Reagan’s Budget Director on Ryan’s Plan

Paul Ryan’s Fairy-Tale Budget Plan

By DAVID A. STOCKMAN

PAUL D. RYAN is the most articulate and intellectually imposing Republican of the moment, but that doesn’t alter the fact that this earnest congressman from Wisconsin is preaching the same empty conservative sermon.

Thirty years of Republican apostasy — a once grand party’s embrace of the welfare state, the warfare state and the Wall Street-coddling bailout state — have crippled the engines of capitalism and buried us in debt. Mr. Ryan’s sonorous campaign rhetoric about shrinking Big Government and giving tax cuts to “job creators” (read: the top 2 percent) will do nothing to reverse the nation’s economic decline and arrest its fiscal collapse.

Mr. Ryan professes to be a defense hawk, though the true conservatives of modern times — Calvin Coolidge, Herbert C. Hoover, Robert A. Taft, Dwight D. Eisenhower, even Gerald R. Ford — would have had no use for the neoconconservative imperialism that the G.O.P. cobbled from policy salons run by Irving Kristol’s ex-Trotskyites three decades ago. These doctrines now saddle our bankrupt nation with a roughly $775 billion “defense” budget in a world where we have no advanced industrial state enemies and have been fired (appropriately) as the global policeman.

Indeed, adjusted for inflation, today’s national security budget is nearly double Eisenhower’s when he left office in 1961 (about $400 billion in today’s dollars) — a level Ike deemed sufficient to contain the very real Soviet nuclear threat in the era just after Sputnik. By contrast, the Romney-Ryan version of shrinking Big Government is to increase our already outlandish warfare-state budget and risk even more spending by saber-rattling at a benighted but irrelevant Iran.

Similarly, there can be no hope of a return to vibrant capitalism unless there is a sweeping housecleaning at the Federal Reserve and a thorough renunciation of its interest-rate fixing, bond buying and recurring bailouts of Wall Street speculators. The Greenspan-Bernanke campaigns to repress interest rates have crushed savers, mocked thrift and fueled enormous overconsumption and trade deficits.

The greatest regulatory problem — far more urgent that the environmental marginalia Mitt Romney has fumed about — is that the giant Wall Street banks remain dangerous quasi-wards of the state and are inexorably prone to speculative abuse of taxpayer-insured deposits and the Fed’s cheap money. Forget about “too big to fail.” These banks are too big to exist — too big to manage internally and to regulate externally. They need to be broken up by regulatory decree. Instead, the Romney-Ryan ticket attacks the pointless Dodd-Frank regulatory overhaul, when what’s needed is a restoration of Glass-Steagall, the Depression-era legislation that separated commercial and investment banking.

Mr. Ryan showed his conservative mettle in 2008 when he folded like a lawn chair on the auto bailout and the Wall Street bailout. But the greater hypocrisy is his phony “plan” to solve the entitlements mess by deferring changes to social insurance by at least a decade.

A true agenda to reform the welfare state would require a sweeping, income-based eligibility test, which would reduce or eliminate social insurance benefits for millions of affluent retirees. Without it, there is no math that can avoid giant tax increases or vast new borrowing. Yet the supposedly courageous Ryan plan would not cut one dime over the next decade from the $1.3 trillion-per-year cost of Social Security and Medicare.

Instead, it shreds the measly means-tested safety net for the vulnerable: the roughly $100 billion per year for food stamps and cash assistance for needy families and the $300 billion budget for Medicaid, the health insurance program for the poor and disabled. Shifting more Medicaid costs to the states will be mere make-believe if federal financing is drastically cut.

Likewise, hacking away at the roughly $400 billion domestic discretionary budget (what’s left of the federal budget after defense, Social Security, health and safety-net spending and interest on the national debt) will yield only a rounding error’s worth of savings after popular programs (which Republicans heartily favor) like cancer research, national parks, veterans’ benefits, farm aid, highway subsidies, education grants and small-business loans are accommodated.

Like his new boss, Mr. Ryan has no serious plan to create jobs. America has some of the highest labor costs in the world, and saddles workers and businesses with $1 trillion per year in job-destroying payroll taxes. We need a national sales tax — a consumption tax, like the dreaded but efficient value-added tax — but Mr. Romney and Mr. Ryan don’t have the gumption to support it.

The Ryan Plan boils down to a fetish for cutting the top marginal income-tax rate for “job creators” — i.e. the superwealthy — to 25 percent and paying for it with an as-yet-undisclosed plan to broaden the tax base. Of the $1 trillion in so-called tax expenditures that the plan would attack, the vast majority would come from slashing popular tax breaks for employer-provided health insurance, mortgage interest, 401(k) accounts, state and local taxes, charitable giving and the like, not to mention low rates on capital gains and dividends. The crony capitalists of K Street already own more than enough Republican votes to stop that train before it leaves the station.

In short, Mr. Ryan’s plan is devoid of credible math or hard policy choices. And it couldn’t pass even if Republicans were to take the presidency and both houses of Congress. Mr. Romney and Mr. Ryan have no plan to take on Wall Street, the Fed, the military-industrial complex, social insurance or the nation’s fiscal calamity and no plan to revive capitalist prosperity — just empty sermons.

David A. Stockman, who was the director of the Office of Management and Budget from 1981 to 1985, is the author of the forthcoming book The Great Deformation: How Crony Capitalism Corrupts Free Markets and Democracy.

What Mitt’s Released Returns Do Show

A Tax Expert Takes a Closer Look At Romney’s Tax Returns

Posted: 13 Aug 2012 11:25 PM PDT
Tax Notes has seen fit to put an informative article by Lee Sheppard about Mitt Romney’s tax returns outside its paywall. This piece shows that questions about what might lurk in the returns that Romney has withheld has diverted attention from some dodgy tax issues in the filings he has provided.

The public has gotten understandably unhappy about the $3 million Swiss bank account he held. Sheppard points out that it was common for people like Romney not to report it at all, and the release of older returns would reveal whether he had complied before the US crackdown. Her comment:

Swiss bank account. Issue: Did Romney report it properly?

A Romney grantor trust had a $3 million Swiss bank account at UBS that the trustee closed in 2010. Romney’s campaign said that the account was disclosed on foreign bank account reports and that U.S. tax was paid on the interest from it…

Nondisclosure was common among rich people before the 2010 enactment of the Foreign Account Tax Compliance Act. The penalty for failure to file an FBAR was bupkes, and the agency in charge of enforcing the law, Treasury’s Financial Crimes Enforcement Network, had no interest in enforcing it. Very few FBARs were filed before 2010. At about 200,000 filings annually, the rate of FBAR compliance was estimated to be less than 20 percent before the IRS crackdown.

Another issue which the media has flagged is the monster size of Romney’s IRA. The tax expert’s view:

IRAs. Issue: Can profits interests or special classes of shares in private equity target companies be contributed to IRAs?

Romney has a gigantic IRA, which may hold as much as $100 million in assets. We do not know what it contains. We can only speculate. Given the applicable contribution limits, it is hard to see how the IRA got so big, even if Bain deals were hugely profitable. Regardless of what is in the IRA, serious valuation and self-dealing questions are raised.

A detailed discussion follows, and it’s hard to see how this IRA is kosher.

The article discusses nine additional troubling aspects of the Romney returns that have been put on view, and they are instructive and pointed. For instance, finance people always refer to the manage participation in fund profits as a “carried interest.” But as Sheppard stresses, the IRS calls that a “profits interest” and they have specific valuation rules. And she is clearly not happy with how the popular press missed the real issue with Bain’s use of Cayman Islands investment vehicles:

Private equity. Issue: Cayman residence of funds.

The places where some of Bain Capital’s numerous private equity funds are organized — Bermuda and the Cayman Islands — are tax havens. The widespread use of tax and banking havens by large U.S. multinationals and investment funds as an escape hatch from U.S. tax, banking, and securities laws, while offensive, is tolerated and even encouraged by U.S. law and administrative practice.

Mainstream newspapers howl that Romney has assets in the Caymans, but the reality is worse. Bain Capital invests in the United States and other countries, including China, but it organizes its funds in the Caymans to keep investor lists secret while availing itself of British corporate law. Every other investment fund does the same thing.

The practical effect of Cayman registration is that if investors were of a mind to lie to their home governments about the existence of or income from their Bain investments, the secrecy of investor lists makes it easier to do so. As the Romney campaign pointed out, all these investors still owe tax to their home governments (including the U.S. government) on their Bain income.

She flags the Marriott tax shelter as improper, some treatments as particularly questionable, such as the intramarital/intrafamily transfers and the notorious show horse:

Ann Romney’s Olympic horse. Issue: Is Rafalca a business?

Probably not. Before the Romneys can claim any passive loss deduction for Ann Romney’s share of Rafalca’s expenses, the LLC that owns the horse, Rob Rom Enterprises, has to be engaged in a trade or business. For that, it has to satisfy the hobby loss rule for horses, which has a rebuttable presumption of a business if there is a profit in two out of seven years (section 183(c)). Rob Rom has owned Rafalca for six years.

Rafalca’s rider said she would be bred when her show career was over. That may be a stretch, because the horse is 15 and has been in strenuous competition for 11 years. If she could produce a foal or two, it would have to be sold for $500,000 or more.

Moreover, the prize money in dressage competitions doesn’t come close to covering the roughly $120,000 per year for Rafalca’s upkeep and transportation from California to European competitions. So it is unlikely she would ever make a profit for her owners.

I encourage you read the article in full. It is very accessible and informative. In closing, Sheppard observes:

It is often said that the rich get rich and stay rich by watching every penny. Romney certainly fits that description. He looks for every tax angle, to a degree that is unbecoming in someone who would be the executive in command of the administrative apparatus that enforces the tax law.

And that is what is so bizarre about Romney on this issue and many others. He’s not a Perot, who entered politics abruptly and therefore could be expected to have some trouble in making the transition from corporate life to being on the public stage. But Romney is an archetypal member of the 0.1%. He is so far removed from ordinary Americans that he can’t grok what proper behavior is even if he were to try.