Month: June 2021

THE CASE FOR A WEALTH TAX

Note: I apologize for the infrequent blog posting. I’m on sabbatical with out-of-town grandchildren visiting.

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.

Recent revelations about how little federal income tax the ultrawealthy pay and how they legally avoid income tax liability make the case that a wealth tax is essential for a fair tax system. A fair tax system is necessary a) to provide sufficient funds for the public programs needed to serve the public and the public good, and b) to preserve public support for the tax system.

ProPublica, an independent, nonprofit newsroom that does investigative journalism in the public interest, has obtain and analyzed 15 years of data on the tax returns of thousands of the country’s wealthiest households. Its analyses show the wealthy pay very little in income taxes, perfectly legally, despite the fact that their wealth is growing by leaps and bounds. [1] (This post is largely a summary of this ProPublica reporting.)

The median American household earns about $70,000 a year and pays about 15% of this in income taxes. For the period from 2014 to 2018, a typical middle class American household paid a total (for these five years) of about $62,000 in federal income tax on total earnings of around $350,000. Meanwhile, its wealth, primarily the value of its home, grew by $65,000. Its effective tax rate on the combine total of earned income and increase in wealth was about 15%.

ProPublica’s detailed analysis of the 25 wealthiest Americans found that collectively their wealth increased by $401 billion in the five-year period from 2014 to 2018. Their earned income was tiny by comparison. They paid an aggregate total of $13.6 billion in federal income taxes. Their effective tax rate on the combined total of their earned income and increase in wealth was about 3.4% (versus the 15% paid by a typical middle-income taxpayer).

Another analysis found that in 2018, in comparison to their wealth, a typical middle-income household paid 75 times as much in income tax as those 25 ultrawealthy Americans. At the end of 2018, the 25 wealthiest Americans had an estimated wealth of $1.1 trillion and in 2018 paid federal income taxes of $1.9 billion. It would take 14.3 million typical American households to have this much wealth and those 14.3 million households paid federal income taxes of $143 billion in 2018.

This disparity in income tax paid when wealth is factored in is the result of a 1920 Supreme Court decision where the Court ruled that the income tax laws as written apply only to income received in cash and not to an increase in wealth (i.e., the value of assets), unless assets are sold and cash (or other forms of proceeds) are received. Before this decision, the income tax had applied to increases in wealth.

This decision provided the wealthy with a huge loophole for tax avoidance. The ultrawealthy own billions of dollars worth of stock, often in companies they own or control. The 25 wealthiest Americans have seen the value of their stocks skyrocket in recent years. To minimize earned income (and income tax), they often take modest salaries from their companies; some take salaries of only $1.

Some of the ultrawealthy avoid having income (and therefore paying income tax) because they are able to pay their living expenses by borrowing large sums of money, sometimes billions of dollars, using their stock wealth as collateral for loans. These loans are not considered income and therefore are not subject to income tax. Furthermore, the interest on the loans is often tax deductible and can be used to offset (i.e., cancel out) income, reducing or eliminating taxable income and the amount of income tax owed.

The wealthy often avoid income tax by reducing taxable income with deductions. Deductions can be losses on various investments or business ventures, such as real estate or sports teams. Charitable contributions are another deduction that reduces taxable income. And, of course, if they do sell some of their stock or other assets, the profits on those sales, as well as the dividends and interest they get from their investments, are unearned income, which is taxed at a lower rate than earned income (if it isn’t eliminated by deductions).

The wealthy have gotten these tax breaks (and others) written into U.S. tax laws through their spending on and donations to the political campaigns of many of our elected officials, as well as through their lobbying of elected and appointed officials. (See my previous posts on how the U.S. tax system favors the rich and what can be done to make it fairer.)

The degree to which the wealthy control the debate on tax policy is reflected in the fact that the current tax reform proposals from President Biden would have little impact on the wealthy. Nonetheless, these tax reform proposals are reported as being big and controversial changes in our income tax laws. One proposal is to raise the income tax rate on high earned incomes back to 39.6% from 37%. (For perspective, it was over 90% in the 1950s and 70% in 1980.) This would have little effect on the wealthy because only a small portion of their income is earned income and this is a small percentage increase. A second proposal, would make the income tax rate on unearned income (e.g., dividends and the gain on the sale of assets) the same as the higher rate on earned income. This would have more of an effect on the wealthy, but little effect on the ultrawealthy that ProPublica analyzed in detail as they rarely sell their assets or they have deductions that reduce or eliminate their taxable income.

The failure of the wealthy in America to pay their fair share in taxes harms our country in two main ways. First, government is under-funded and can’t do the things we need it to do – from maintaining and building infrastructure, to investing in human capital, to maintaining a just and sufficient safety net for those who fall on hard times, to building and maintaining a public health system that can save lives during a pandemic or other health crisis. Second, taxes are citizens’ collective contributions to having a civil society and supporting the public good. Such a system is viable only if citizens believe it is fair and everyone is contributing their fair share.

ProPublica’s investigative reporting on the U.S. tax system is performing a valuable public service. An informed debate about our tax system and the design of policies for a fair system can only happen if there is good data and an accurate picture of how the tax system is working.

These data and the picture they paint make it clear that the only way to have a truly fair tax system is to tax wealth (as Senators Warren and Sanders have proposed) or to tax increases in wealth as income even if assets are not sold and no cash or other proceeds are received (i.e., to tax unrealized capital gains).

I urge you to contact your U.S. Representative and Senators and to ask them to support a tax on wealth or increases in wealth as the only way to make our tax system fair. 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 support a tax on wealth or increases in wealth, in addition to his current proposals, as such a tax is essential to making our tax system truly fair. 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]      Eisinger, J., Ernsthausen, J., & Kiel, P. 6/8/21, “The secret IRS files: Trove of never-before-seen records reveal how the wealthiest avoid income tax,” ProPublica (https://www.propublica.org/article/the-secret-irs-files-trove-of-never-before-seen-records-reveal-how-the-wealthiest-avoid-income-tax)

REGULATION OF THE FINANCIAL INDUSTRY IS BADLY NEEDED Part 2

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.

My previous post made the case for strong regulation of the financial industry to protect consumers with a strong Consumer Financial Protection Bureau (CFPB). The financial industry needs strong regulation because it has repeatedly shown that without regulation it will rip off consumers and engage in practices that put our economy and our whole financial system at-risk.

In addition to the Trump administration’s weakening of the CFPB and other regulation of the financial industry, pro-business judicial decisions have also weakened consumer protections from abusive financial industry practices. However, Congress can restore these consumer protections through appropriate legislation.

First, the Supreme Court ruled that the Federal Trade Commission (FTC) cannot seek monetary compensation for consumers defrauded by payday or other short-term lenders. The Consumer Protection and Recovery Act has been introduced in Congress and would make it clear that the FTC can seek financial compensation for these consumers. [1]

Second, the Comprehensive Debt Collection Improvement Act would strengthen a variety of protections for borrowers that were weakened by judicial decisions. For example, it would limit email and other electronic harassment by debt collectors and restrict abusive practices by medical debt collectors.

Finally, the Non-judicial Foreclosure Debt Collection Clarification Act would regulate any business involved in home foreclosures without a judge’s authorization as a debt collector under the Fair Debt Collection Practices Act. In 30 states and D.C., lenders can foreclose and repossess a home without going to court and getting a judge’s ruling. A Supreme Court ruling limited home owners’ rights in these states. This legislation would give these home owners the protections of the Fair Debt Collection Practices Act.

The Securities and Exchange Commission (SEC) is an independent federal regulatory agency responsible for protecting investors and maintaining the fair and orderly functioning of securities markets. It works to ensure full public disclosure of information so all investors are on an equal footing. To that end, it works to prevent, identify, and punish insider trading, where some people have information that is not available to the general public and therefore have an unfair advantage in making decisions about buying and selling securities. [2]

Classic insider trading was in the news a year ago. Some members of Congress, who had received private, closed-door briefings on the coronavirus, made substantial stock market trades that appeared to be informed by this non-public information. Similarly, some executives of firms working on coronavirus vaccines, who had knowledge of the progress of their vaccine development that was not public, made substantial stock market trades that appeared to be informed by this non-public information. There were also situations where an insider shared non-public information with an outsider who then appears to have made investment transactions based on this non-public information.

However, there is another type of insider trading that may be more insidious – using sophisticated computers to make large trades moments before other trades that are in the pipeline are executed and become public knowledge. This is referred to as “front-running” and is a systemic problem in securities markets. It allows those with these sophisticated computer systems to make profits at the expense of everyone else who’s buying and selling securities.

Although the SEC has the power to address these problems under existing laws, it has failed to stop these practices which unfairly disadvantage run-of-the-mill buyers and sellers of securities.

The SEC is also charged with preventing large-scale speculation, particularly with borrowed money, that puts banks and financial corporations at-risk of bankruptcy if a large speculative investment goes bad. This is exactly what caused the 2008 financial collapse. This type of systemic risk is substantial today in large part because the financial industry has created “investments” that are called derivatives – financial instruments that are derived from or based on other financial instruments. In 2008, for example, the core problem was derivatives based on home mortgages. These were packages of home mortgages, and portions of them (e.g., the interest and principal portions of payments), and speculation on how interest rates would change, etc. These and many other derivatives are hard for most investors to understand, can be very volatile, are hard to put a value on, are hard to regulate, and it’s almost impossible to predict how they will perform as an investment. Therefore, investing in them is basically gambling and the securities market for them is basically a casino.

The laws and regulations that were put in place after the 2008 collapse to prevent a recurrence have been watered down or unenforced to the point that many experts believe we are likely to see a repeat of that collapse, and possibly a worse one. The largest 40 banks across the world are larger than ever and so interconnected through derivative “investments,” loans, and other financial transactions, that governments would have no choice but to bail them out again to prevent a total collapse of the financial system if any piece of this complex, opaque, and highly speculative financial casino were to crash in value.

I urge you to contact your U.S. Representative and Senators and to ask them to support strong, effective regulation of the financial industry through federal agencies such as the Federal Trade Commission and the Securities and Exchange Commission. Consumers and our financial markets need to be protected from the no-holds-barred greed and hubris of those in the financial industry. The consistent, aggressive, and risky practices across the financial industry, including by its largest corporations, require 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 at the Federal Trade Commission, the Securities and Exchange Commission, and other federal agencies. 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]      Cohen, R. M., 4/27/21, “Congress looks to judicial overrides to strength consumer protections,” The Intercept and The American Prospect (https://theintercept.com/2021/04/27/supreme-court-ftc-consumer-debt/)

[2]      Turner, L., & Kuttner, R., 2/18/21, “The financial reforms we need,” The American Prospect (https://prospect.org/economy/financial-reforms-we-need-lynn-turner-interview/)