to End a Billion-Doillar Tax Break for Private Equity, New York Times (Oct. 23, 2013) reminded me of the import of a recent court decision--Sun Capital Partners (No. 12-2312 First Circuit Cout of Appeals July 2013), --important for its implications for the private equity industry's privileged "carried interest" tax treatment (income to managers currently treated as preferentially taxed capital gains rather than ordinary compensation income) and the assumed treatment of the pension obligations of employees of companies taken over by those funds (ability of private equity funds to disavow a company's pension obligations to its ordinary workers through bankruptcy). As Davidoff notes, private equity managers claim that changing the carried interest privilege would result in less investment and ultimately harm economic growth. That's an argument long used by the right to justify the capital gains privilege, but certainly controversial (at least), since uninvested money will earn even less than invested money that is taxed at a slightly higher rate. Given the hugely outsized earnings by equity fund managers--in the hundreds of millions and even billions annually--it seems unlikely that a higher tax rate would sharply reduce investment. They'd still have after-tax income equal or more than most CEOs. And as I've noted frequently here, getting carried interest taxation right would be at least one step towards ensuring that the tax system performs its most important justice function by reducing, rather than exacerbating, the income inequality dynamic that harms the kind of broad-based economic growth that underlies a sustainable economy. See, e.g., works on income inequality and the problems of unequal wealth distribution for sustainable economies by Benjamin Friedman, Piketty & Saez, Kate Pickett and Richard Wilkinson (e.g., The Spirit Level: Why Equality is Better for Everyone (2009)). The Sun Capital case arose out of the takeover of Scott Brass, a manufacturing business, by Sun Capital Partners, a private equity fund that buys out distressed companies for restructuring and resale (often involving firing workers and using bankruptcies to disavow pension obligations). As Davidoff summarizes: About a year after the takeover, Scott Brass sought bankruptcy protection. Sun Capital sued the comapny's pension fund, the New England Teamsters and Trucking Industry Pension Fund, seeking a judgment that it was not liable for $4.5 million of the company's pension. Under the pension laws, Sun Capital would be responsible for this amount if Scott's employees were under the control of Sun and the funds were engaged in a 'trade or business.' The pension fund argued that the Sun Capital funds were liable because the funds were engaged in the trade or business of operating Scott. Sun Capital argued the opposite, saying that it was merely a passive investor. A Chance to End a Billion-Doillar Tax Break for Private Equity The court concluded that the private equity fund was engaged in a trade or business for purposes of the Employee Retirement Income and Security Act (ERISA), rather than merely a passive investor in the business that it took over, Scott Brass, Inc. Sun Capital Partners (No. 12-2312 First Circuit Cout of Appeals July 2013). This decision could clearly "make it harder for private equity funds to walk away from the unfunded pension liabilities of companies they have bought if the company goes bankrupt." Vic Fleischer, Sun Capital Court Ruling Threatens Structure of Private Equity, DealBook, New York Times (Aug. 1, 2013). And it is "not a big leap to argue that the fund was [also] engaged in a trade or business for tax purposes." Id. No one disputes that the general partner (or its affiliated management company) often gets highly involved with the fund's portfolio companies. In Sun Capital, for example, the management company weighed in on the portfolio company's personnel decisions, capital spending and possible acquisitions. The critical question is whether the general partner's activities can be attributed 'downward' to the fund--that is, from the partner to the partnership. *** ...[T]he court noted that Scott Brass Inc. paid fees to the general partner of the fund for the management services it provided. Those fees were then used to offset part of the 2 percent annual management fees that the limited partners normally pay to the general partner. The court explained that these fees thus 'provided a direct economic benefit' that 'an ordinary, passive investor would not derive: an offset against the management fees it otherwise would have paid its general partner.' ... ...But even without a management fee offset, limited partners generaly derive an economic benefit from the activities of the general partner. ... Sun Capital Court Ruling Threatens Structure of Private Equity. If the Treasury and IRS (or courts) were to conclude that the trade or business determination for ERISA should carry over to tax, a number of tax consequences could well follow that would upend the current highly favored tax treatment of private equity fund investors and investor/managers. * foreign investors in a private equity fund could be treated as having income that is "effectively connected" with a U.S. trade or business, resulting in being subject to tax on that effectively connected income; * tax-exempt investors in a private equity fund could be treated as having trade-or-business income, resulting in application of the UBTI (unrelated business taxable income) rules that would subject the normally tax-exempt investors to tax on that income; and * private equity fund managers' profit shares ("carried interest") could be treated as ordinary income from sales in the ordinary course of business (bought out and restructured companies) rather than as capital gains income from a passive investment. Will Treasury grab this lifeline for eliminating the privileged private equity tax treatment? Remains to be seen. PS. If private equity funds are really trades or businesses, then isn't a private "credit fund" really a banking business that should be regulated as such? See, e.g., Manning, Exclusive: Florida Private Equity Fund Expands, Plans to Offer Credit, Tampa Bay Business Journal (Oct. 28, 2013).
As the post-shutdown resumption of talking in Congress gets underway and the days start counting down to the next debt ceiling deadline (perhaps brought along sooner by the delay in the tax filing startup, as discussed in the last post), I suppose we must all at least hope that the Tea Party Republicans will be held in check by less reactionary members of their party. Or will they pursue their hostage-taking strategy yet again in connection with the debt ceiling, attempting to gain by economic terrorism what they could not win in the regular legislative process or the resumed budget negotiation talks? There has been a series of commentaries in The New Yorker on the debt ceiling, all of which are worth reading. Well before the shutdown and crisis had reached quite the fever pitch of this fall's end game, James Surowiecki wrote that it was time to Smash the Ceiling, The New Yorker (Aug. 1, 2011). And in this year's ridiculous hostage-taking effort by the Tea Party/GOP rightwingers, he pointed out succinctly that acceding to the right's demands in connection with the shutdown "would in effect mean that controlling one house of Congres would be all you need to set policy" with "any law that hard-liners wanted to repeal (or pass) ....pegged to a debt-celining vote." James Surowiecki, After the Shutdown: The Debt Ceiling, The New Yorker, Daily Comment (Oct. 1, 2013). And he's reminded us since that this whole debacle should be the "impetus for Congress to do away with the debt ceiling entirely, so that we don't have to go through this nonsense again." James Surowiecki, The Default Danger Next Time, The New Yorker (Oct. 16, 2013). Many of those on the Tea Party right, however, appear to continue to nurture their iideological position that a breach of the debt ceiling would not be such a big deal and that it is a reasonable price to pay to get their way on things like Obamacare or tax cuts for big corporations or no capital gains tax increases. Ted Cruz went home to praise by the Tea Party Texans--one of the most fanatically right-wing factions in the country. Huelscamp appeared on PBS news last night mumbling the same old mumbo-jumbo about how high the debt is and how the Federal government must stop spending. (ASIDE: Judy Woodruff didn't ask a number of obvious questions that might have cut through Huelscamp's recitation of Tea Party talking points. She could have started with some of the following: * If blowing through the debt ceiling isn't a big deal, as you apparently think since you were pushing for a "no" vote on ending the GOP attempt to force its legislative will in return for not blowing it, then why do you make such an issue, as you just did in your statement here, about how big the US debt is? or * How come you want to keep spending on military while cutting back on vulnerable seniors? or * Why do you use the word "entitlement" to talk about programs that people pay into to fund their earned benefits, but not to talk about the various provisions that the GOP has long supported that favor multinational enterprises and capitalists, like the preferential rate of taxation for capital gains or the percentage depletion allowance for Big Oil or the R&D credit for Big Pharma and other tax expenditures? Etc. ) If the right does try the same tactic again in connection with the "negotiation" on the budget (after they refused to appoint conferees for months) by using the next debt-ceiling limit as a hostage to their demands for more military spending and less spending on earned benefits, the President will need to continue to show the backbone he seemed to develop in this latest imbroglio. He may have to face the Constitutional quandary: given that Congress approved the spending and approved the tax rules that inevitably result in raising less revenues than needed to cover the spending, perhaps the Constitution REQUIRES that the government disregard the debt ceiling as a well-meant (originally, anyway) but ultimately toothless provision. See, e.g., Eric Posner, Emergency Powers Let the President Borrow Beyond the Debt Limit, Room for Debate, NY Times.com (Oct. 3, 2013).