Remember When the IRS Targeted Liberals?

Salon’s Alex Seitz-Wald has a story that provides additional context on the difficulty the IRS has in determining appropriate filters for political activity. See “When the IRS targeted liberals: Under George W. Bush, it went after the NAACP, Greenpeace, and even a liberal church,” Salon.com (May 14, 2013).

While few are defending the Internal Revenue Service for targeting some 300 conservative groups, there are two critical pieces of context missing from the conventional wisdom on the “scandal.” First, at least from what we know so far, the groups were not targeted in a political vendetta — but rather were executing a makeshift enforcement test (an ugly one, mind you) for IRS employees tasked with separating political groups not allowed to claim tax-exempt status, from bona fide social welfare organizations. Employees are given almost zero official guidance on how to do that, so they went after Tea Party groups because those seemed like they might be political. Keep in mind, the commissioner of the IRS at the time was a Bush appointee.

The second is that while this is the first time this kind of thing has become a national scandal, it’s not the first time such activity has occurred.

The article goes on to list the IRS varied record on successful filtering and investigation of political activities, including:

1. The investigation of All Saints Episcopal, a large (liberal) church in Pasadena, because of an anti-war sermon the Sunday before the 2004 election, about Bush’s preemptive war doctrine–a case that was not closed until 2007, when the IRS concluded that the church had violated rules but did not revoke its tax-exempt status;
2. The failure to investigate two large (conservative) churches in Ohio that were apparently engaged in direct political campaigning for the Republican gubernatorial candidate, who even benefited from flights on church planes, inspite of the complaint from a group of religious leaders about the violations;
3. The quick closing of an audit, without any action, of The Living Word Christian Center, a (conservative) church in Minnesota, after its pastor endorsed Michele Bachmann from the pulpit in 2006;
4. The 2004 audit targeting the (liberal) NAACP for criticising Bush for being the first sitting president to fail to address the organization at its annual meeting;
5. The ability of a right-wing group called “Public Interest Watch“, funded almost entirely by Exxon Mobile in one year, to get the IRS to instigate an examination of Greenpeace, an organization critical of Exxon Mobile for its failure to address climate change, in 2006.

Perhaps more interesting–The Senate held a hearing on nonprofits’ political activity under the REPUBLICAN chair of the Finance Committee, who wanted the IRS to come down harder on enforcement of the rules and noted the need to provide legislative clarity about drawing the line between politics and social welfare, the same issue that the right-wing press is accusing the IRS of failing on today.

Related articles

NAACP Chair Emeritus: ‘Legitimate’ For IRS To Target ‘Admittedly Racist’ Tea Party: ‘Taliban Wing’ Of Politics

iberals are held to a higher standard

Bam: Two years after the NAACP criticized Bush in 2004, the

How Apple avoids US taxes with shell games

Tomorrow’s Congressional hearing on the ability of major multinationals to shift profits offshore to avoid US tax (and everywhere-else tax) may finally get the attention of the American public onto a tax issue worth thinking about.

As today’s New York Times makes clear, Apple has used sophisticated tax planning to shift its assets offshore, often to employee-less shells that are run from Apple’s US headquarters. See Nelson Schwartz, Apple avoided billions in US taxes, Congressional panel says, New York Times (May 20, 2013).

Even as Apple became the nation’s most profitable technology company, it avoided billions in taxes in the United States and around the world through a web of subsidiaries so complex it spanned continents and surprised experts, a Congressional investigation has found.

Some of these subsidiaries had no employees and were largely run by top officials from the company’s headquarters in Cupertino, Calif., according to Congressional investigators. But by officially locating them in places like Ireland, Apple was able to, in effect, make them stateless – exempt from taxes, record-keeping laws and the need for the subsidiaries to even file tax returns anywhere in the world.

 

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Atop Apple’s offshore network is a subsidiary named Apple Operations International, which is incorporated in Ireland but keeps its bank accounts and records in the United States, and holds board meetings in California.

Because the United States bases residency on where companies are incorporated, while Ireland focuses on where they are managed and controlled, Apple Operations International was able to fall neatly between the cracks of the two countries’ jurisdiction.

Even John McCain seems to recognize that Apple’s offshoring gimmicks stretch the notion of what should be acceptable: “Apple claims to be the largest U.S. corporate taxpayer, but by sheer size and scale, it is also among America’s largest tax avoiders.” Id. Apple’s gimmicks take advantage of a tax system that does not adequately address the nature of intellectual property as the core of a company’s profit-making business nor the nature of the economic sham of claiming to sell such property to affiliates at “arm’s length prices”, when the purported affiliates are nothing but names on a tiny office door and the purported arm’s length price would never be accepted from a genuine unrelated party. As Sen. Levin noted, Apple has succeeded in avoiding taxes “creat[ing] offshore entities holding tens of billions of dollars while claiming to be tax resident nowhere.” Id.

Apple’s CEO Cook is expected to claim that Apple doesn’t use gimmicks. Id. Of course, like Clinton’s equivocations, that all depends on your definition of a “gimmick.” When you create a vast community of subsidiaries with shell companies that exist to allow you to claim your profits are earned by employee-less companies that just happen to reside where there is no tax, that is using a gimmick, even if it is one that is perfectly legal under an outdated code that has been incessantly weakened by corporate lobbyists for the last three decades, at least.

Cook is also expected to argue that the solution is just to hand over to the big MNEs what they want–tax-free repatriation of profits they have shifted offshore. That’s the same crazy idea that the Bush administration and Republicans in Congress promoted in 2004, one that essentially rewarded companies for engaging in gimmicks and encouraged even more companies to shift even more income offshore and hold it there even longer to avoid US taxes. Congress would be foolish to reward poor social responsibility behavior with an even better tax outcome than that already generated by the poor social responsibility behavior!

The current transfer-pricing regime is not fitted for today’s global commerce. What Congress should consider doing is (1) eliminate offshore deferral altogether, and (2) apply a substance-over-form analysis to all transfers of intellectual property to offshore affiliates that would in most cases treat them as not occurring for tax purposes. It could phase in the end of deferral by permitting companies to treat their current stash of offshore profits as being repatriated on a straight-line basis over five years, so they avoid a humongous one-time tax hit. The legislation should also restrict the use of loss carryovers against such repatriated cash in much the way that loss carryovers are restricted after major acquisitions.

(And, by the way, that idea I had that I might make the iPhone my next smartphone? I’ve just thrown that in the waste basket. Rather not support a company that is so disloyal to the country that fostered the possibility of its existence and high profits.)

Related articles

Apple will claim it doesn’t use overseas ‘tax gimmicks’

Apple Avoiding Billions And Billions Of $ In Taxes

Apple Is Paying Almost No Taxes On The $102 Billion It Has

http://ataxingmatter.blogs.com/tax/2013/05/how-apple-avoids-us-taxes-with-shell-games.html

A Nation of the Non-productive?

Over on Brad deLong’s blog, I tossed off a comment. Thought it was a throw-away, but is it really?

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Now and then for fun, I dip into the Wealth of Nations. Here’s a snippet from the beginning of Chapter III:

““A man grows rich by employing a multitude of manufacturers; he grows poor by maintaining a multitude or menial servants. The labour of the latter, however, has its value, and deserves its reward as well as that of the former. But the labour of the manufacturer fixes and realizes itself in some particular subject or vendible commodity, which lasts for some time at least after that labour is past. It is, as it were, a certain quantity of labour stocked and stored up, to be employed, if necessary, upon some other occasion. That subject, or, what is the same thing, the price of that subject, can afterwards, if necessary, put into motion a quantity of labour equal to that which had originally produced it. The labour of the menial servant, on the contrary, does not fix or realize itself in any particular subject or vendible commodity. His services generally perish in the very instant of their performance, and seldom leave any trace of value behind them, for which an equal quantity of service could afterwards be procured.”

Notably, within mere paragraphs he goes on to tell us that these nonproductive workers include “…“The sovereign, for example, with all the officers both of justice and war who serve under him, the whole army and navy, are unproductive labourers…”

So, is America headed toward a state the majority of whose members are either unproductive rulers, soldiers, or servants? Because the growers, manufacturers, builders, miners etc are either disappearing or working for peanuts.

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Rulers, soldiers, servants — of course, no nation can consist entirely of rulers and their servants (excepting small niche nations whose living is made off of niche jobs like banking, gambling, religion, and other intangibles.) However, it seems that the trend in the US over the past 30 years has been to offshore as many of Adam Smith’s “productive” jobs as possible, or cut their pay and power stateside. Meanwhile, the US has maintained the huge military and has built up the servant class.

Well, is this a problem? Every creature has its niche, so maybe it could be a good thing for America to become the largest unproductive niche nation on the planet. It works for other, admittedly much smaller, nations. Could it work for the US?

The hazards here depend on internal and external pressures. Externally, being able to reliably utilize the productivity of the rest of the world, as and when needed, at prices the US is happy with, is in large part a function of the huge military. Maybe this is a stable strategy, but the more you depend on a single strategy like this, the more likely a single unforeseen event can hammer a wedge in the spokes. If one American outrage, however objectively minor, induced oil producing nations to stop selling to US customers, what happens to the huge military, and the domestic servant economy?

Internally, reducing the bulk of the population to dependent soldiers or servants is no way to build a resilient, tough and responsive nation. Whether they revolt or not, such a social structure cannot be counted on to respond optimally to new situations and threats.

You won’t, on the other hand, find “credibility” discussed when people speak of the Fed’s inevitably weak-kneed inclination to raise inflation (expectations).

So after thirty years of diligently establishing its reputation for credibility, the Fed has no credibility. They announce on December 12 that they’ll allow inflation to go as high as 2.5% (shock! awe!). And what happens to inflation expectations?

Yes, it was a limp-wristed “promise”: they would only allow that irresponsibly dangerous hyperinflationary jump to 2.5% if unemployment remained above 6.5%. (Pick a mandate, any mandate. You know which one they’ll choose.)

So after three decades of diligently protecting responsible creditors from the manifest evils of inflation, and imposing responsibility on feckless, impatient entrepreneurial, risk-taking borrowers, nobody believes for an internet minute that the Fed can or will address the unemployment side of their mandate — that it has the wherewithal to do so, or the inclination if it did.

Got credibility?

Cross-posted at Asymptosis.

Krugman’s complaining that he doesn’t understand the rules that his detractors are arguing by, and Marks suggests he watch this (55 seconds):

Is anyone else wishing our esteemed President knew the rules for knife fights?

Cross-posted at Asymptosis.

In my post The Fed is not “Printing Money.” It’s Retiring Bonds and Issuing Reserves, I said:

…when the Fed gives the banks reserves and retires bonds, it’s taking on market risk/reward, replacing it with absolutely nonvolatile, risk/reward-free assets (at least in nominal terms). It’s removing leverage and volatility from the banking system.

And:

The banking system doesn’t “take money” out of total reserves, or reduce those reserves, to fund loans.

And now I find this in a speech today at the Japan Society by FRBNY President and CEO William Dudley (HT Matthew Klein). Emphasis mine:

…asset purchases work primarily through the asset side of the balance sheet by transferring duration risk from the private sector to the central bank’s balance sheet.  This pushes down risk premia, and prompts private sector investors to move into riskier assets.  As a result, financial market conditions ease, supporting wealth and aggregate demand.  The fact that such purchases increase the amount of reserves in the banking system and the size of the monetary base is a byproduct — not the goal — of these actions.

Or to put it another way: when you increase M in MV = PY, the most likely result — the result you have to assume by default absent some convincing story about real-economy incentives, causes, and effects —  is a purely arithmetic decline in V (cf. Dudley’s “byproduct”), with zero effect on P or Y.

This is doubly true if by M you mean the Monetary Base (as monetarists do, inconsistently but often) — the only measure of money that includes reserve balances. Increasing the quantity of reserve balances (hence the monetary base) does not magically increase either P or Y.

Cross-posted at Asymptosis.

“Since the I.R.S. also is the chief enforcer of Obamacare requirements, [Michele Bachmann] asked whether the I.R.S.’s admission means it ‘will deny or delay access to health care’ for conservatives. At this point, she said, that ‘is a reasonable question to ask.’ ”

– Bob Unruh, Why Obama Released Embarrassing IRS Bombshell, WND Exclusive, May 13

Yes, that’s right.  You read the title of this post correctly.  Obamacare turns out to be a single-payer healthcare insurance program, after all!

Or so says Michele Bachmann, anyway.  And she certainly would know.

This is great news, in my opinion.  But, I mean, who knew?  I’d thought until now that the only role that the IRS plays in Obamacare was to collect the penalty, via the tax apparatus, from individuals who aren’t insured through their (or a family member’s) employer and who choose to pay the penalty rather than buy insurance in the private market.  In other words, that the IRS role concerns only people who don’t have healthcare insurance, not people who do.

But apparently I was wrong.  I haven’t actually read the statute, which is infamously long, and somewhere in it, it requires all healthcare insurance premiums to be paid to the IRS.  The  name of which, once the full law kicks in next year, will be the Internal Blue Cross/Blue Shield Revenue Service.

Yes, the agency will still collect ordinary income taxes as it does now.  But it also become our healthcare insurer. Unless you are a conservative, in which case it will still require you or your employer to pay your insurance premiums to that agency. Or maybe just through that agency; I’m not sure which.  As I said, I haven’t read the statute, so I don’t know whether this will be like the Medicare system, or instead the agency will forward the premiums to your chosen private insurer, at least unless you’re a conservation, in which case the agency might use your premiums to pay for daycare for the young children of liberals.

Or maybe I’m misunderstanding completely, because of wishful thinking on my part.  Maybe instead, the statute requires the private insurance companies to get the agency’s approval before agreeing to pay a policyholder’s medical bills.

Yeah, that must be it.  The statute requires the private insurance companies to get the agency’s approval before agreeing to pay a policyholder’s medical bills. It’s odd, though, that three years after the statute’s enactment, this has never been mentioned before. By anyone.  Which makes that report about the Bachmann interview truly an exclusive.

“Top Marginal Taxation and Economic Growth”

by my student Santo Milasi

The paper explores the relationship between statutory top marginal tax rates on personal income and long-run economic growth. While theoretical models of endogenous growth explicitly allow for nonlinear effects of taxation on economic growth, the majority of existing empirical studies assume a linear association. By contrast, this paper investigates both a linear and a non-monotonic relationship between top tax rates and GDP growth. Using a panel of 18 OECD countries over the period 1960-2009, this paper finds support in favor of a quadratic top tax-growth relationship. Results are robust to different model specifications and estimation techniques. The point estimates of the regressions suggest that the marginal effect of higher top tax rates becomes negative above a growth maximizing tax rate on the order of 70 percent. The quadratic relationship found for the whole sample period does not hold over the period 1975-2009. Instead, the link between top tax rates and GDP growth after 1975 is well summarized by a linear and positive top tax-growth relationship. Since top marginal tax rates after 1975 are well below the estimated growth maximizing level, such a result suggest that the top tax-growth relationship after 1975 might be placed on the upward-sloping side of the “growth-hill”. There is an even stronger positive top tax-growth relationship after 1985, when average top tax rates across OECD are lower than 50%.

Link to a pdf of the paper.

Personally I think the null that there is any justification for the continued existence of the Republican party has now been rejected at standard confidence levels.  Your milage may vary.

Currency and Reserve Balances

I buried one fact: banks can reduce total Fed reserve balances by withdrawing currency — physical cash — from their Fed reserve accounts. I only gestured toward this in a parenthetical and a link. It’s a trivial point for this discussion, but it raises confusion. This is the other thing (besides bonds) that the Fed issues and retires in return for reserve balances. As with bonds, it’s purely an exchange between banks and the Fed (though it’s driven by customers’ cash needs).

Banks actually have nominal control over this. The Fed has to issue currency to them (retiring reserves in exchange) when they ask for it, and they have to retire currency (issuing reserve balances) when banks send it back.

But this in no way suggests that reserve balances are money. You can withdraw currency (notes) from your bank. Does that mean that your checking account contains currency? That checking deposits are currency? No.

This issue is unimportant here because it’s essentially a mechanical function. As long as it’s working properly — ATMs dispense cash and people can deposit cash — it has no effect on things. (And cash is pretty small magnitude in the total system). Banks keep enough cash on hand to handle their customers’ needs, and the Fed accomodates that. Aside from drug dealers, etc., nobody holds much physical currency.

The only reason cash would be an important consideration would be if the Fed starting paying (significant) negative interest on reserve balances — charging the banks to to hold their reserve deposits. Banks might decide to build secure warehouses and drive cash to and from the Fed, trading it for reserve balances, when they needed to fund loans or when loans got paid off. (It’s kinda tricky to fund a $400,000 mortgage with cash…)

Otherwise it’s a nonissue for this discussion. But I should have made it clear.

Whaddaya Mean by M, Buster?

People really don’t like the idea that the Fed’s not printing “money.” MV=PY adherents especially object.

Let’s look at the standard definitions. None of the monetary aggregate definitions M0 through MZM includes reserve balances. By those definitions, reserves are not money. (Ditto the divisia measures.) So by those definitions, when the Fed issues new reserves, it’s not “printing money.”

The one exception is the “Monetary Base,” or “base money.” That definition of money includes currency, coins, and reserves. Here’s a handy chart from Wikipedia:

So fine: M in the equation of exchange means Base Money. But if you look at the data using that definition, it seems like there’s some serious explainin’ to do. Here’s the velocity of MB:

A 60+% decline since 2008? Hmm…

Cross-posted at Asymptosis.