September 10, 2007
Lobbyists for America’s rich love to wink. At legislative hearings on tax reform — or any other issue that might inconvenience their clients — you can see them winking all the time.
The pattern usually plays out like this: High-priced lobbyists set themselves down behind the witness table and proceed to predict the end of western civilization, or some comparable catastrophe, should the reforms their clients oppose ever become law.
This outrageously dire scenario on the record, the lobbyists then cheerfully grin at their lawmaker pals across the witness table, secure in the knowledge that simple legislative gridlock, if nothing else, will keep in place the status quo they’re so ardently defending.
But last week, at a day-long House Ways and Means hearing on a “Fair and Equitable Tax Policy for America’s Working Families,” Capitol Hill’s lobbyist legions weren’t winking. They were worrying. No back-slapping power-suit bonhomie filled the high-ceilinged congressional hearing room. Only nervous laughter.
What has the power-suits so unsettled? We explain below.
The investment banking district in Copenhagen, notes Danish commentator Jakob Illeborg, hardly rates as a “worldwide financial hotspot.” But top Danish bank execs have begun collecting annual bonuses that top $10 million, and that’s “not going down well” in this egalitarian nation. Claus Hjort Frederiksen, the Danish minister for employment, recently warned against “top executives becoming greedy.” Added Frederiksen: “Such an inclination would quickly spread to the rest of society.” The most affluent 20 percent of Danes now take in 7.5 times more income than the bottom 20 percent. In the United States, Census data released late last month show, the highest-income fifth makes 14.8 times more than the lowest . . .
Most of the richest fifth in the United States live in high-population, high-inequality states like California and New York. But America’s income gaps, a new report from the Oregon Center for Public Policy reminds us, are dividing considerably smaller states as well. From 2002 to 2005, says the Center study, only the top fifth of Oregonians “saw their earnings rise faster than inflation.” The bulk of those gains went to the top fifth's tippy-top. Oregon’s richest 1 percent — households with over $360,000 in income — collected 97 percent of all Oregon income gains over the 2002-2005 time span . . .
Listen up, laddies and lassies, Scotland wants you — especially if you happen to own a fine motor car. Scotland's tourist agency last year sent promotions to every Rolls-Royce owner in the world, as part of a campaign to “sell Scotland as a luxury destination.” The campaign seems to be working. Private jet traffic into Edinburgh and Glasgow jumped 26 percent last year. What explains this luxury surge? Scottish tourism entrepreneurs are providing the personal touch. One Scottish “holiday planner,” David Tobin of Dream Escape, flew over to the United States to spend three days going over a vacation itinerary with a client. Dream Escape weekends start at $10,000 per person. The sinking U.S. dollar, says Tobin, hasn’t slowed American luxury travelers one whit: “The exchange rate could be five to one and they'd still come. These people are truly spending out of a different pot.”
In Russia today, they call their super-rich the “oligarchs.” Now a new player — the “minigarch” — has emerged on the Russian economic scene. Finans magazine, a “money mag for those in the know,” has just published a list of Russia’s richest kids, as measured by the stash they can expect to inherit. At the top of the list: 17-year-old Yusuf Alekperov, the only child of Vagit Alekperov, Russia’s biggest oilman. Yusuf stands to collect $12.3 billion. Finans limited the first minigarch list to offspring who figure to inherit at least $1 billion each. The 70 kids the magazine counted will pick up a combined $240 billion. Russia abolished inheritance taxation two years ago . . .
Hunger has stalked India for generations. But India is now experiencing an incredible economic growth spurt. Will this growth eradicate what scientists call “undernutrition”? A team of medical researchers from Harvard and the UK’s University of Bristol don’t think so — unless India starts distributing income more equitably. The researchers have just published, in the Journal of Epidemiology and Community Health, a study that looks at hunger and obesity in 26 Indian states. The greater a state’s income inequality, researchers S. V. Subramanian1, Ichiro Kawachi, and George Davey Smith found, the greater both under and overnutrition. Individuals at the same income level turn out to be “better off in a more egalitarian area, in terms of having a reduced risk both of being undernourished and of being overnourished.” One reason: the manipulation of social safety net programs “by vested interests, a characteristic more likely to be present in states with high levels of income inequality.”
Inequality
by the numbers
Newly revised!
Quote of the Week
“Top business leaders have become like sports heroes, but without the talent.”
Bill Bonner, president,
Agora Publishing, a top global financial newsletter network, Corporate Heights,
September 3, 2007
New Wisdom
on Wealth
Chuck Collins, Time to tax CEO perks? Daily Herald (Provo, Utah), September 4, 2007
Sarah Anderson, Are CEOs worth that much more? Christian Science Monitor, September 5, 2007
Sam Pizzigati, Congress eyes corporate pay for itself, Topeka Capital Journal, September 7, 2007
This past spring, America’s premier private equity firm, the Blackstone Group, filed the public disclosures necessary to have its stock sold on Wall Street, a move that suddenly revealed how incredibly huge private equity manager earnings have become. Blackstone’s top five execs together pocketed $771.5 million in 2006.
In short order, headlines would also reveal that private equity fund kingpins, on their hundreds of millions in income, are paying taxes at rates lower “than the people who clean their offices and answer their phones,” as a labor-public interest reform coalition noted last week.
These reformers are backing legislation, introduced by Rep. Sandy Levin, that would up the tax rate on the mega millions that go to fund managers from 15 to 35 percent, and, last week, this legislation took center stage at a House Ways and Means hearing.
Opponents of the Levin legislation, predictably, brought out the heavy artillery. A small army of business trade associations showed up to make the case that raising tax rates on investment fund honchos would, as the U.S. Chamber of Commerce put it, “risk undermining America’s preeminent position in the world as a leader in invention, innovation, entrepreneurial activities, and growth.”
But these business groups face a dilemma. To stop reform legislation, business lobbyists normally simply work behind the scenes to gum up the congressional works. Their goal: congressional inaction. If Congress doesn’t act, the status quo holds, loopholes stay open. The rich win.
This tried-and-true formula, here in 2007, no longer applies. America’s most affluent today desperately need congressional action on taxes, not inaction. The reason? If they don’t get action — and soon — they’ll lose all the tax cuts the George W. Bush years have so generously bestowed upon them.
The Bush tax cuts started flowing in 2001 with the passage of sweeping legislation that slashed tax rates on America’s highest incomes and estates. But that passage didn’t come easily. To maneuver the cuts through Congress, GOP leaders had to play games with the legislative process. They had to include in the final tax legislation an expiration date.
Under the legislation, as signed into law, the Bush tax cuts will go fully into effect in 2010 and then expire. In 2011, under current law, the tax code will revert to the pre-George W. status quo.
GOP leaders in Congress and the White House, back in 2001, saw this expiration date as no big deal. They figured they would have plenty of time, before 2011, to make their tax cuts permanent.
But the political tables have turned. George W. Bush has become amazingly unpopular, and his allies no longer control Congress. The private equity fund revelations have, in the meantime, dramatically raised the public profile of the tax code’s core unfairness.
To make matters worse — for deep-pockets — some powerful members of Congress are now talking about plugging the private equity tax loophole and using the resulting proceeds to provide tax relief for middle class families caught up in the “alternative minimum tax,” or AMT.
Congress created the AMT in 1969 to crack down on wealthy tax cheats. But the AMT has since evolved into a tax regimen that subjects modestly affluent households to higher-than-normal tax rates. To lift this burden, House Ways and Means Chair Charlie Rangel said last week, Congress must “look at the entire tax code.”
Inaction on taxes, in short, no longer remains an option. Rangel and other top congressional leaders want action to avert a fiscal AMT train wreck. The rich, for their part, need congressional action to preserve the status quo set to expire in 2011. And the rich need this action quickly, while George W. Bush still sits in the White House.
But if the rich and their hired guns push for action on taxes, amid the current furor over private equity tax windfalls, they risk losing the battle over what that action will be. The wealthy could even lose their single biggest loophole of all: the current preferential tax treatment for “capital gains” income from the sale of stocks and other property.
We have more, in a Too Much analysis online, on capital gains — and the overall battle for progressivity in America’s tax system.
At last Thursday’s House hearing on tax reform — and a companion Senate hearing held the same day — ever-inventive apologists for America’s super-rich did their best to rationalize away today's amazingly low tax rates on sky-high investment fund incomes.
Ever-vigilant critics of these low tax rates, also present at last week’s hearings, did an even better job demolishing these rationalizations.
University of Illinois law professor Victor Fleischer, for instance, explained how investment fund partnerships worth billions of dollars have nothing in common with the small business partnerships that partnership tax law was originally legislated to protect.
The Urban Institute's C. Eugene Steuerle, a former U.S. Treasury official, described how current private equity tax breaks are doing more to leverage the U.S. with debt than jobs. And Stetson University’s Darryll Jones exposed the emptiness of the argument that “risk taking” entitles fund kingpins to kid-gloves tax treatment.
Maverick investment fund insiders like William Stanfill, the founding partner of Trailhead Ventures, added to the demolition job and called on Congress to pass Rep. Sandy Levin's pending reform legislation.
“Our industry won’t end or be significantly disrupted if this legislation is enacted,” Stanfill told Congress, “any more than the auto industry’s dire predictions of doom came to pass after mileage standards, seatbelts, and air bags were mandated.”
Defenders of the private equity tax status quo offered one particularly bizarre rationalization at last week's hearings. Higher taxes on fund managers, the defenders argued, would drive these managers to do their wheeling and dealing all abroad.
Critics of the current investment fund tax situation quickly pointed out that fund managers, if they took their wheeling and dealing abroad, would still be subject, as U.S. citizens, to U.S. taxes.
Fair enough, acknowledged Jonathan Silver, the top spokesman for the National Venture Capital Association. Still, he noted, what about the “many non-U.S. venture capitalists who currently operate in the U.S., but who could easily move their activities back to their home countries”?
Nations like China and India, Silver testified, are making their economies tax-friendly to investment fund activity. If the United States moves in the opposite direction, wheeler-dealers from abroad in the United States “could easily move their activities back to their home countries.”
In effect, Silver was advising Congress not to increase taxes on American financial hustlers because that would discourage foreign financial hustlers from setting up shop in the United States.
The appropriate response to an argument so bizarre? Leo Hindery, one of the investment fund mavericks who testified last week, may have had the most cogent rejoinder.
Investment industry claims that “dire unintended consequences” await the United States should taxes on fund managers be boosted, Hindery told Congress, boil down to “complete poppycock.”
Stat of the Week
The 20 highest-paid managers of U.S. private investment fund partnerships last year averaged $657.5 million each — and paid virtually no Medicare payroll tax on that income. This tax avoidance, legal because investment managers can label their earnings as “capital gains,” denies Medicare as much as $1.8 billion a year, says the National Women’s Law Center, enough “to pay the Medicare hospital costs of 204,000 to 408,000 Americans.”
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