More Discussion of Romney's Trusts

The trusts I posted about Saturday are now getting a lot of attention.  Here's an article from Bloomberg today discussing them.

I note the statement near the end:

Romney “uses every trick in the book,” Breitstone said. “It’s going to be harder to do tax planning in the future. He’s bringing attention to things that weren’t getting attention.”

Let's hope so....

Germany should leave the Euro

In the comments to the Telegraph piece on Portugal comes an interesting idea:

I believe it would be much better and cost effective in the present moment to put Germany and a few countries who are willing to do it out of the euro rather than make everybody else leave or pay the price of their interest in staying. They would have the control on the stronger currency they wish and the rest would go on their own. The devaluation and the cost would be smaller for all.  

A big problem for the periphery countries (and it is not just those countries - witness recent political standoffs in France and the Netherlands) is that they don't have a currency that they can devalue relative to their primary trading partners.  So the only way they can generate the funds to repay the enormous debts run up during the bubble years is to cut their costs - and hope that the cost cuts don't cause a decline in their revenues as well.  This, so far, has been shown to be an obvious failure everywhere it has been tried - not to mention the suffering it imposes on the average citizen. 

Of course, the big primary trading partner is Germany.  Having Germany leave the euro would result in that country having its own currency whose value would rise relative to the euro - which has the same effect as if the periphery countries left the euro a devalued their currencies. 

Interesting idea.

Portugal Reaching the Breaking Point

Via Yves comes this article in yesterday's Telegraph:

The Portuguese people have put up with one draconian package after another – with longer working hours, 7pc pay cuts, tax rises, an erosion of pensions, etc – all amounting to a net fiscal squeeze of 10.4 of GDP so far in cyclically-adjusted terms. (It will ultimately be 15pc).


They have protested peacefully, in marked contrast to the Greeks, even though the latest poll by the Catholic University shows that 87pc are losing faith in Portugal’s democracy.

Yet Mr Passos Coelho’s rash decision to raise the Social Security tax on workers’ pay from 11pc to 18pc has at last brought the heavens down upon his head.

He was hauled in front of the Council of State – a sort of Privy Council of elders and wise men – for a showdown over the weekend. Eight hours later he emerged battered and bruised to admit defeat. The measure will not go ahead.

Francisco Louca from left-wing Bloco suggested that the prime minister cannot survive such a defeat. "The government is dead", he said.

Of all the countries on the European periphery, Portugal appears to have gotten the worst of it.  Their debt is much higher than Greece, and the measures taken to get it under control are just as draconian, yet thus far there has been no outbreak of violence like elsewhere.  But it appears people have had enough.  And its not just because of the latest proposed tax increase discussed above:

Unemployment has reached 15.7pc (36.4pc for youth). Citigroup expects the economy to contract by 3.8pc this year, a further 5.7pc next year, and yet again by 1.3pc in 2014. (and even then the current account will still be deficit – proof of the absurdity of EMU)


The slump will be so severe that the budget deficit will rise, not fall. Shrinking tax revenues will outweigh gains from cuts. Lisbon is chasing its tail. Citigroup says the deficit will be 5.1pc of GDP this year, 4.9pc next year, and 5.4pc in 2014.

And this is even with all the austerity measures taken so far.  Portugal is a picture perfect example of the failure of expansionary austerity. People are learning that all the measures the government has taken to reduce the debt are instead making the situation worse.

But the powers that be in the Eurozone won't take no for an answer. 

How this will all play out is anyone's guess....

Astronomy Pic of the Day

IC5070: The Pelican Nebula:

From NASA:

The Pelican Nebula lies about 2,000 light-years away in the high flying constellation Cygnus, the Swan. Also known as IC 5070, this cosmic pelican is appropriately found just off the "east coast" of the North America Nebula (NGC 7000), another surprisingly familiar looking emission nebula in Cygnus. The Pelican and North America nebulae are part of the same large and complex star forming region, almost as nearby as the better-known Orion Nebula. From our vantage point, dark dust clouds (upper left) help define the Pelican's eye and long bill, while a bright front of ionized gas suggests the curved shape of the head and neck. Based on digitized black and white images from the Samuel Oschin Telescope at Palomar Observatory, this striking synthesized color view includes two bright foreground stars and spans about 30 light-years at the estimated distance of the Pelican Nebula.

Quote of the Day

Power (n): the only narcotic regulated by the SEC instead of the FDA.

                                       - Anonymous

What Digby Said

Read the whole thing...

Suicides on the Rise

I'm not surprised by this either.  But still is very sad.  Thank you Galtian overlords....

Bursting Bubbles are Good for Lawyers

I love it:

While many of the recent scandals have been relatively isolated, the scope of the rate-rigging scandal has been vast, encompassing 16 banks. More than 10 government authorities around the world are looking into whether the banks reported false rates, potentially affecting trillions of dollars of financial products like mortgages and student loans.

The investigation is still in its early days, but experts say it is likely to drag on for years. Authorities could arrest traders this year, and more cases against big banks are expected. Earlier this year, Barclays agreed to pay $450 million to settle accusations that it had reported false rates.

“This is looking like a full employment act for the corporate bar,” said Samuel W. Buell, a professor at Duke Law School. 

No matter what happens, the lawyers always come out smelling like a rose....

The Future of Education

Paul Campos on the scandal at New England Law School.

You really should read the whole thing to get a taste of what is happening in the education field these days.  This is not just a story about one law school.  This is now the face of modern post-secondary education.  There are literally dozens of schools out there that are catering to this perceived need that you must have a college degree to succeed, and that are providing horrible educations to many people at exhorbitant costs, funded by government loans and the like that ultimately burden our young people with huge amounts of debt.

And my biggest fear is that with the continuing pressure to provide "alternatives" to public education at the elementary and secondary level, this is what the education system for our grandchildren - from pre-school through high school - will look like.

Very scary....

Saturday Night Music

Heard this song this morning and I can't get it out of my head....Happy Saturday Night!

Romney's Returns - The Untaxed Gains

In this post, I mentioned there were two points in Baumann and Serwer's post that I wanted to talk about.  This is the second:

Romney's tax rate does not account for much of his wealth. The income tax…doesn't tax you on changes of the value of your stuff from year to year unless you convert that stuff into cash," Galle explains. "If you never sell it then it doesn't become part of your income." A huge portion of the Romneys' fortune—as much as $100 million—is tied up in Mitt's individual retirement account (IRA), where it has grown tax-free for decades. That account is in the top .001 percent of all IRAs. Any increase in the value of Romney's IRA is not counted when his income is calculated. This is true for other Americans, too, but most Americans who have IRAs—only 48 million do—have relatively small amounts of money in them. The median IRA was worth $17,863 in 2010. So, for most Americans, the IRA tax exemption isn't the huge factor it is for Romney. 

There is more to this than just the income that is deferred by putting it in the IRA.  The good thing about that IRA is that the income in the IRA will eventually be taxed.  It's just a matter of when.

The same can't be said for investments directly held.  Like the guy in the quote above says, when you have a portfolio of investments, the gains don't get taxed unless you sell the investments.  And if you hold them until you die, the gains never get taxed at all.  

But there are ways to turn investments into cash without actually selling them.  The most obvious way is to borrow against them.  But there are now derivative instruments out there that will give you the value of stock that you own without actually having to sell them.  Such instruments, though, like the estate planning that I mentioned in the prior post, are well beyond the means of us mere peons.

In recent years, I have increasing thought that for property that's readily tradable in the markets: stocks, bonds and commodities, gains should be taxed regardless of whether you sell them.  The whole concept of waiting to record your gains until you sell the property is that it's not possible to accurately value the assets as the appreciate in value, and that property is not the equivalent of cash.  But with these kinds of assets, valuation is never an issue.  And these kinds of investments are effectively the equivalent of cash - with today's markets you can convert your investments into cash as easily as you can withdraw money from your savings account.  It makes no sense anymore to treat changes in the value of your investments any differently than changes in the amount of cash that you have.  In the latter case, if your cash goes up, you have income.  The same should be true if your marketable investments do.

The accounting rules already do this.  The tax rules should too.

There are ways to do this that really aren't that complicated.  And I have some ideas about that, which I will post about in the future.  But it really is something that should be done.  There is too much money being made that is just not being taxed.

And you know whose making it....

Romney's Returns: The Grantor Trusts

Nick Baumann and Andrew Serwer have some interesting tidbits about the tax return Romney released yesterday.  Two points especially caught my eye.  I'll cover one of them here - the other in a post to follow.

Baumann and Serwer point out the following:

Romney still pays taxes on his sons' enormous trust funds. David Cay Johnston, a Reuters columnist, tax expert, and Pulitzer Prize winner, tells Mother Jones that without the taxes Romney paid on his sons' trust funds, which are worth around $100 million combined, "his rate would be much lower."

This is the result of the trust being treated as a "grantor trust."  Normally, the way a trust is taxed is that it pays tax on its undistributed income.  For example, say a trust has $1 million of income, and under the terms of the trust it distributes 50% of that income to its beneficiaries.  The trust will pay tax on the undistributed income - $500,000 of income in this example - and the beneficiaries will pay tax on the income distributed to them by the trust.  

A grantor trust - also known as an imperfect trust - works differently.  These trusts are call "grantor trusts" because when they are set up by the person who funds them (the "grantor"), that person under the terms of the trust has retained significant powers over the what can be done with the investments in the trust.  Because of this, the tax law treats the grantor - and not the trust itself - as the owner of the assets in the trust, so that the grantor is required to report the income from the trust on his or her tax return.

When you set up a trust with someone other than yourself as the beneficiary, you are usually doing it in order to transfer the value of the assets placed to the benificiary.   The trust mechanism allows you to delay the transfer of the actual assets to the beneficiary, but the income from the assets belongs to the beneficiary, and ultimately the assets themselves and whatever income hasn't been previously distributed goes to the beneficiary at the end of the trust.

Normally, when a trust is set up and you transfer assets to it, the transfer constitutes a gift, and you have to pay gift tax.  You can set up the trust with the grantor retaining powers over the assets, but if you do then the grantor may be treated as not having made a completed gift.  This is important from the estate planning point of view, because if you haven't made a completed gift, the property in the trust will be included in your estate when you die.  If you do make a completed give when you set up the trust, then the property won't be included in your estate.  Of course, if you make a completed gift and the value of the gift is large enough, you have to pay a gift tax.

Now, here's the fun part.  The rules for determining whether you've made a completed transfer to a trust for income tax purposes are different from the rules for determining whether you've made a completed transfer to a trust for estate and gift tax purposes.  It is possible - and probably likely in Romney's case, although you really don't know without seeing the trust documents themselves (fat chance of that happening) - that you can make a completed gift for gift tax purposes but not for income tax purposes.  What does this mean?  It means that the income that is earned by the trust belongs to Mitt's kids now - it is out of the Romney estate and will never be subject to a gift or estate tax.  But Romney is the one that pays the tax on it!

So say I'm one of Romney's sons, and my share of the income from the trust is $1 million and it is all capital gain.  If I were to report that income, I would have to pay, say, $150,000 of capital gains taxes on it.  But since it's a grantor trust for income tax purposes - I don't have to - Dad does!  Now, isn't that just another $150,000 gift Dad has made to me?  You betcha it is.  So does the tax law treat it as a gift subject to the gift tax?  No it doesn't.  

So what's probably going on here is that the Romney boys are getting all this money from the trust, and Dad is paying all the tax on it.  The imperfect trust: the gift that keeps on giving!

This is what you pay fancy estate planning lawyers for.  

Mitt Romney: The Confidence Fairy

Gotta love Krugman....

Why I'm not a big Obama fan

People wonder sometimes why I am not a passionate supporter of Obama.  Oh, I am passionately opposed to Romney, who I think would be a disaster as president (hell, he's been a disaster as a candidate over the last month), but I tend to view Obama as the lesser of two evils.

The reason is things like this:

Lanny A. Breuer, the head of the Justice Department’s Criminal Division, last week spoke to the New York City Bar Association, extolling the virtues of deferred and nonprosecution agreements as the new standard for how the Justice Department deals with criminal conduct by corporations.

It is not just corporate investigations that are being concluded with these agreements. They have been used recently with individuals to resolve investigations, like the recent agreement with the cyclist Floyd Landis over possible fraud charges. TheSecurities and Exchange Commission has also embraced them as a means to wrap up civil securities fraud cases.

This is what Breuer actually said in his speech:

The result has been, unequivocally, far greater accountability for corporate wrongdoing - and a sea change in corporate compliance efforts. Companies now know that avoiding the disaster of an indictment does not mean an escape from accountability.  They know that they will be answerable even for conduct that in years past would have resulted in a declination. Companies also realize that if they want to avoid pleading guilting, or to convince us to forego bringing an case altogether, they must prove to us that they are serious about compliance. Our prosecutors are sophisticated. The know the difference between a real compliance program and a make-believe one.  They know the difference between actual cooperation with a government investigation and make-believe cooperation. And they know the difference between a rogue employee and a rotten corporation.

 I really don't know how this guy can say this with a straight face.  Remember this?

When Citigroup agreed last month to pay $285 million to settle civil charges that it had defrauded customers during the housing bubble, the Securities and Exchange Commission wrested a typical pledge from the company: Citigroup would never violate one of the main antifraud provisions of the nation’s securities laws.
To an outsider, the vow may seem unusual. Citigroup, after all, was merely promising not to do something that the law already forbids. But that is the way the commission usually does business. It also was not the first time the firm was making that promise.

Citigroup’s main brokerage subsidiary, its predecessors or its parent company agreed not to violate the very same antifraud statute in July 2010. And in May 2006. Also as far as back as March 2005 and April 2000.

Citigroup is far from the only such repeat offender — in the eyes of the S.E.C. — on Wall Street. Nearly all of the biggest financial companies, Goldman Sachs, Morgan Stanley, JPMorgan Chase and Bank of America among them, have settled fraud cases by promising the S.E.C. that they would never again violate an antifraud law, only to do it again in another case a few years later.

A New York Times analysis of enforcement actions during the last 15 years found at least 51 cases in which 19 Wall Street firms had broken antifraud laws they had agreed never to breach.

As a tool to bring about corporate accountability, these agreements have been an abject failure.  Yet last week the Obama administration spoke before a crowd of Wall Street lawyers and extolled their virtues. 

The timing of this speech is not accidental.  With Romney's campaign going downhill, there's lots of buzz of how the street is starting to hedge its bets, and that more and more of its money is heading to the Obama campaign.  Surely this Breuer's message helps in this.  

The message to the street is that nothing is going to change.  And that, in a nutshell, is why I am not a big Obama fan.

You were expecting serious?

Brad Delong links to Joe Weisenthal on Romney's housing policy, released yesterday:

Yesterday evening (a Friday evening!) the campaign revealed a whitepaper titled Securing the American Dream and The Future of Housing Policy that's so unsubstantial, we half-suspect the timing was done so that nobody would see it amid the release of the 2011 tax documents, which came out about 20 minutes earlier. This is honestly a sentence in his whitepaper on The Future Of Housing Policy:

The Romney-Ryan plan will completely end “too-big-to-fail” by reforming the GSEs.

Romney and Ryan believe that "too-big-to-fail", which generally refers to the assumption that a collapse of a major Wall Street institution would be catastrophic to the overall economy, thus making a bailout imperative, would be solved by the reform of Fannie and Freddie. Or maybe Romney and Ryan believe that only Fannie and Freddie are too big to fail, and that the collapse of a mega-bank would be fine. Those are the only possible readings of that sentence. As for Romney and Ryan's plan to reform the GSEs, the plan is to... reform them. Here's the full context for the above quote:

End “Too-Big-To-Fail” And Reform Fannie Mae And Freddie Mac: The Romney-Ryan plan will completely end “too-big-to-fail” by reforming the GSEs. The four years since taxpayers took over Fannie Mae and Freddie Mac, spending $140 billion in the process, is too long to wait for reform. Rather than just talk about reform, a Romney-Ryan Administration will protect taxpayers from additional risk in the future by reforming Fannie Mae and Freddie Mac and provide a long-term, sustainable solution for the future of housing finance reform in our country.

So basically there are no details at all. Too Big To Fail will be fixed by reforming the GSEs, and the GSEs will be fixed... somehow….

It's reasonable to think that the challenger who is trying to disrupt the status quo, actually says something that would... disrupt the status quo. Failing to provide any details or a plan during the heart of the campaign undermines the notion that he is a serious alternative.

Really, there was never anything serious about the Romney campaign.  It's basically: "Obama is bad, vote for me."  If you expect anything more serious than that at this stage of the game, you will be deeply disappointed.

Astronomy Pic of the Day

Grand Spiral Galaxy NGC1232:

From NASA:

Galaxies are fascinating not only for what is visible, but for what is invisible. Grand spiral galaxy NGC 1232, captured in detail by one of the new Very Large Telescopes, is a good example. The visible is dominated by millions of bright stars and dark dust, caught up in a gravitational swirl of spiral arms revolving about the center. Open clusters containing bright blue stars can be seen sprinkled along these spiral arms, while dark lanes of dense interstellar dust can be seen sprinkled between them. Less visible, but detectable, are billions of dim normal stars and vast tracts of interstellar gas, together wielding such high mass that they dominate the dynamics of the inner galaxy. Invisible are even greater amounts of matter in a form we don't yet know - pervasive dark matter needed to explain the motions of the visible in the outer galaxy.

Quote of the Day

Because bankers measure their self-worth in money, and pay themselves a lot of it, they think they're fine fellows and don't need to explain themselves.

                                            - James Buchan

I'm not optimistic

My browsing this morning didn't leave me very optimistic about neat-term economic prospects.

First, there was this post by Yves Smith about how bank depositors in Greece, Spain and other periphery countries have been shrinking, which will be a major impediment to finding a solution to the problems over there..  Yes, I guess it's good news that the mainstream press is finally waking up to the issue, but it's just another bad trend that is an ominous sign.

Then there was this story, which was linked to by Yves, about the growing number of expats leaving China.  Really, with moribund economies here and in Europe, China for the last few years has been the driving force in the world economy, and the fact that things are slowing down there is not a good thing at all.  As the article says,

Besides some of the reasons specific to China, expats leaving a nation can be a leading indicator of weaker economic growth. For example the number of expats in Japan apparently also declined in the 90s, although exact numbers are difficult to pinpoint. What is clear however is that a bubble economy often creates unrealistic expectations about future growth, attracting capital and talent. And when the bubble bursts, years of sub-par growth ensue....If Japan is any indication of such an adjustment, the correction could be severe indeed. After the peak in the 90s and the subsequent decline, the nation's GDP growth has never recovered.

One could say the same thing here - after the bursting of the bubble five years ago, who knows if we will every see growth like we did in the 90s again?  But that's not what makes this ominous.  What makes it ominous is that much of the world's economic growth fed off of China's tremendous expansion ove rhte last couple of decades.  If that slows down - if Chinese consumers don't continue to make progress at the same rate, what does that portend for the world economy?  Nothing good.

And then, to top it all off, I read this interview with Neil Barofsky.  The following portion is particularly disturbing:

HR: What are the potential future losses that the U.S. government—that taxpayers—might have to absorb?

Neil Barofsky: The real issue is the potential for another financial crisis because we haven’t fixed the core problems of our financial system.  We still have banks that are “too big to fail.”  Standard & Poor’s estimated last year that the up-front cost of another crisis, including bailing out the biggest banks yet again, would be roughly 1/3 of the U.S. gross domestic product (GDP) or about $5 trillion.  The resulting problems will be even bigger.

HR: What were the problems resulting from the 2008 financial crisis?

Neil Barofsky: When you look at the fiscal impact of the 2008 crisis, you have to look at it not only in terms of lost tax revenues and increased government debt, but also in terms of the loss of household wealth.  People who became unemployed suffered tremendous losses and the government’s social benefit costs expanded accordingly.  One of the reasons we had the debt ceiling debate last year, when the U.S. credit rating was downgraded, and why we are facing a fiscal cliff ahead is the legacy of the 2008 crisis.  We have a lot less dry powder to deal with a new crisis and we almost certainly will have one.

HR: Why do you expect another financial crisis?

Neil Barofsky: It just comes down to incentives.  A normally functioning free market disciplines businesses.  The presumption of bailout for “too big to fail” institutions changes the incentives of a normally functioning free market.  In a free market, if an institution loads up on risky assets with too little capital standing behind them, it will be punished by the market.  Institutions will refuse to lend them money without extracting a significant penalty.  Counterparties will be wary of doing business with companies that have too much risk and too little capital.  Allowing “too big to fail” institutions to exist removes that discipline.  The presumption is that the government will stand in and make the obligations whole even if the bank blows up.  That basic perversion of the free market incentivizes additional risk.

HR: Are “too big to fail” banks taking more risks today than they did before?

Neil Barofsky: Bailouts give bank executives an incentive to max out short term profits and get huge bonuses, because if the bank blows up, taxpayers will pick up the tab.  The presumption of bailout increases systemic risk by taking away the incentives of creditors and counterparties to do their jobs by imposing market discipline and by incentivizing banks to act in ways that make a bailout more likely to occur.

HR: Is it just a matter of the size of banking institutions?

Neil Barofsky: The big banks are 20-25% bigger now than they were before the crisis.  The “too big to fail” banks are also too big to manage effectively.  They’ve become Frankenstein monsters.  Even the most gifted executives can’t manage all of the risks, which increases the likelihood of a future bailout.

HR: Since bank executives are accountable to their shareholders, won’t they regulate themselves?

Neil Barofsky: The big banks are not just “too big to fail,” they’re ‘too big to jail.’  We’ve seen zero criminal cases arising out of the financial crisis.  The reality is that these large institutions can’t be threatened with indictment because if they were taken down by criminal charges, they would bring the entire financial system down with them.  There is a similar danger with respect to their top executives, so they won’t be indited in a federal criminal case almost no matter what they do.  The presumption of bailout thus removes for the executives the disincentive in pushing the ethical envelope.  If people know they won’t be held accountable, that too will encourage more risk taking in the drive towards profits.

HR: So, it’s just a matter of time before there’s another crisis?

Neil Barofsky: Yes.  The same incentives that led to the 2008 crisis are still in place today and in many ways the situation is worse.  We have a financial system that concentrates risk in just a handful of large institutions, incentivizes them to take risks, guarantees that they will never be allowed to fail and ensures that the executives will never be held accountable for their actions.  We shouldn’t be surprised when there’s another massive financial crisis and another massive bailout.  It would be naïve to expect a different result.

What a great way to start the day....

Tough - Move!

When I was younger and more naive (hehe), one of the things I couldn't understand was the propensity for the older members of our community to vote against school budgets all the time.  The argument I always heard was that they were retired and living on fixed incomes and couldn't affort the higher property taxes.  My feeling always was that property taxes are a cost of living in your community like everything else, and really if you can't afford to live in the community you live in there are always less expensive places to go.  I mean, if a person who loses his job and gets a lower paying one and can't afford his mortgage payments anymore, he sells the house and moves.  I didn't see how that was any different than an older person no longer being able to pay his property taxes.

I was vilified every time I thought that.

But now I wonder that is the new message to our seniors.  Here's yahoo news with an article touting how you can live very well on your social security check in Eau Claire, Wisconsin.

Hidden message:  can't afford to stay where you are?  Move!

Astronomy Pic of the Day

Polar Ring Galaxy:

From NASA:

NGC 660 lies near the center of this intriguing skyscape, swimming in the boundaries of the constellation Pisces. Over 20 million light-years away, its peculiar appearance marks it as a polar ring galaxy. A rare galaxy type, polar ring galaxies have a substantial population of stars, gas, and dust orbiting in rings nearly perpendicular to the plane of the galactic disk. The bizarre configuration could have been caused by the chance capture of material from a passing galaxy by the disk galaxy, with the captured debris strung out in a rotating ring. The polar ring component can be used to explore the shape of the galaxy's otherwise unseen dark matter halo by calculating the dark matter's gravitational influence on the rotation of the ring and disk. Broader than the disk, NGC 660's ring spans about 40,000 light-years.

Quote of the Day

The rallying cry of the American Revolution was not "no taxation."  It was "no taxation without representation."  It was about freedom, equality and democracy.

Taxing the Rich

This is a follow-up on this article I linked to earlier.  It reminded me of this discussion several weeks ago in the New York Times Room For Debate section on whether or not to eliminate the tax on capital gains.  At the time I had been tempted to write about this debate, and one of the key arguments in favor of reducing taxes on the rich - namely, that if we tax them too much, they will move their money elsewhere, thereby hurting ou economy.

Outside the US, it is unbelievable how easy it is for an executive of a multinational corporation to avoid taxes.  The US is the only country that taxes based on citizenship, not residence, so that a French citizen who lives outside of France will normally not pay tax in their home country.  And most countries will only tax nonresidents on income earned within their countries, and do not tax a nonresident's investment income (the US treats nonresidents this way as well).  And most countries have specific rules about how long you have to be present in order to be a resident.  I know of a number of executives that claimed they were not resident in any country because they travelled between regional headquarters located in different countries, and didn't meet the residence test in any country.  Based on that, they claimed their investment income wasn't taxable anywhere.

One of the main differences between our system of income taxation and other countries' systems is that we tax our citizens and regardless of where they live, and we tax them on their worldwide income, not just income earned in the United States.  The Guardian article talks about a French executive who is considering becoming a Belgian national in order to avoid the proposed increase in French tax.  Under current US law, that couldn't happen.  The only way for an American citizen to avoid tax on his income is to renounce his US citizenship and leave the country.

Or to affirmatively hide his income and break the law by failing to report it.  Frankly, when it comes to someone like Romney, I have no idea why he would have accounts in a place like the Cayman Islands.  Legally, anything he earns through those accounts is subject to tax in the same manner as if he kept those funds in the US and invested them here.  The only advantage of the Caymans is secrecy, and the only reason to keep it secret is if you're not reporting something you're supposed to report.

When the UBS guy got his whistleblower's reward last week, it was for helping to identify hundreds of Americans that were doing just that.

Actual business income is different.  If you invest in a corporation that makes money by selling goods or services outside the US, the income of the corporation is usually not taxed in the US until the company pays dividends to the US shareholder.  But if the corporation makes investments - if its income is rents, royalties, dividend, interest and trading gains - that rule doesn't apply.  The US shareholders generally have to report this kind of income as the corporation earns it, and pay tax on it whether or not the corporation pas the income out as dividends.  So you can't set up a corporation in the Cayman Islands, have that corporation invest in overseas markets and hope to avoid paying taxes on your investment returns.

Unless, of course, you are counting on secrecy, and not reporting the income you are supposed to be reporting.

Let me repeat one important point:  The only way for a US citizen to avoid tax on his investment income is to renounce his US citizenship.  He can't move it to offshore accounts and legally avoid taxes on the income.  He can't even leave the country and become a resident elsewhere and legally avoid US taxes on the income.  The only way to avoid US tax on the income is to renounce his citizenship.

The guy advocating eliminating capital gains tax claims it means US citizens would be less likely to invest abroad if US tax was lower.  But they have to pay tax on their gains regardless of where they are earned.  They not only have to invest abroad, but they have to renounce their citizenship and move abroad in order to gain any advantages of lower tax rates overseas.  My view of anyone who would do that?  Good riddance.

Astronomy Pic of the Day

Centaurus A:
:

From NASA:

What's the closest active galaxy to planet Earth? That would be Centaurus A, only 11 million light-years distant. Spanning over 60,000 light-years, the peculiar elliptical galaxy is also known as NGC 5128. Forged in a collision of two otherwise normal galaxies, Centaurus A's fantastic jumble of young blue star clusters, pinkish star forming regions, and imposing dark dust lanes are seen here in remarkable detail. The colorful galaxy portrait was recorded under clear Chilean skies at the Cerro Tololo Inter-American Observatory. Near the galaxy's center, left over cosmic debris is steadily being consumed by a central black hole with a billion times the mass of the Sun. As in other active galaxies, that process likely generates the radio, X-ray, and gamma-ray energy radiated by Centaurus A.

Interesting Links

Links to a few things I found interesting:

Tax 'traitors' widen divisions in belt-tightening France - The Guardian.  I'll have a lot to say about this in the next day or so.

Cerberus desconstructs Bobo's latest column.

Judge Enjoins Indefinite Detention Provisions of NDAA.  Funny how I missed this when it happened.

What is Middle Class?  It's not what our political leaders think it is....

Glenn Greenwald on what free speech really means.  Hint: its not "you can say whatever you like as long as I agree with it...."

Quote of the Day

Reasonable people adapt themselves to the world. Unreasonable people attempt to adapt the world to themselves. All progress, therefore, depends on unreasonable people. 

                                  - George Bernard Shaw 

Selective Religious Outrage

From Digby.

They Think the American People are Stupid

Naill Ferguson, at the Daily Beast/Newsweek:

It’s a paradox. The economy is in the doldrums. Yet the incumbent is ahead in the polls. According to a huge body of research by political scientists, this is not supposed to happen. 

Commenter John at Delong's Blog:

Apparently the notion of the American people not being dupes is considered weird enough as to warrant an explanation. 

Yep.

Krugman's mistaken about this one

Liquidationists:

So where are Romney and his party coming from? Basically, they’ve thrown out 80 years of economic analysis and evidence because it doesn’t fit their ideological preconceptions....

Wrong.

This has nothing to do with ideology.  If they actually thought this policy wasn't gonna work, they would be giving each other high fives like after the killing of our ambassador and others earlier this week. 

These guys have only one hope of winning this election, and that is by the majority of the electorate blaming Obama for the state of the economy.  For that to occur, they need two things to happen:  first, that the electorate forget that the policies they espouse are the same ones that got us in this mess to begin with, and second, that the economy does not improve.  Republicans have spent the last 46 months doing everything they can to make sure both of these things happen.  The last thing the wanted was for the Fed to actually do something that might actually help the economy.

As for this:

What you really have to wonder about is all the not-stupid economists who have aligned themselves with this guy and that crew. Probably they imagine that once the election is past sensible economics will return. But the odds are that they are wrong, and that they’re sacrificing their own credibility to put charlatans and cranks in the driver’s seat.

I think it goes deeper than this.  Yes, maybe they fear that they will have to wait another 4 years before those choice appointments are made available to them.  But I really think this is based on fear of losing as well.  The last thing these people want is to see some Keynesian miracle pull the economy out of this mess.  It would just demonstrate that the whole construct they have created is a fraud, and they would go down in history as among the biggest monsters the profession has ever produced.

A lot has been written lately about how the republican/conservative brand is up against changing demographics of our country, and how they are making one last stand in this election.  I would say the same thing is happening as far as their economists are concerned as well.  The only way they don't go down in history thoroughly discredited is if they win this election.

The Education Problem

I am a strong believer in public education.  Having grown up going to public schools, and graduating from them to an elite college and highly ranked law school, I have always recognized the incredible contribution made to my success by the education I received when I was growing up.  And being a military brat, I experienced it in a lot of different settings in many places around the country and can't think of any place I went to school where I feel like the system failed me.  Of course, that was in the 1960s and 70s, before the concerted attacks began against the system.

One thing that has always been clear to me, however, is the impact that wealth has on outcomes.  A couple of days I came across this post from Mel Riddle which demonstrates this to no end.

I actually have had my fill with hearing how far behind our kids are compared to other countries.  The primary evidence cited for this has always been the PISA test, conducted by the Organization for Economic Cooperation and Development (OECD), an international organization of countries of which the United States is a member.  There are 34 member countries in the OECD, which includes all of the countries listed on the table above plus a handful of others.  The OECD describes the PISA this way:

PISA is an international study that was launched by the OECD in 1997. It aims to evaluate education systems worldwide every three years by assessing 15-year-olds' competencies in the key subjects: reading, mathematics and science. To date over 70 countries and economies have participated in PISA.

Mel's post examines some of the statistics in the latest PISA test, which was conducted in 2009 and the results of which were announced in 2010.

Country	Poverty Rate	PISA Score
Finland	3.40%	536
Canada	13.60%	524
New Zealand	16.30%	521
Japan	14.30%	520
Australia	11.60%	515
Netherlands	9.00%	508
Belgium	6.70%	506
Norway	3.60%	503
Switzerland	6.80%	501
Poland	14.50%	500
United States	21.70%	500
Germany	10.90%	497
France	7.30%	496
Ireland	15.70%	496
Denmark	2.40%	495
Hungary	13.10%	494
United Kingdom	16.20%	494
Portugal	15.60%	489
Italy	15.70%	486
Greece	12.40%	483
Czech Republic	7.20%	478
Austria	13.30%	471

Note: I re-arranged this table from the one in Mel's post to show the countries in order of test scores, not poverty rates.

Two points should be noted at the outset.  First of all, the scores for the United States its rankings compared to other countries are markedly higher for 2009 as compared to earlier years.  In fact, we are making progress in improving our students' performance.

The second thing that should be noted is that, of all the countries on the list, the poverty rate for the United States is far higher than it is for other countries.

Mel also created this table, which to me is even more striking.  It breaks out the performance of students American schools, based on the percentage of the student population in the school that are on the free and reduced price lunch program - a good barometer of relative wealth of the districts in which the schools are located:

Free and Reduced Meal Rate	PISA Score
Schools with < 10%	551
Schools with 10-24.9%	527
Schools with 25-49.9%	502
Schools with 49.9-74.9%	471
Schools with >75%	446
U.S. average	500

This table says all you need to know.  Students who live in the wealthiest districts perform as good or better than students anywhere in the world.  But students in the poorest districts are fall behind - way, way behind.

As with anything, it all comes down to money.

How did we end up with a system that provides such stark differences?  More on that in my next post.

Projection

My general impression is that people who will say or do anything to win cannot conceive that others don't feel the same way.  They assume that everyone else will say or do anything to win as well.

Hence this.

And this.

Who Triggered the Riots

So it wasn't far right jews who posted that video that got Islamists so upset earlier this week.

It was neo-Nazis.

Not a surprise....

More Tax History

One of the foundational provisions in the income taxation of corporations is the ability of an independent businessperson to incorporate his or her business tax free.  There is a specific provision in the tax law - section 351 of the Internal Revenue Code - which permits this.  Of course, it doesn't specifically say that you can incorporate a business tax free.  What it says is that if a person transfers property to a corporation that he or she controls in exchange for stock in that corporation, the person doesn't have to report any gain on the exchange.  Sometimes a business is operated by two or more persons in a partnership, so the provision applies if two or more persons transfer property to a corporation that they jointly control in exchange for stock in the corporation.

Beginning in the late 1950s, some bright investment bankers got the idea that they can exploit this provision to the advantage of investors.  Suppose I own stock in a public company, and I decide that I want to diversify my holdings - turn it from shares in one corporation to a diversified portfolio of investments.  In order to do this, I would normally have to sell part of my stock to buy other stocks.  Or I could sell my stock and use the cash to buy into a mutual fund - which by definition manages a portfolio of investments on behalf of a large group of investors.  In either case, by selling my stock, I have to recognize my gains and pay tax on them.  Even if I could find someone willing to swap stocks with me - in effect, barter with them to trade stock in the corporation I own for stock in other companies - I would still have to recognize my gains.

What these investment bankers came up with is to have a whole bunch of investors all at once transfer their investments to a newly-organized mutual fund.  This would qualify under section 351 - one or more persons transferring property to a corporation that they collectively control.  The investors were thus able to convert an investment in a single company into a portfolio of investments without having to recognize their gains.

Needless to say, this was troubling to the IRS, whose job it is to prevent people from avoiding their tax obligations.  As a result, it proposed an administrative rule that basically held that if the corporation was a mutual fund, section 351 did not apply and the investors would have to recognize their gains.  Within a month, the Senate Finance Committee adopted an amendment to a completely unrelated item of tax legislation that had already been passed by the House of Representatives, specifically stating that section 351 did apply if the corporation was a mutual fund.  Someone, obviously, was unhappy with the IRS's proposed rule and prevailed on the Senate to stop it in its tracks.

But then a funny thing happened.  After the Senate passed the bill, it went to a conference committee, and when the final version of the bill emerged from the conference, it provided that section 351 only applied to these transactions if they occurred prior to the passage of the new law.  It did not apply to future transactions.

So now people can no longer swap their investments for shares in a mutual fund without being taxed on their gains.

Yes, sometimes the good guys do win.  Of course, that was almost 50 years ago....

Astronomy Pic of the Day

M27 - "The Dumbell Nebula":

From NASA:

While hunting for comets in the skies above 18th century France, astronomer Charles Messier diligently kept a list of the things he encountered that were definitely not comets. This is number 27 on his now famous not-a-comet list. In fact, 21st century astronomers would identify it as a planetary nebula, but it's not a planet either, even though it may appear round and planet-like in a small telescope. Messier 27 (M27) is an excellent example of a gaseous emission nebula created as a sun-like star runs out of nuclear fuel in its core. The nebula forms as the star's outer layers are expelled into space, with a visible glow generated by atoms excited by the dying star's intense but invisible ultraviolet light. Known by the popular name of theDumbbell Nebula, the beautifully symmetric interstellar gas cloud is over 2.5 light-years across and about 1,200 light-years away in the constellation Vulpecula. This impressive color composite highlights details within the well-studied central region and fainter, seldom imaged features in the nebula's outer halo. It incorporates broad and narrowband images recorded using filters sensitive to emission from sulfur, hydrogen and oxygen atoms.

Quote of the Day

To his dog, every man is Napoleon; hence the constant popularity of dogs. 

                         - Aldous Huxley

Wow, Thanks Avedon and Duncan

As I stated in my profile, I started this blog mostly as a way to vent my opinions.  I started it almost three years ago and, as you can see from the number of posts, have had long stretches of time when life has intervened and I just wasn't paying attention to this.  I never really made much of an effort to promote it, consistent with my original purpose - to vent.  I've averaged a couple of page views per post - mostly from my mother (love you Mom!) but also from a few select friends who check it out from time to time.

All the same, I am here every day, mostly to check out the blogger feed - to see what the people whose opinions I value are saying.  And there are four blogs in particular that I make it a point to read everything they post (but not the comments - don't have that much free time on my hands!):  Duncan Black's Eschaton, Digby's Hullabaloo, Yves Smith's nakedcapitalism, and Avedon Carol's Sideshow.  

So imagine my surprise this morning when I checked in with Duncan, saw this post, and clicked on the link, which sent me to this.  Suddenly found myself reading my own blog!

The big shock came later in the day - in 24 hours I have more hits - WAY more hits - like 150% more hits - than all my other posts combined.  Amazing what a link from such prominent bloggers can do.

So I've resolved to be a bit more active here.  To those of you who saw me for the first time as a result of the link, here's hoping I can keep your interest.

And to Avedon and Duncan, thanks for the link!

Just An Aside

I am reading a book now called "Before France and Germany" by a historian named Patrick Geary which basically is about the history of western Europe between the fall of the Roman Empire and the rise of Charlemagne (i.e., from about 500 AD to 800 AD).  Don't ask why, but I've alway been fascinated by this era of history - the darkest of the so-called "Dark Ages."  In the first chapter - which describes the last couple of centuries of the rule of Rome - I came across this passage, regarding the persecution of the Christians by Emperor Diocletion beginning in the year 303 AD:

This Christian sect, which had originated as a reform movement within Judaism, had spread to urban centers throughout the Empire by the end of the third century.  Its members, united under their bishops, followed a wide variety of occupations and lifetyles, but were united by their private and quasisecret religious rites and beliefs which stood in sharp contrast with those of their neighbors.  Their radical and exclusive monotheism, their belief in an eternal afterlife of bliss for the few elect and of eternal torture for the rest of humankind, and their insistence that only those of their cult could achieve this salvation were all likely to build resentment in the rest of society. 

You think?

Actually, add to this the abounding rumors that their religious rites included the eating of flesh and the drinking of blood, and one can imagine why mainstream society was not really friendly to them.

Just a thought....

We Made This Mess

When I have conversations with people about our current state of affairs, I often have problems getting this point across.  Charlie says it so succinctly:

It was a single line, tossed off really a little past halfway through his acceptance speech, and it didn't even really draw all that much of a response from a crowd that was ready to recreate Bastille Day every time he got from a subject to a verb without turning an ankle. He mentioned it almost as an aside.

 "...the hard and frustrating and necessary work of self-government."

That I heard. That I understood. It is not musical. It is not in any way poetic. But it is a clear line drawn between the president and the person and the party that would like to take his job from him. It is now an article of absolute faith among Republicans that "the government" is an entity separate from "the American people," which they say the same way that the old Jesuits talked about "the mystical Body of Christ." It is now an ironclad commandment of conservative orthodoxy that "the government" is something parasitic and alien. There is a reason why conservatives talk about "government" and not "self-government," because to refer to the latter is to concede that "the government" is really the most basic product of our political commonwealth, that it is what we produce among ourselves so as to order the production of everything else that we do together. This is not an idle distinction. It is the entire message of last week's Republican convention, and it is the entire message of the campaign they are planning to run, and, make no mistake, it resonates deeply with millions of people because it has been spoonfed to them as a kind of noxious anesthetic for almost foty years now, a long enough time for it to seem as though it is the natural order of things.

"...the hard and frustrating and necessary work of self-government."

Make no mistake. This little throwaway line was the most direct, and the most serious, challenge that the president threw down at the feet of the Republican ticket on Thursday night because it strikes at the very essence of four decades of conservative political philosophy. We create "the government" we have. "The government" is not imposed from without. It is our creation. Its proper operation is our responsibility. If we do not like the way it operates, we do the hard and frustrating and necessary work to change the way it does. If we believe that it is being hijacked, we do the hard and frustrating and necessary work of using the tools of self-government to run the moneychangers out of the place. If we do not like the way the person we vote for is doing the job with which we have entrusted him — if he, say, allows the crooks who brought down the economy to walk away free, or if he perpetuates policies antithetical to civil liberties, or if he gets a little too cozy with fracking or if he gives away too much in some Grand Bargain — then we do the hard and frustrating and necessary work of self-government to hold his damn feet to the fire and say, "No further."

"...the hard and frustrating and necessary work of self-government."

Our government has been set up as an ongoing creative process. That's the real genius of it. It is what we make of it. It is our fault when we create a grotesque out of it like we have at this moment in time. Two largely corporate-owned parties, one of them a little nicer to gay people, and women, and old folk, a system sodden with money and corruption and increasingly unresponsive to anyone who doesn't pay to corrupt it even more. This is what we created. It was not imposed from without. We voted for the politicians who voted to put on the Supreme Court the men who unleashed the floodgates. We voted for the politicians who deregulated Wall Street — and Bill Clinton was one of them — and turned the vandals loose in the treasure house. Or we didn't vote, and we didn't realize that not voting is also a creative act. There is nobody in this country who is not complicit in the current state of our politics.

"...the hard and frustrating and necessary work of self-government."

I have often had conversations with my conservative friends about their fear of granting too much power to our government - too big a role in the lives we live.  I agree with that fear to a degree.  I don't have that fear if our government is operating in the manner set out in our Constitution - if our government is truly responsive to the people.  Yes there is the whole "tyranny of the majority" thing, but that's what the Bill of Rights is for, and so long as the Bill of Rights is properly enforced there will be limits on what the majority can impose on the minority. 

No the real issue is the tyranny of the few.  That's really what our government was always designed to protect against.  That's what gets broken down as the country becomes increasingly in thrall to "two largely corporate-owned parties" operating under "a system sodden with money and corruption and increasing unresponsive to anyone who doesn't pay to corrupt it even more."

A hundred years or so ago there was a movement in this country - the Progressive movement - that recognized that a free market truly isn't a free market if some players become so big and so economically powerful that the normal rules of the market no longer apply.  This movement led to the passage of anti-trust laws and the creation of the federal trade commission and food and drug administration, acts designed to curb the ability of large, economically powerful interests to distort the operation of the markets.  There was a recognition that a free market operates best when the same rules apply to all of its participants.  There was a recognition that an individual's freedom to participate can be curtailed by overwhelming wealth and power of other private participants - indeed, that that overwhelming power is more threatening to the freedom of the individual than anything the government can do, especially a government that is responsive to the people as a whole.

I keep asking people what is the worst denial of freedom you can think of?  Slavery.  And what is slavery?  One human being - a private person, not the government - literally owning another person as a piece of property.  The government is not the only entity that can deny your freedom.  Other people can too.  But I would go one further.  It is the role of the government to prevent people from denying other people their basic freedoms.  After all, that's what the government does when its police prevent crime, is it not?  And yes, the government does that by restricting the freedom of those that would deny it to others.  It puts the person who robs you behind bars.  That's what government is for.

Any law that is passed is a limitation on some person's freedom.  The whole question is one of line drawing.  How important is it to the good of the whole that the freedom of some be curtailed? 

I have always had faith that a government that is actually responsive to the people - that actually reflects the will of the people - will strike the right balance.  And that it is because it is the people themselves who are deciding where that line should be drawn. 

But when the government ceases to be responsive to the people - when it acts on the whim of the powerful few - that's when the government should be viewed with suspicion.  That's when it becomes a threat to freedom. Especially when the mechanisms that are in place to protect your freedoms - the bill of rights, the judicial system - begin to fail, as they have in the last decade or so. 

How did we get here?  I have my own thoughts and feelings about that one.  But that will have to come later....