Monthly Archives: January 2015

Counterpunch: Poor Children Aren’t Worth Saving

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The Case of Florida

Child Health Care and the Class Divide

by W.T. WHITNEY Jr.

The U.S. split between a wealthy elite and the majority poor is old news. Yet as revelations surface as to who siphons off money for themselves and what happens to the impoverished many, the story continues. It gets into how governments deal with health care. In that regard, health care for children may serve as a marker for when government programs leave off serving the common good. The state of children’s health is like the proverbial “yellow canary” in a mine shaft whose death warned of toxic gas accumulation.

Children are vulnerable, and when problems emerge, they are readily apparent. That’s the case in Florida now. On December 31, 2014 U.S. Circuit Judge Adalberto Jordan announced a decision involving Florida’s Medicaid program and its role in serving child health. Jordan was responding to a 2005 legal action brought by pediatricians, dentists, and nine children on behalf of children enrolled in Florida’s Medicaid program. The lawyer arguing their case insisted that $200 million was needed to fix the program.

As reported by the Miami Herald, Jordan stated that “lawmakers had for years set the state’s Medicaid budget at an artificially low level, causing pediatricians and other specialists for children to opt out of the insurance program for the needy.” Jordan’s ruling declared that to force physicians caring for poor children to accept payments “far below what private insurers would spend — and well below what doctors were paid in the Medicare program for a more powerful group, elders — amounted to rationing of care.”

Judge Jordan cited adverse effects: physicians refusing to care for children served by Medicaid, children going without preventative care, dental care, and screening for lead intoxication. To secure specialty care, children had to travel to other states or to distant cities in Florida. Every year Florida’s Medicaid program removes thousands of recipient children from its roles.

Jordon’s ruling applies to large numbers of children. In 2013, 24 percent of Florida children were classified as poor, presumably making them Medicaid-eligible. More specifically, 40 percent of black children and 15 percent of white children were poor. The year before, 11.4 percent of Florida Children had no health insurance at all.

Child death figures for Florida’s children suggest health services for low-income children and families are fundamentally flawed. For example, mortality for African American children, whose families are much more likely to be poor than those of white children, is high. In 2011, out of 1000 babies born, 11.5 African American babies died in their first year of life; the comparable figure for white babies was 4.8. Similarly, out of 100,000 children from one to 14 years of age, 35 black children and 27 white children died in 2011.

Yet well-to-do Floridians, and their children, are far removed from grim realities like these. It appears that, “Florida ranked third (in the nation) in 2011 in a study measuring the gap between the income of the top 1 percent of Floridians and the bottom 99 percent. In Florida, the top 1 percent earned on average 32.2 times as much as the bottom 99 percent.”

Governor Rick Scott and colleagues drawn from Florida’s wealthy minority have operated Florida’s Medicaid program since 2011. A basic assumption would be that as a program serving the public’s health, Florida Medicaid should prioritize thriving and survival for all children. Judge Jordan’s findings suggest that goals for the program are otherwise, or that its administration is incompetent. Governor Scott is an experienced health care administrator, but what about his priorities?

During Scott’s tenure as CEO of the massive Columbia/HCA health care corporation, the U.S. government convicted 14 of his underlings on charges of fraud. His corporation paid a $1.7 billion fine. The Tampa Bay Times reported that, to avoid incriminating himself, Scott pled the Fifth Amendment 75 times during the course of depositions related to the case. He resigned in 1997, spent a few years as a “venture capitalist,” and then turned to politics.

In a financial disclosure statement released at the end of his successful 2014 gubernatorial campaign – his second – Scott reported a 2013 net worth of $132.7 million. Additionally, “three members of the state cabinet (…) reported a net worth of $10.95 million.” With Scott and his team attending to their personal wealth, the suspicion is that children’s health was never their foremost concern.

Pondering on who is in charge of public health programs for children and how such programs operate has its limitations, however. A larger, more basic, question remains: why are some population groups of children in trouble and others not? A recent United Nations statement epitomizes worldwide epidemiologic analyses over many years. “Children born into poverty,” it said, “are almost twice as likely to die before the age of five as those from wealthier families.”

In this sense, Judge Jordon’s epoch ruling on the Florida Medicaid program evokes an oil and water difference between the interests of two social classes. If that is so, then remediation of problems with Florida Medicaid – the cure – rests ultimately on achieving big changes within U.S. society such that all children survive and live in dignity. The health care part of that agenda would entail a universalized health-care endeavor or a national health service.

Such ambitious thinking rests on unified struggle by the many, which is not presently in the cards. In the meantime, however, what is to keep healthcare activists buoyed up by Judge Jordan’s decision from taking incremental, consciousness –raising steps as they look toward healthcare for us all?

W.T. Whitney Jr. is a retired pediatrician and political journalist living in Maine.

 

Naked Capitalism on Corporate Tax Scams

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How More and More U.S. Corporate Profits Escape the Corporate Income Tax

Posted on January 29, 2015 by

Yves here. This post makes an important and simple point about one big source of the fall in the relative importance of corporate income as a source of Federal tax revenue that is often ignored in official discussions: the rise in the use of pass-through entities. An older theory was that, generally speaking, you could get the benefits of limited liability and pass through treatment only if you were a small fry. The S corporation election was meant to promote entrepreneurial activity. If you want to be a partnership and get the tax bennies, fine, but you have to live with the risk of unlimited personal liability.

The use of limited liability corporations started to pick up steam in the later 1990s (I recall asking my regular attorney about converting to an LLC in 1997 and she though they were too untested legally to be worth the risk) and are now common. And the impact over time of this change, as well as the use of other tax-reduction strategies, has been significant. In 1952, corporate income tax provided 33% of total Federal tax receipts. By 2013, it had fallen to 10%.

By John Miller. Originally published at Triple Crisis

The effective corporate income tax rate is almost exactly the same in the United States as in other OECD countries. (While the U.S. statutory corporate tax rate is well above the OECD average, the many loopholes in the U.S. corporate tax bring the effective rate down substantially.) Then how is it that corporate taxes account for a much smaller share of GDP in the United States than in other high-income countries? The answer lies in forms of incorporation that allow U.S. corporate profits to be taxed at the lower individual income tax rate.

Two changes paved the way for more and more profit to escape the corporate income tax in the United States. The federal government extended limited legal liability, which protects owners from losing their personal assets if their business fails, to some partnerships and “pass through” corporations not subject to the corporate income tax. Then the tax reform of 1986 cut the top tax bracket of the individual income tax to 28%, well below the statutory corporate income-tax rate. That opened up a large tax advantage for owners who paid individual income taxes on their profits instead of corporate income taxes.

Pass-through businesses—-S-corporations (which afford up to 100 owners limited liability), partnerships (including limited liability partnerships in which all the partners enjoy limited liability), and sole proprietorships—-have flourished over the last three decades. In 1980, corporations subject to the corporate income tax (called “C-corporations”) generated nearly four fifths (78%) of business net income, a measure of a business’s profitability. By 2007, pass-through businesses’ share of net income surpassed that of C-corporations. In fact, partnerships, S-corporations, and sole proprietorships each outnumbered C-corporations.

That was not the case in other high-income countries. In 2004, for instance, nearly two-thirds of U.S. businesses with taxable profits over $1 million were not subject to the corporate income tax. Meanwhile the next-highest share among large, high-income countries belonged to the United Kingdom, with just 26%.

The three-decade decline in the corporate share of net income, enabled by the rise in pass-through businesses with limited liability, has eroded the tax base for the U.S. corporate income tax. That explains how U.S. corporate income tax receipts as a share of GDP (2.3% in 2011) were able to drop well below OECD average (3.0% in 2011), even while the U.S. and OECD effective tax rates on corporate income were nearly identical.

Today, the majority of business profits are taxed at an even lower rate than that imposed by a corporate code riddled with loopholes. A thorough-going reform of taxes on profits must therefore not only close loopholes in the corporate income tax but also no longer extend limited liability to businesses that don’t pay corporate income taxes. With the profits of S-corporations and limited liability companies added to its base, the corporate income tax would be extended to at least another one-fifth of business net income. No longer extending limited liability to millionaire owners of S-corporations and limited liability companies, by itself, would add more than one-tenth of business net income to the base of the corporate income tax.

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Jim Hightower on Poor Little Richie Rich

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A Whining Wall Street Banker Pleads for Pity

Wednesday, January 28, 2015   |   Posted by Jim Hightower
Jamie is PO’d. He’s fed up with all of this populistic attitude that’s sweeping the country, and he’s not going to take it anymore!

Jamie Dimon recently bleated to reporters that, “Banks are under assault.” Well, not most banks, but JPMorgan Chase, America’s largest Wall Street empire, which Jamie heads. Government regulators, snarls Jamie, are pandering to grassroots populist anger at Wall Street excesses by squeezing the life of JP Morgan casino.

But wait – didn’t JPMorgan score a $22 billion profit last year, a 20 percent increase over 2013 and the highest in its history? And didn’t those Big Bad Oppressive Government Regulators provide a $25 billion taxpayer bailout in 2008 to save Jamie’s conglomerate from its own reckless excess? And isn’t this Wall Street popinjay raking in some $20 million in personal pay to suffer the indignity of this so- called “assault” on his bank. Yes, yes, and yes.

Still, Jamie says that regulators are piling on JPMorgan Chase: “In the old days,” he whined, “you dealt with one regulator when you had an issue. Now it’s five or six. You should all ask the question about how American that is,” the $20-million-a-year man lectured to reporters, “how fair that is.”

Well, golly, one reason Chase has half-a-dozen regulators on its case is because it doesn’t have “an issue” of illegality, but beaucoup illegalities, including deceiving its own investors, cheating more than two million of its credit card customers, gaming the rules to overcharge electricity users in California and the Midwest, overcharging active-duty military families on their mortgages, illegally foreclosing on troubled homeowners, and … well, so much more.

So Jamie, you should ask yourself the question about “how fair” is all of the above. Then you should shut up, count your millions, and be grateful you’re not in jail.

“Morgan Chase Chief Says ‘Banks Are Under Assault,'” www.nytimes.com, January 14, 2015.

“Tracking the $700 Billion Bailout,” www.nytimes.com, 2015.

“J.P. Morgan Adds $206 Billion to Its $25 Billion Plus Tally of Recent Settlements,” www.wsj.com, January 7, 2015.

“JPMorgan Chase,” www.wikipedia.org, 2015.

Naked Capitalism: Protecting the Mitt Tax Dodge

gfi - us assets in tax havens

Tax Haven USA: The Vortex-Shaped Hole in Global Financial Transparency

Posted on January 27, 2015 by

Yves here. Nicholas Shaxson’s landmark book on tax havens, Treasure Island, described how the US was the biggest sponsor of what Shaxson called “offshore,” or tax havens and tax secrecy. He tells us how the US is working to keep it that way.

By Nicholas Shaxson. Adapted from a post by the Tax Justice Network.

The U.S., seen from space

If people stash their wealth or earn income overseas, that is just fine — as long as their tax authorities get the information they need to tax that wealth or income according to the law, and as long as money laundering and financial crimes can be effectively tracked, and so on. Where there are cross-border barriers to legitimate tax collection, law enforcement and other instruments of democratic societies, then there is an offshore problem.

The only credible way to provide the necessary information is through so-called automatic information exchange (AIE), where governments make sure the necessary information is available across borders, as a matter of routine.

For years, those who advocated AIE were ignored or even ridiculed. Pie in the sky, many said. The OECD, the club of rich countries that dominates international rule-making on tax and tax-related information sharing, was for years pushing its so-called Internationally Accepted Standard which was, well, the internationally accepted standard for cross-border information exchange, despite being only slightly better than useless.

In the past couple of years, however, the world has turned.

The OECD is now in the middle of putting in place a system – known as the Common Reporting Standards (CRS) – to implement automatic information exchange (AIE). The CRS is the first ever potentially global system of AIE, and although it has serious shortcomings and loopholes, it is potentially a major step forwards from a largely transparency-free past.

Meanwhile the European Union had been moving ahead with plans to beef up its own, older schemes for AIE, notably through amendments to tighten up its loophole-ridden Savings Tax Directive and other related initiatives (for an overview of that, see here.) The United States, for its part, has been rumbling forwards with its Foreign Account Tax Compliance Act (FATCA), which is, at least technically speaking from a self-interested U.S. perspective, fairly strong. (In fact, the OECD’s CRS is modeled on FATCA.)

But – and here comes a big ‘but’ – how do these different initiatives mesh together? Might anything fall between the cracks?

The European Union, for its part, seems to be working hard and in fairly straightforward fashion to get its ducks in line with the CRS, the OECD’s emerging global standard. It will be incorporating a lot of the OECD technical standards into EU law, in cut-and-paste fashion, and will add categories to include in the mix: such as covering the all-important insurance sector more comprehensively than the CRS does, and covering other categories of income and capital including income from employment, directors’ fees, pensions, and ownership of and income from immovable property.

But the United States’ position on meshing FATCA with the global standards? Well, now there’s a story.

That building in the Cayman Islands is still there

President Obama recently gave his State of the Union address, with an eye to his legacy. He’s taken an interest in tax haven issues in the past, declaring in 2009 that Ugland House, a building in the Cayman Islands that then housed some 19,000 companies, was either

“the largest building in the world or the largest tax scam in the world. . . it’s the kind of tax scam that we need to end.”

With statements such as this, he managed to get himself some serious anti-tax haven credentials, at least from a public relations perspective.

But how has the Obama administration shaped up on tax havens since then?

Well, in the details of the emerging global architecture on tax and financial transparency lies an issue – we’d go so far as to describe it as an international outrage – that is likely to tarnish his legacy seriously. A failure to tackle this will make many wealthy people wealthier and poorer people poorer, and will undermine crime-fighting, in the U.S. and around the world.

USA: ‘we’ll pretend to join in’

The U.S. position on the emerging global transparency architecture has basically been to say ‘we are doing our home-grown FATCA project, and it’s technically similar to the OECD’s CRS, so we don’t need to join the CRS.’ Which, at first glance, looks like a position that could be defensible, depending on the detail.

A crucial part of the detail, however – and this is where the vortex starts to come in – hangs on the all-important question of reciprocity. The United States is extremely keen for other countries to pony up information about U.S. taxpayers hiding their cash offshore and overseas – as it should. But when it comes to reciprocity, or providing information in the other direction, things change.

The U.S. (again, on the surface) has said that is committed to sharing FATCA-related information under so-called Intergovernmental Agreements (IGAs,) which are bilateral deals that stipulate how and in what circumstances the relevant information may be handed over to foreign governments. (There are three basic models: 1A, 1B and 2: only the Model 1A agreements are reciprocal; the Treasury’s U.S. public list of IGAs is here, with the different models explained here.)

In May last year Alex Cobham at the Center for Global Development wrote a useful blog entitled Joining the Club: The United States Signs Up for Reciprocal Tax Cooperation, welcoming the U.S. commitment to reciprocal information exchange, as far as the announcement went. By November, though, as the details came through, he began to raise the alarm. In a post entitled Has the United States U-Turned on Tax Information Exchange? he wrote:

“A full commitment to reciprocal and automatic, multilateral information exchange, backed by legislation to ensure beneficial ownership information is available, has been replaced by an indication that the United States will seek to provide information in the few bilateral Foreign Account Tax Compliance Act (FATCA) agreements that require it, for which the United States accordingly commits to ‘advocate’ for domestic legal changes that would create the necessary beneficial ownership transparency.

After the midterm elections, the success of such advocacy seems unlikely. But it would be a sad irony if the legacy of an administration that began with such strong rhetoric on shutting down tax havens was to leave the United States as the biggest remaining centre of anonymous company ownership.”

Now that more information, source material, and details, is available, matters look worse still. The precise details of what the US is offering are alarming.

The gory details

The United States is already a tax haven for foreigners, as outlined in detail in the “Fall of America” chapter in my book Treasure Islands, and, more recently, here. To achieve effective reciprocity with other countries the U.S. would need to tighten up its rules considerably, and in numerous ways.

The U.S. Treasury’s Financial Crimes Enforcement Network (FINCEN) seems to be taking a lead on some of the internal stuff to prepare the ground for international co-operation, with new rules entitled “Customer Due Diligence Requirements for Financial Institutions.” Here we get into the weeds a bit.

How good are the Fincen rules? Well, for starters, on page 45152 Fincen says it

is proposing rules under the Bank Secrecy Act to clarify and strengthen customer due diligence requirements for: Banks; brokers or dealers in securities; mutual funds; and futures commission merchants and introducing brokers in commodities.”

Our emphasis added. The first thing to notice is that these are just proposals. To get approved, they’re going to have to get this lot past Senator Rand Paul, the combined lobbying power of the Big Four accounting firms and Wall Street and Florida banks, and a host of other vested interests.

Then there are the loopholes larded through this document.

For instance, the players identified in the Fincen paragraph above are just a subset of actors in the financial menagerie that is out there. The document continues:

“In addition to input from covered financial institutions, FinCEN sought and received comments on the ANPRM [Advance Notice of Proposed Rule Making] from financial institutions not subject to CIP [Customer Identification Program] requirements, such as money services businesses, casinos, insurance companies, and other entities subject to FinCEN regulations.”

There are no plans to cover these chaps as yet. And this is a problem: in many countries insurance policies, for example, are classic tax evasion and secrecy vehicles — and they’re already carved out.

Then there is the question of trusts, where no useful beneficial ownership information seems to be required. There is this, mostly on p45160:

“There are many types of trusts. While a small proportion may fall within the scope of the proposed definition of legal entity customer (e.g., statutory trusts), most will not. . . . identifying a ‘‘beneficial owner’’ among the parties to such an arrangement for AML purposes, based on the proposed definition of beneficial owner, would not be practical. At this point, FinCEN is choosing not to impose this requirement. “

Our emphasis, again, added. Trusts are a matter of astonishing complexity, slipperiness and importance in the world of offshore secrecy. The world of offshore trusts is a multi-headed hydra, and through these vehicles it is possible to achieve levels of secrecy that are at least as strong as the traditional Swiss banking kind.

And there are potentially even more egregious exemptions. Take a look at this corker:

“Financial institutions noted that a requirement to ‘‘look back’’ to obtain beneficial ownership information from existing customers would be a substantial burden. FinCEN proposes that the beneficial ownership requirement will apply only with respect to legal entity customers that open new accounts going forward from the date of implementation. Thus, the definition of ‘‘legal entity customer’’ is limited to legal entities that open a new account after the implementation date.”

Translation: we’ll accept a complete whitewash of everything in the past, because it will be a “burden” on those poor, belaboured financial institutions. And stuff that’s still going on won’t be covered if the account in which it’s happening was opened before then. Oh, and for now there is no “implementation date”, anyway.

Wouldn’t it have been nice if Fincen could at least come up with something strong, then expect it to be watered down at a later stage of law making? But no: they seem to be hobbling themselves from the outset. Is Fincen even trying?

And even then – if Fincen were to close all these loopholes and obtain all this customer information, it doesn’t seem clear that it would be authorised to pass it on to the U.S. Internal Revenue Service (IRS), which would be the body that would be mandated to hand over the necessary information to foreign governments that need it to tax or police their wealthy citizens and criminals.

A Europe-based expert we spoke to went as far as to describe the U.S.’ adherence to the emerging global transparency standards, just based on what this Fincen document says, ‘farting in the wind.’ This document shows that the US is currently unable under its domestic law to reciprocate with information exchange, because its banks are not required to collect the necessary beneficial ownership information.

So much for the requirements for financial institutions in the U.S. to fish the information out of its customers, ready for exchange with their home governments. Now look at how the (non-)information they do obtain is to be shared out with the U.S.’ foreign partners. Article 6 from one of the U.S. Model IGAs (Intergovernmental Agreements) says:

“Reciprocity. The Government of the United States acknowledges the need to achieve equivalent levels of reciprocal automatic information exchange with [FATCA Partner].”

The U.S. government acknowledges the need to be reciprocal. That’s nice. But will it be reciprocal?

Turn to Article 2, and you get a picture of what the U.S. may obtain from other countries, versus what other countries may obtain from the U.S. Here’s a summary of some of the differences, from Andres Knobel of the Tax Justice Network. Take Germany, for instance: look at how thin the US banks’ reporting obligations are about Germans, compared to German banks’ reporting obligations about US persons.

German vs US Fatca IGA

You get the picture. A comparison with more details is available here.

Reciprocity, anyone?

Oh, and then there is the problem that only some countries, but not others, have signed or committed to sign these IGAs.

After that, there’s the problem that the U.S. legislation required to tackle this stuff is all over the place, in different legislative nooks and crannies. Jack Blum gave a good overview of an earlier version of this mess to the U.S. Senate Finance Committee in 2008, and he added this detail, in an email to me last week:

“after the current round of IRS budget cuts there is no way the United States could implement Information Exchange. Without the people nothing the law says really matters.

Things here are in a real mess.”

Loophole USA: the big one. Will the OECD and its member states – not to mention developing countries – wake up to these issues? And will the United States itself realise that if it doesn’t play ball, others won’t want to play either?

If not, the world’s wealth will flood more upwards and out of sight rather more rapidly than it would have done. That’ll be quite a legacy for President Obama.

Truthdig: Robert Reich on Wall Street Fraud

The Middle Class Can’t Be Saved Unless Wall Street Is Tamed

Posted on Jan 27, 2015

By Robert Reich

This post originally ran on Robert Reich’s Web page.

Presidential aspirants in both parties are talking about saving the middle class. But the middle class can’t be saved unless Wall Street is tamed.

The Street’s excesses pose a continuing danger to average Americans. And its ongoing use of confidential corporate information is defrauding millions of middle-class investors.

Yet most presidential aspirants don’t want to talk about taming the Street because Wall Street is one of their largest sources of campaign money.

Do we really need reminding about what happened six years ago? The financial collapse crippled the middle class and poor — consuming the savings of millions of average Americans, and causing 23 million to lose their jobs, 9.3 million to lose their health insurance, and some 1 million to lose their homes.A repeat performance is not unlikely. Wall Street’s biggest banks are much larger now than they were then. Five of them hold about 45 percent of America’s banking assets. In 2000, they held 25 percent.

And money is cheaper than ever. The Fed continues to hold the prime interest rate near zero.

This has fueled the Street’s eagerness to borrow money at rock-bottom rates and use it to make risky bets that will pay off big if they succeed, but will cause big problems if they go bad.

We learned last week that Goldman Sachs has been on a shopping binge, buying cheap real estate stretching from Utah to Spain, and a variety of companies.

If not technically a violation of the new Dodd-Frank banking law, Goldman’s binge surely violates its spirit.

Meanwhile, the Street’s lobbyists have gotten Congress to repeal a provision of Dodd-Frank curbing excessive speculation by the big banks.

The language was drafted by Citigroup and personally pushed by Jamie Dimon, CEO of JPMorgan Chase.

Not incidentally, Dimon recently complained of being “under assault” by bank regulators.

Last year JPMorgan’s board voted to boost Dimon’s pay to $20 million, despite the bank paying out more than $20 billion to settle various legal problems going back to financial crisis.

The American middle class needs stronger bank regulations, not weaker ones.

Last summer, bank regulators told the big banks their plans for orderly bankruptcies were “unrealistic.” In other words, if the banks collapsed, they’d bring the economy down with them.

Dodd-Frank doesn’t even cover bank bets on foreign exchanges. Yet recent turbulence in the foreign exchange market has caused huge losses at hedge funds and brokerages.

This comes on top of revelations of widespread manipulation by the big banks of the foreign-exchange market.

Wall Street is also awash in inside information unavailable to average investors.

Just weeks ago a three- judge panel of the U.S. court of appeals that oversees Wall Street reversed an insider-trading conviction, saying guilt requires proof a trader knows the tip was leaked in exchange for some “personal benefit” that’s “of some consequence.”

Meaning that if a CEO tells his Wall Street golfing buddy about a pending merger, the buddy and his friends can make a bundle — to the detriment of small, typically middle-class, investors.

That three-judge panel was composed entirely of appointees of Ronald Reagan and George W. Bush.

But both parties have been drinking at the Wall Street trough.

In the 2008 presidential campaign, the financial sector ranked fourth among all industry groups giving to then candidate Barack Obama and the Democratic National Committee. In fact, Obama reaped far more in contributions from the Street than did his Republican opponent.

Wall Street also supplies both administrations with key economic officials. The treasury secretaries under Bill Clinton and George W. Bush – Robert Rubin and Henry Paulson, respectfully, had both chaired Goldman Sachs before coming to Washington.

And before becoming Obama’s treasury secretary, Timothy Geithner had been handpicked by Rubin to become president of Federal Reserve Bank of New York. (Geithner is now back on the Street as president of the private-equity firm Warburg Pincus.)

It’s nice that presidential aspirants are talking about rebuilding America’s middle class.

But to be credible, he (or she) has to take clear aim at the Street.

That means proposing to limit the size of the biggest Wall Street banks;  resurrect the Glass-Steagall Act (which used to separate investment from commercial banking); define insider trading the way most other countries do – using information any reasonable person would know is unavailable to most investors; and close the revolving door between the Street and the U.S. Treasury.

It also means not depending on the Street to finance their campaigns.

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Image: Antonin Scalia

Naked Capitalism: The Cap on Social Security

Removing the Social Security Tax Cap Would Benefit Most Workers

Posted on January 23, 2015 by

Yves here. As we and others have discussed at some length, the concern over Social Security funding is vastly overhyped. As Nicole Woo discusses in this Real News Network interview, one simple fix, that of eliminating the cap on who is subject to the tax, would solve most of the gap that is anticipated in long-term projections. And the Social Security tax as now constituted is regressive and thus promotes inequality, so lifting the cap also moves the tax system toward being more progressive. That’s before we get to the MMT issue that “taxing” to fund any government activity is a political mechanism that is a holdover from the gold standard days, and not how government functions are funded operationally.

In fact, with more and more promised pensions being slashed, and investment returns flagging thanks to QE and ZIRP, the notion that ordinary people can save enough for their retirement is a chimera. Thus preserving and strengthening Social Security is more important than ever.

JESSICA DESVARIEUX, TRNN PRODUCER: Welcome to The Real News Network. I’m Jessica Desvarieux in Baltimore.

It’s a new year, and if you’re one of those early birds, you’ve started on your taxes. But did you know that if you earn more than $118,500 year, the government can’t tax those earnings under the Social Security tax, which is also known as the payroll tax cap? That means that someone who makes twice the cap this year pays the tax on only half of his or her wages. It’s a big issue, considering the future of Social Security is continuously being debated in Washington.

Our guest today is Nicole Woo. She is the director of domestic policy at the Center for Economic and Policy Research in Washington, D.C. Her new paper is titled Who Would Pay More If the Social Security Payroll Tax Cap Were Raised or Scrapped?

Thank you for joining us, Nicole.

WOO: Thank you for having me.

DESVARIEUX: So, Nicole, let’s start off with that question that you pose in your paper. Who would actually pay more if this tax cap were raised or scrapped?

WOO: Well, we looked at the numbers, and it comes out to the top 6 percent, six out of 100 Americans. So the people who are at the very top of the income scale are the only folks who would have to pay more if this payroll tax cap were raised or eliminated.

DESVARIEUX: And how high would that payroll tax cap have to be raised?

WOO: Well, there are different proposals out there. There are some proposals to eventually slowly phase the cap out entirely. And that would mean that the wealthiest people among us would pay the same rate as the rest of us, which seems kind of fair. If they were to do that, if Congress were to pass a bill like that, the Social Security shortfall that we’ve seen in the future would be reduced by about 70 to 80 percent.

There are some other bills in Congress that would raise the cap a little higher or a little higher, still shielding the highest incomes from the tax. So there are different proposals out there, but they all kind of look at the same thing, and that’s trying to get some more inequality in the rate that regular people pay versus the wealthy.

DESVARIEUX: But should we really be concerned about Social Security, since it’s solvent and currently has close to $3 trillion in its trust fund?

WOO: That’s right. Right now the Social Security trust fund does have a lot of money in it. And that’s because back in the ’80s Congress and the president back then decided that they saw the baby boomers coming. It wasn’t a surprise. And they decided to sort of pre-fund Social Security. So since 1983, workers, American workers, have been putting more into Social Security than has been coming out. It’s their money that’s in the trust fund.

What has happened since the ’80s is actually inequality has increased. So more and more of the wages in this country are above the payroll tax cap–they’re above what’s right now $118,500. That cap has been moving up with inflation every year. But as the income gaps have gotten wider, more and more of the wealthy’s income has been shielded, which is part of why the trust fund isn’t quite as big as we needed it to be.

However, right now, with the $3 trillion, Social Security will be fine until about 2033. After that point, Social Security will be able to pay about three quarters of the benefits promised, and nobody wants to see a cut of 25 percent. But that’s still significant money. It’s not like Social Security will just stop paying immediately. If nothing were to be done, then people would still get checks, but they would only be about three-quarters of what they were expecting.

DESVARIEUX: So, Nicole, are you saying that if we were to do away with this cap, then we wouldn’t run into that issue?

WOO: As I said earlier, one of the bills, some of the bills out there that were in the last Congress would slowly eliminate the cap entirely, and that would take care of 70 to 80 percent of the shortfall. There are some other bills that raise the cap, like, from 118,000 to 250,000 or to 400,000, and that would mean people would pay the payroll tax, but not on all of their income for the wealthiest, who would just capture some of the highest incomes. And, of course, those bills would take care of less of the shortfall. But certainly, as people talk about ways to shore up Social Security, this is one of the most effective ways to take care of it. And, again, it’s about fairness. It’s about making sure that all workers pay the same rate in their Social Security taxes.

DESVARIEUX: Nicole, can you just speak to specifically which lawmakers are supporting these types of proposals?

WOO: Well, we are in a new Congress now, but in the last Congress, Senator /pɑːrkɪn/, who has since retired, and Senator Begetch introduced some bills, as well as Senator Sanders. On the House side we had representative Gwen Moore, Linda Sánchez, Ted Deutch, Peter DeFazio, and some others I probably forgot, but all Democrats at this point. I don’t think there are any Republicans on those bills.

DESVARIEUX: Okay. So who do you see as being the largest opponents to these bills? And what’s really their interest?

WOO: Well, I’m not a mind reader, but from what they’re saying, there’s a split. A lot of Democrats are saying that Social Security needs to be expanded, that especially after the financial crisis we went through, where people’s home prices crashed, they lost their homes–a lot of people’s social security stayed, but their retirement accounts, their 401(k)s and IRAs crashed along with the stock market. That Social Security is even more important. And with the unemployment rates we’ve seen, more and more people don’t have savings as they’re going into retirement. So there are a number of Democrats who think we should reduce or eliminate the payroll cap, not only to shore up the fund, but also to perhaps expand it a bit and give people a little bit more security in retirement. And that’s pretty much the Democratic view.

On the Republican side, there is a lot more talk about cutting benefits, saying that retirees are spoiled or there might be fraud in the program. And so they’re interested in just cutting benefits rather than increasing the revenues into the program.

DESVARIEUX: But, Nicole, what about Wall Street? Wasn’t there a push to reform Social Security by those on Wall Street?

WOO: You might–that’s a good question. Back in the Bush years, you might remember, there was a push to privatize Social Security, and that was taking money out of the trust fund, or future–or revenue that people would putting with their taxes would not go into the trust fund and instead would go to the stock market. And that was back in the mid 2000s. Could you imagine if that had happened and that Social Security money had been in the stock market right before the crash? We would have such a larger retirement crisis now than we already do. And certainly Wall Street would make a lot of fees if millions and millions of American workers’ retirement money that’s now in Social Security went into the stock market and other Wall Street vehicles. So certainly they are behind any sort of push to either privatize Social Security, move more money into the private industry, or to just sort of push out ideas and concepts about Social Security being in crisis, because if people believe there’s a crisis, then they’re going to say, oh, well, maybe we should go with the private market. But the fact is that Social Security is one of the best investments out there. The fees are very low because the trust fund is in U.S. Treasury bonds. They’re very safe. And the fees are not like what you would get in a 401(k). So, in many ways Wall Street and the financial industry have an interest in sort of scaring people about Social Security and eventually moving that money into the private sector.

DESVARIEUX: Alright. Nicole Woo, joining us from Washington, D.C., thank you so much for being with us.

WOO: Thank you.

Naked Capitalism: Ripping Off Our Students

Student-loan-debt

Department of Education Sides Against Students to Feather Its Own Bed in For-Profit Corinthian Colleges Debacle

Posted on January 21, 2015 by

We hadn’t reported much on the horrorshow of for-profit Corinthian Colleges’ creative and varied ways of ripping off its students simply because the scandal seemed to be ably covered elsewhere. Par for the course for many for-profit colleges, its students had taken on hefty amounts to attend when they were unlikely to land jobs that made that much borrowing a sensible proposition. But Corinthian Colleges departed substantially from the already-dubious norms of the debt-peddaling practices of the for-profit educational-industial complex. From Distance Education:

Faced with dropping enrollment numbers as well as investigations from the Consumer Financial Protection Bureau, attorneys general in multiple states, and regulators from the Department of Education, Corinthian Colleges is on the verge of declaring bankruptcy. The charges against it include presenting false job placement data to prospective students in its marketing, altering student grades and attendance records, and questionable recruitment and student loan advisory practices. The federal government recently announced it would withhold some student aid from the company, causing a delay that the company claims necessitates the bankruptcy.

Corinthian Colleges looked to be on the way to a well-deserved demise as a result of CFPB and Department of Education interventions, as well as investigations and lawsuits by state attorneys general in twenty states along with the SEC. That seemed to imply that students were going to come out as well as they could given the abuses they’d suffered.

It turns out we were naive. After all, this is America, where debtors routinely get the short end of the stick even when the lender engaged in fraud.

The Department of Education moved, in what appeared at first to be an effort to shut down Corinthian Colleges. It demanded that the education complex produce records on its job placement rate among students. When Corinthian Colleges failed to comply, it instituted a 21-day waiting period on the company being able to access federal student aid funding. That is what precipitated a cash flow crisis and the bankruptcy threat mentioned above.

But the DoE action may instead have been to put the agency out in front of the other legal actions and investigations, particularly that of the CFPB, so as to get control of the situation. As WSWS notes:

Not uncharacteristically, the Obama administration responded with an immediate $16 million life preserver, with a total of $35 million pledged in the form of accelerated financial aid payments. The government move was unprecedented, and some have likened it to a bank-style bailout….Among CCI’s 108 institutional stockholders, the largest is Wells Fargo, a bank, followed by a whole series of hedge funds, including Shah Capital Management, FMR LLC, Dimensional Fund Advisors, Vanguard Group and Blackrock. According to a congressional report, profits increased eleven-fold at Corinthian between 2007 and 2010, growing to $240.8 million.

And as Matthew Bruckner explains today in Credit Slips, not only did the Administration rescue enable the government to escape losses on debt that otherwise could have been wiped out, but the DoE even reaped fees for salvaging this toxic operation:

While the CFPB continued to prosecute its lawsuit, the ED worked with Corinthian Colleges to find a buyer and prevent its campuses from shutting down. Why didn’t the ED join the lawsuits or pending investigations by “nearly half of the country’s state attorneys general, the Department of Justice, Securities and Exchange Commission, and the Consumer Financial Protection Bureau”?

The deal that the ED has apparently blessed may save the ED approximately $600 million, but it seems to do so at the expense of the students the ED serves. Ordinarily, when an institution of higher education closes, its students can avail themselves of the “closed school discharge,” which enables students to discharge 100% of certain federal student loans if they meet certain criteria.  But the ED has apparently approved a deal struck between Corinthian Colleges and the Education Credit Management Corporation (“ECMC”), pursuant to which many students will not be able to avail themselves of the closed school discharge.  Moreover, the terms of the sale to ECMC provide for various payments to the ED, including $12 million at closing and a $17.5 “earnout” to be paid over the next seven years. In short, the ED is preventing some students from discharging debts that many think they were fraudulently induced to take out, and will receive a direct financial benefit from an entity that appears to benefit from this decision. As a result, some consumer advocates have claimed that the ED is hopelessly conflicted.

How the ED can claim that it’s protecting students when it’s depriving some them of the choice of whether to continue their studies or discharge many of their federal, student loan obligations, especially when the ED is collecting a fee in the process?

So just like homeowners who served to foam the runway for banks, students continue to be cannon-fodder for predatory lenders, with the Department of Education taking its cut for protecting Corinthian Colleges’ allies from suffering the full consequences of being in bed with such a persistent bad actor. There seems to be no limit to the willingness of this Administration to grind down what it apparently regards as little people to do damage control for itself and its powerful allies.

Humor: The Borowitz Report

Credit Photograph by Chip Somodevilla/Getty

WASHINGTON (The Borowitz Report)—President Obama is courting controversy with his decision to address a group that has become dominated in recent years by extremists.

Some have questioned the appropriateness of the President speaking to such an extremist group, especially because it has issued threats against the United States government in recent years.

As recently as 2013, for example, the extremists threatened to shut down the entire federal government if their demands were not met.

On Tuesday afternoon, the White House defended the President’s decision to speak to the extremists, pointing out that the Administration had also initiated dialogues with Iran and North Korea.

Get news satire from The Borowitz Report delivered to your inbox.

Naked Capitalism: The Stupidity of Energy Exports

Crushing The U.S. Energy Export Dream

Posted on January 20, 2015 by

By Arthur Berman, a petroleum geologist with 36 years of oil and gas industry experience. He is an expert on U.S. shale plays and is currently consulting for several E&P companies and capital groups in the energy sector. Berman is an associate editor of the American Association of Petroleum Geologists Bulletin, and was a managing editor and frequent contributor to theoildrum.com. He is a Director of the Association for the Study of Peak Oil, and has served on the boards of directors of The Houston Geological Society and The Society of Independent Professional Earth Scientists. Originally published at OilPrice

Exporting crude oil and natural gas from the United States is among the dumbest energy ideas of all time.

Exporting gas is dumb.

Exporting oil is dumber.

The U.S. imports almost half of the crude oil that we use. We import 7.5 million barrels per day. The chart below shows the EIA prediction that production will slowly fall and imports will rise (AEO 2014) after 2016.

US net energy export

This means that the U.S. will never be self-sufficient in oil. Not even close.

What about the tight oil that is produced from shale? That’s included in the chart and is the whole reason that U.S. production has been growing. But there’s not enough of it to keep production growing for long.

Here is a chart showing the proven tight oil reserves just published last month by the EIA.

US Tight Oil

Total tight oil reserves are 10 billion barrels (including condensate). The U.S. consumes about 5.5 billion barrels per year, so that’s less than 2 years of supply. Almost all of it is from two plays–the Bakken and Eagle Ford shales. We hear a lot of hype from companies and analysts about the Permian basin but its reserves are only 7% of the Bakken and 8% of the Eagle Ford.

Tight oil comprises about one-third of total U.S. crude oil and condensate reserves. The U.S. is only the 11th largest holder of crude oil reserves (33.4 billion barrels) in the world with only 19% of Canada’s reserves and 12% of Saudi Arabia’s reserves.

proven oil

In other words, the U.S. is a fairly minor player among the family of major oil-producing nations. For all the fanfare about the U.S. surpassing Saudi Arabia in production of crude oil, we are not even players in reserves. What that means is that we may temporarily pass Saudi Arabia in production because it chooses to restrict full capacity, and U.S. production will fade decades before Saudi Arabia’s production begins to decline.

Let’s put all of this together.

• The U.S. will never be oil self-sufficient and will never import less than about 6 million barrels of oil per day.
• U.S. total production will peak in a few years and imports will increase.
• The U.S. is a relatively minor reserve holder in the world.

How does this picture fit with calls for the U.S. to become an exporter of oil? Very badly. For tight oil producers to become the swing producers of the world? Give me a break.

Perhaps we should send congressional proponents of oil export like Joe Barton (R-TX), Ted Cruz (R-TX) and Lisa Murkowski (R-AK) to “The Shark Tank” TV show to try to sell their great idea to the investors and judges.

I’m out.

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