REGULATION OF THE FINANCIAL INDUSTRY IS BADLY NEEDED

Note: If you find my posts too long or too dense to read on occasion, please just read the bolded portions. They present the key points I’m making and the most important information I’m sharing.

The financial industry needs strong regulation because it has shown time and time again that without regulation it will rip off consumers and engage in practices that put our economy at-risk. Apparently, greed and hubris are endemic in the financial industry – from the CEOs on down. However, many Members of Congress resist strong regulation because of the campaign money they get from the industry. In addition, some members of the Executive Branch have opposed strong regulation of the financial industry, particularly those who have come through the revolving door from the industry.

Enforcement of existing regulations was quite lax under President Trump’s administration and needs to be strengthened. Furthermore, new regulations are needed to rein in problems that weren’t previously addressed and ones that have newly cropped up. The industry is always inventing new ways to circumvent regulations and developing new, risky, financial transactions. It remains to be seen whether President Biden and the Democratically controlled Congress will implement strong regulation of the financial industry.

Federal regulators asked the financial industry to forego overdraft fees because of the financial hardships of the pandemic. Despite this, the industry collected $4 billion in overdraft fees from consumers during 2020. JPMorgan Chase alone collected almost $1.5 billion in overdraft fees, which contributed to its $29 billion in 2020 profits. Overall, the financial industry collected $17 billion in overdraft fees in 2019. Clearly, regulation is needed of overdraft fees and the circumstances in which they are charged. Both have been the subject of abuse by financial corporations.

To protect consumers from abusive financial industry practices, the Consumer Financial Protection Bureau (CFPB) needs to be powerful and aggressive. It was created in the aftermath of the 2008 financial collapse, which revealed huge fraud by the financial industry in the home mortgage market. The lack of any agency focused specifically on protecting the public from abusive financial practices was a key contributing factor. However, the financial industry has lobbied hard to weaken the CFPB. As a result, both Republicans and Democrats in Congress and many in the Executive Branch, particularly under President Trump, have worked to weaken the CFPB.

As an example of lax enforcement under President Trump, the CFPB recovered just $700 million for consumers in 2020, down from $5.6 billion in 2015. Meanwhile, consumer complaints to the CFPB rose to record levels in 2020. In the four years of the Trump administration, the CFPB recovered an annual average of less than $600 million for consumers, while under President Obama it had recovered an average of $2.1 billion a year, three and a half times as much. Furthermore, under Trump the focus was on small firms rather than the major financial industry corporations. [1]

Fortunately, the Consumer Financial Protection Bureau is being revitalized under President Biden and will:

Enforce legal protections for debtors, including renters behind on their rent and student borrowers, while limiting abusive debt collection practices,
Strengthen regulation of payday lenders, including requiring them to assess a borrower’s ability to repay a loan,
Strengthen regulation of overdraft fees, and
Seek systemic change in the industry not just penalties for individual cases.

Wells Fargo is one of the notoriously bad actors in the financial industry. For example, in 2016 it admitted to creating millions of unauthorized accounts for customers to meet high sales and revenue targets. This led to the resignation of CEO John Stumpf, who was replaced by Tim Sloan, the bank’s president and chief operating officer. Sloan, four months earlier, when the fake accounts scandal was well known and had been going on for years, said in an interview that Wells Fargo’s aggressive sales tactics were appropriate and were not going to change. After Sloan took over as CEO, the bogus accounts scandal worsened and Wells Fargo also admitted to fraud in other business areas from car insurance to mortgages, as well as using faked customer signatures to satisfy anti-money laundering rules. Regulators imposed fines and took the dramatic step of prohibiting Wells Fargo from growing its business. [2]

When CEO Sloan left Wells Fargo in March 2019, he had been paid $40 million in his 2 ½ scandal-laden years as CEO and tens of millions of dollars in his previous 30 years at Wells Fargo. Now, he wants to collect another $20 million in deferred compensation. Government regulators could block this compensation under a law allowing them to limit “golden parachute” payments to senior executives who were involved in illegal activity at a financial institution. Whether they will do so remains to be seen.

I urge you to contact your U.S. Representative and Senators and to ask them to support strong regulation of the financial industry and a strong Consumer Financial Protection Bureau. Consumers and our economy need to be protected from the no holds-barred greed and hubris of those in the financial industry. The consistent, repeated fraud and risky practices across the financial industry, including by its largest corporations, requires no less. You can find contact information for your U.S. Representative at http://www.house.gov/representatives/find/ and for your U.S. Senators at http://www.senate.gov/general/contact_information/senators_cfm.cfm.

Please also contact President Biden and ask him to appoint individuals who will implement strong regulation of the financial industry and to fully support Rohit Chopra, the strong regulator he has nominated to lead the Consumer Financial Protection Bureau. (Confirmation is pending in the Senate.) This is important because Biden has not always supported strong regulation of corporations and the financial industry. He is from Delaware, which is the legal home of many U.S. corporations because of its lax regulation of corporations. You can email President Biden via http://www.whitehouse.gov/contact/submit-questions-and-comments or you can call the White House comment line at 202-456-1111 or the switchboard at 202-456-1414.

[1] Newmyer, T., 1/28/21, “CFPB muzzled under Trump, prepares to renew tough industry oversight,” The Boston Globe from the Washington Post

[2] Rucker, P. 3/10/21, “Bank regulator could block disgraced ex-Wells Fargo CEO from $20 million payout,” The American Prospect (https://prospect.org/power/bank-regulator-could-block-disgraced-ex-wells-fargo-ceo-from-payout/)

OPPOSITION TO “SOCIALISM” IS A DOG WHISTLE FOR RACISM

As I imagine you’ve heard, Republicans are attacking President Biden’s and Democrats’ policy proposals as “socialism.” I thought, naively, that Republicans were just trying foster opposition based on Cold War fears by conflating socialism with communism and identifying it as the existential threat to American democracy.

Heather Cox Richardson, with her historical perspective, has opened my eyes to the fact that the opposition to “socialism” has deeper roots in our history and is a dog whistle for racism. (If this use of the term dog whistle is new to you, please see this footnote. [1])

First, socialism is formally defined as an economic and political system where workers own the means of production (e.g., factories, farms, and organizations that provide services as well as the raw materials, machines, tools, and physical facilities used in producing goods and services). This is NOT, by any stretch of the truth, what Biden and Democrats are proposing. Socialism recognizes workers as the essential input to the economy and, therefore, posits that they should own the means of production and be the beneficiaries of the fruits of the economy.

Social democracy, on the other hand, is a political and economic system where a democratic government manages and regulates capitalism (i.e., private ownership of the means of production) to ensure social and economic justice. In our democracy, the government’s commitment to social and economic justice for all is stated in our founding documents – that all people are created equal, that all people should be guaranteed life, liberty, and the ability to pursue happiness, and that all people have the rights delineated in the Bill of Rights.

The explicit recognition that equal opportunity and true freedom require economic security was stated by President Franklin D. Roosevelt in his proposal for an economic bill of rights [2] and by Senator Bernie Sanders in his statements on what democratic socialism means to him (although technically speaking, he was describing social democracy and not democratic socialism). [3] [4] (See this footnote for a definition of democratic socialism and communism. [5])

Currently, Republicans are using “socialism” as a dog whistle to mean the use of government resources to promote racial equity and justice. Their dog whistle definition of “socialism” is the use of taxes paid by hardworking white men (and women) to benefit lazy people of color who are happy to live on government benefits. Today’s Republicans claim this “socialism” will undermine American democracy and freedom. The dog whistle is that these policies will undermine the “freedom” and privilege of white people.

This use of “socialism” goes back to 1871 when southern Democrats claimed they opposed voting by Blacks, not due to racism, but because Black voters would elect policy makers who would promote “socialism,” i.e., taxing white property owners to pay for roads, schools, and hospitals that would benefit Blacks. [6] They argued that Black voting would lead to “socialism” that would destroy America (namely the America of white supremacy). [7] [8]

After the Brown v. Board of Education decision in 1954, which found racial segregation in public schools unconstitutional, the use of government resources to enforce desegregation and civil rights was attacked as “socialism” because the costs of implementing desegregation and civil rights (for “undeserving” Black people) would be paid for by taxes on hardworking white men (and women). In 1958, Republican Senator Barry Goldwater accused his own party’s President Eisenhower of succumbing to “the siren song of socialism” for his use of government resources (troops) to enforce desegregation of Little Rock, Arkansas, High School. The irony was that the Goldwater family had made its money from government funding for dam construction in Arizona. [9]

Republican attacks on government, on a public safety net, and on beneficiaries of public assistance (inaccurately stereotyped as people of color) took on new strength and significance with the election of President Reagan in 1980. Remember Reagan’s attack on the mythical “welfare queen” with her Cadillac and mink coat? The attacks on “socialism” as a dog whistle for racism have only escalated since then.

Today, Republicans are vigorously charging that President Biden and Democrats are working to bring “socialism” to America. They claim that a no-holds-barred fight is necessary to save American from “socialism.” They are even willing to dispense with a commitment to democracy to “save” America. This disregard for democracy dates to at least 1980 when Republican strategist Paul Weyrich stated, “I don’t want everybody to vote …our leverage in the elections quite candidly goes up as the voting populace goes down.” That’s why Republicans have been and are actively engaged in voter suppression efforts. (Weyrich was a co-founder of the Heritage Foundation, which today is deeply involved in promoting state voting suppression laws and with the “audit” of voting in Arizona and elsewhere.) In October 2020, Utah Senator Mike Lee tweeted, “Democracy is not the objective … liberty, peace, and prosperity are. … democracy can thwart that.” [10]

Republicans are claiming today, as white southern Democrats did after the Civil War, that keeping “socialism” from coming to America requires keeping Black and other likely Democratic voters from voting; democracy, our Constitution, and our founding principles (which make America exceptional) be damned. The racism of the post-Civil War white Democrats’ attacks on “socialism” was made clear by the brutal Jim Crow laws they implemented to keep Blacks in their place and to prevent them from voting.

The implications of today’s Republicans’ claims of needing to prevent “socialism” in America aren’t completely clear, but civil rights, police reform, and social and economic justice are definitely targets. However, the racism behind their attacks on “socialism” is clear and these attacks should no longer be a dog whistle; every American should hear the racism in their attacks on “socialism” loudly and clearly.

[1] The term dog whistle here is a political adaptation of the fact that a dog whistle can’t be heard by humans but can be heard by dogs. In politics, it refers to language that will be heard as supporting white privilege and supremacy by those people attuned to such sentiments, but won’t be heard by many other people as being racist and where the politician opposing “socialism” – or using other dog whistles – can deny racist intent.

[2] President Franklin Delano Roosevelt, 1/11/44, “The economic bill of rights,” retrieved from the Internet 5/22/21 at https://www.ushistory.org/documents/economic_bill_of_rights.htm

[3] Senator Bernie Sanders, 11/19/15, “Senator Sanders on Democratic Socialism and Defeating ISIS,” retrieved from the Internet 5/22/21 at https://www.c-span.org/video/?400961-1/senator-bernie-sanders-address-democratic-socialism (Sanders begins speaking at 8 mins., defines socialism at 12 mins., and presents his and FDR’s vision at 30 mins. into this 1 hr. 40 min. video)

[4] Golshan, T., 6/12/19, “Bernie Sanders defines his vision for democratic socialism in the United States,” Vox (https://www.vox.com/2019/6/12/18663217/bernie-sanders-democratic-socialism-speech-transcript)

[5] Democratic socialism is socialism where both the economy and society are governed democratically, with decision making by citizens with a focus on economic and social justice. Democratic socialism is not compatible with capitalism, which is based on private ownership of the means of production and, therefore, where the benefits, economic and also social and political power, flow to the owners of capital, i.e., the owners of physical and monetary assets.

Communism is formally defined as an economic and political system where the workers own the means of production and that is dedicated to equality for all, implemented through an authoritarian government. The main difference between communism and socialism is that socialism is compatible with democracy and liberty, while communism requires authoritarianism and denies basic individual liberties.

[6] Cox Richardson, H., 4/19/21, “Letters from an American blog,” (https://heathercoxrichardson.substack.com/p/april-19-2021)

[7] Cox Richardson, H., 5/14/21, “Letters from an American blog,” (https://heathercoxrichardson.substack.com/p/may-14-2021)

[8] Cox Richardson, H., 1/16/21, “Letters from an American blog,” (https://heathercoxrichardson.substack.com/p/january-16-2021

[9] Cox Richardson, H., 4/19/21, see above

[10] Cox Richardson, H., 5/14/21, see above

KEEPING THE RICH FROM GETTING EVEN RICHER

The rich have been getting dramatically richer, generally at the expense of the rest of us, for the last 40 years. My previous post identified four ways the U.S. tax system favors the rich:

Lower tax rates on the types of income (i.e., unearned income) that are prevalent among the wealthy,
Weak enforcement of tax laws that allows the wealthy to engage in substantial illegal tax evasion,
The lack of a wealth tax on anything other than one’s home, and
Tax loopholes that allow the wealthy to significantly reduce the amount of income tax they pay.

Federal tax laws and regulations are, obviously, the result of policy decisions made by elected officials (i.e., Congress and the President) and bureaucrats in the executive branch who report to the President. Therefore, these four ways that the tax system is tilted in favor of the wealthy can and should be changed.

First, the tax rates on unearned income should be raised. There’s a strong argument for making the tax rates on unearned income the same as on earned income and there’s no good reason to tax unearned income at a lower rate than earned income. It would be fairer to treat all kinds of income the same and this would eliminate the perverse incentive to manipulate income to have it fall into a category with a lower tax rate.

Tax rates in general, for both unearned and earned income, should be made more progressive. This would make our tax system fairer. The current top income tax rate is 37%. In the 1950s, the top tax rate was over 90% and in 1980, it was 70%. [1] So, the rich have gotten huge tax cuts over the last 70 years. And by the way, the economy was doing just fine in the 1950s with those higher tax rates. Raising the top rate by 1% would increase government revenue for needed programs and investments by about $12 billion per year. President Biden has proposed increasing the top rate to 39.6% (where it was before the 2017 Republican tax cut). This would generate about $31 billion in annual revenue.

Second, the budget of the IRS needs to be increased to strengthen enforcement of tax laws. It is estimated that every dollar spent on enforcement will reduce tax evasion by about $10. President Biden has proposed increasing IRS funding by about $8 billion per year and estimates that this would decrease tax evasion and increase government revenue by about $70 billion per year.

The IRS’s funding has been cut dramatically in recent years. This has reduced its ability to enforce tax laws and stop tax evasion. According to a Congressional Budget Office (CBO) report, from 2010 to 2018, the IRS’s annual budget declined by 20% and its staff decreased by 22%. Funding for enforcement fell by nearly 33%. Reviews of individual tax returns fell by 46%, while reviews of corporate tax returns fell by 37%. With less money and fewer staff, the IRS has had reduced capacity to enforce tax laws. ^[2] Nonetheless, the IRS is auditing low-income households, particularly those claiming the Earned Income Tax Credit for low-wage workers, at about twice the average rate that it audits the overall population.

The CBO estimated that $381 billion per year of taxes owed are not collected, mostly because of under-reporting of income by wealthy Americans. Because nearly all wage income is reported to the IRS by employers, unearned income and business income are far more likely to be under-reported. Wealthy Americans receive far more of these kinds of income than middle- and lower-income households. Therefore, the wealthy are the primary ones guilty of tax evasion by under-reporting income and are the beneficiaries of reduced IRS enforcement.

Third, a wealth tax would be an important step in making our tax system fairer, reducing economic inequality, and limiting the ability of families to perpetuate multi-million-dollar fortunes across generations, which is contributing to the emergence of an oligarchy in American society and politics. (See my previous posts on oligarchy in America here and here.) Senators Warren and Sanders have proposed a wealth tax that would place a 2% annual tax on wealth over $50 million, rising to 3% on wealth over $1 billion. It is estimated that such a wealth tax would raise $300 billion a year in revenue for the federal government.

Fourth, tax loopholes for the wealthy should be closed. There are too many of them to go into detail or provide an exhaustive list. As a starting point, we should:

Eliminate the “carried interest” loophole for managers of real estate, venture capital, private equity, and hedge funds that lets them pay the lower unearned income tax rates on the income they earn from their jobs,
Reduce the amount of money that can be given as tax-free gifts,
Reduce the amount of money that can be put tax-free into retirement accounts,
Reduce the amount of money that can be transferred tax-free in an estate, and
Eliminate the “stepped up basis” law that allows for tax-free transfers of assets that have increased in value. (See my previous post for more details on these tax loopholes.)

I encourage you to contact your U.S. Representative and Senators and tell them you support policy changes such as those above that would make our tax system fairer, stop the runaway increase in economic inequality, and generate revenue to pay for needed government programs, such as improving infrastructure and providing better supports for children and families. You can find contact information for your US Representative at http://www.house.gov/representatives/find/ and for your Senators at http://www.senate.gov/general/contact_information/senators_cfm.cfm.

I also encourage you to contact President Biden and to tell him you support his policy changes and others that would make our tax system fairer, reduce economic inequality, and generate revenue to pay for needed government programs. Contact the White House at https://www.whitehouse.gov/contact.

[1] Reich, R., 4/2/21, “Tax the rich. Here’s how,” Common Dreams (https://www.commondreams.org/views/2021/04/02/tax-rich-heres-how)

[2] Congressional Budget Office, July 2020, “Trends in the Internal Revenue Service’s funding and enforcement,” https://www.cbo.gov/system/files/2020-07/56422-CBO-IRS-enforcement.pdf

HOW THE RICH GET RICHER #2

Here’s number 2 in a series of posts on how the rich get richer, generally at the expense of the rest of us. (See number 1 here.)

The U.S. tax system favors the rich with:

Lower tax rates on the types of income (i.e., unearned income) that are prevalent among the wealthy,
Tax loopholes that allow the wealthy to significantly reduce the amount of income tax they pay,
Weak enforcement of tax laws that allows the wealthy to engage in substantial illegal tax evasion, and
The lack of a wealth tax on anything other than one’s home.

First, unearned income (e.g., income from dividends and the increased value of investments, aka capital gains) is generally taxed at a lower rate than earned income (i.e., income from wages). The wealthy, of course, receive the lion’s share of unearned income.

The overall federal tax rate on earned income for a typical household is 29.65%. The income tax rate is 22% on middle income households. The tax for Social Security is 6.2% and is matched by one’s employer. The tax for Medicare is 1.45% and is also matched by one’s employer. Income tax rates on earned income begin at 10% for lower income households and increases to 37% (on income over $622,000). Social Security only taxes earnings up to $142,800, so the effective tax rate for those with higher incomes declines as income increases. Therefore, the highest overall federal tax rate on earned income today is just about 40%. (Historically, the maximum federal income tax rate was 70% in 1980 and over 90% in the 1950s, compared with 37% today.)

The federal tax rate on most unearned income is roughly half of that on earned income – 15% for middle income taxpayers and a maximum of 20% for high income taxpayers. The tax on long-term capital gains (i.e., the increase in value of investments owned for more than one year) is zero for lower income households and increases to 20% (on income over $434,550). Most dividend income is taxed at the same rates as long-term capital gains. Unearned income is not subject to Social Security and Medicare taxes. By the way, billionaires in the U.S. gained about $1 trillion in wealth due to the increased values of their investments during the pandemic year from March 2020 to March 2021.

In early 2011, the very wealthy investor Warren Buffett publicly stated that he believed it was wrong that rich people, like himself, paid a smaller portion of their incomes in income taxes than middle class people, like his secretary. President Obama and some in Congress proposed changes in income tax laws to ensure that the wealthy paid more in income tax, but these proposals were not enacted.

Second, the broad variety of tax loopholes that benefit the wealthy constitute a form of welfare for the wealthy that is rarely discussed using this terminology. One of the most egregious loopholes is the so-called “carried interest” loophole. It allows managers of real estate, venture capital, private equity, and hedge funds (who are invariably wealthy) to claim the income they earn from their jobs to be capital gains (i.e., unearned income), which cuts the income taxes they pay roughly in half. This loophole is estimated to cost the federal government about $1.4 billion a year in lost tax revenue. [1]

An individual can make a gift of up to $15,000 per year to anyone they want to (e.g., children and grandchildren) and to as many people as they want to. The recipient(s) do not have to pay any tax on the gift they receive. Only the wealthy can afford to make gifts of this magnitude, of course.

An individual can contribute up to $19,500 ($26,000 if over 50) to a 401k retirement savings account and reduce their taxable income by the amount of their contribution. In some cases, an individual could also contribute $6,000 ($7,000 if over 50) to an Individual Retirement Account (IRA) and reduce their taxable income by this amount as well. Clearly, only wealthy individuals can afford to make contributions of this magnitude to retirement accounts, so this is another way the rich can dodge income taxes.

When a wealthy individual dies, roughly $11 million of their estate can be passed on tax-free. As a result, only about 3,000 estates are subject to the federal estate tax each year. The maximum tax rate on the assets passed on by an estate is 40%. Some in Congress have proposed eliminating the estate tax completely.

If investments or assets are left to children when a wealthy parent dies, the children never have to pay any tax on the increased value of the investment during the parent’s lifetime. If they were to sell the investment or asset on the day they received it, they would owe no tax. So, for example, Bill Gates can leave his billions of dollars of Microsoft stock to his children and they can sell it when they receive it and owe no tax, so no tax would ever be paid on the billions of dollars of increase in its value from the day Bill Gates got the stock.

Any homeowner can deduct the interest paid on up to $1 million of mortgages to reduce the amount of income on which they owe tax. (This limit has been reduced to $750,000 for mortgages obtained after 2017.) This applies to mortgages on first and second homes. This tax break costs the federal government more than it spends helping poor families pay rent and avoid homelessness. Homeowners can also reduce their taxable income by up to $10,000 for property taxes they paid. [2] This $10,000 limit was imposed in 2017; the deduction used to be unlimited. These tax breaks have the greatest benefit for the wealthy, of course.

The cost to the federal government of lost revenue due to the various income tax breaks (aka loopholes) is huge – more than $1.5 trillion a year, which is more than the cost of Social Security or of Medicare and Medicaid combined. The bulk of the benefits from these income tax breaks or loopholes goes to wealthy individuals, of course.

Third, the wealthiest 1% of U.S. households don’t report over one-fifth of their income costing the federal government an estimated $175 billion every year. Some simply don’t report all their income, but many use complex tax strategies to dodge income taxes. Because the IRS rarely audits wealthy taxpayers (only 6% of those with income over $10 million), much of this tax avoidance is never subject to enforcement actions. Budget cuts and staff shortages at the IRS are partly to blame, but policy decisions have also contributed to the fact that the poor are audited at about twice the rate (roughly 0.7%) of the overall population. [3]

Finally, wealth is not taxed in the U.S., with the exception of the major asset or investment of the middle-class – one’s home. The property tax on one’s home, typically levied by local government, is the only wealth tax in America. It ranges from a high of 2% per year to a low of an effective rate of 0.3%. Ownership of all other wealth, other assets or investments (e.g., stocks, bonds, and other financial instruments), which are mostly owned by the wealthy, are not taxed.

The wealthy and their political supporters have lots of rationales for why they shouldn’t pay more taxes. Many of these rationales contradict ones they present to argue against public assistance for the poor or increased unemployment benefits or an increase in the minimum wage.

The bottom line is that by pretty much any measure and also from an historical perspective, the wealthy are not paying their fair share. The U.S. tax system is rigged in favor of the wealthy. When the wealthy and their political supporters say the country can’t afford to help low- and middle-income people with health care, child care, higher education, or housing costs, or that Social Security benefits need to be cut, remember that the wealthy are getting hundreds of millions of dollars of benefits each year from the provisions or loopholes of our tax laws. On top of this, there would be additional hundreds of millions of dollars of revenues for the federal government each year if the wealthy were paying their fair share.

My next post will present a variety of proposals and strategies to make our tax system fairer.

[1] Reich, R., 4/2/21, “Tax the rich. Here’s how,” Common Dreams (https://www.commondreams.org/views/2021/04/02/tax-rich-heres-how)

[2] Buchheit, P., 3/22/21, “The boundless advantages of the welfare state – for the rich,” Common Dreams (https://www.commondreams.org/views/2021/03/22/boundless-advantages-welfare-state-rich)

[3] Johnson, J., 3/22/21, “ ‘This is tax evasion’: Richest 1% of US households don’t report 21% of their income, analysis finds,” Common Dreams (https://www.commondreams.org/news/2021/03/22/tax-evasion-richest-1-us-households-dont-report-21-their-income-analysis-finds)