Tax History

I have been doing some research on the Wilson-Gorman Tariff Act of 1894 - which enacted the income tax law that was struck down by the Supreme Court in the Pollock case, leading to the passage of the 16th Amendment - and came across something that struck me as kind of weird.  It seems that among the items listed in the act that could be imported without duty free was "Dragon's blood."  This struck me as rather odd - I mean, really, people didn't actually believe in dragons back then, did they?  Turns out that this is the name that is given to a bright red resin that was (and apparently continues to be) used in dyes and varnishes.

Whew!

Another Foreign Bank Settles with the IRS

Lichtensteinische Landesbank settles charges that it conspired with U.S. person holding accounts at the bank to hide their money from the IRS. Here is the DOJ press release. The bank agreed to forfeit the fees it earned for managing the accounts and to provide restitution to the IRS for lost taxes due to tax evasion.  

Not a big fish, but every little bit helps.  What I would like to know is what happened to the scum who they were conspiring with.

Stashing the Cash to Avoid the Tax

Interesting new study by USPIRG.

Not reported much in the MSM though.  It was picked up in the Wall Street Journal and HuffPost, but not much else.

I guess that's because it's not really considered news.

The Downgrade of Chicago and the Rating Agencies: Criminal Enterprises

Yves Smith has a story up about Moody's downgrade of the City of Chicago.  Another story about how markets are manipulated for the benefit of the plutocracy.

My initial reaction was to be shocked when I read this.  I mean, even this is enough to make clear the rampant corruption in the system at this point:

I asked a colleague who had worked for Moody’s in the 1990s why outside parties were allowed to influence ratings. His reply via e-mail:

When I was at Moody’s, a substantial majority of the rating downgrades or upgrades that took place were initiated by an outside investor inquiry.

These days, it’s big business for investors to research a bond, conclude that it should be upgraded or downgraded, take the appropriate position in the bond, and then lobby the rating agency to make the move that is supported by their research, and profit from the change in market value (or market to model valuation) that accompanies the rating change.

Since rating agencies have historically invested virtually nothing in surveillance, it is not hard for a diligent investor to be ahead of the rating agency action. Once the rating agency gets the info on the bond, it is very hard for the rating agency to ignore the information.

As if this isn't bad enough - that people seek to manipulate the ratings of bonds so that they can take advantage of the ride up or down, speculation is that Rahm Emanuel himself lobbied to have the city downgraded.  Yves' friend believes that to be the case:

Also, I’m pretty sure I read in last couple of days that Rahm himself lobbied Moody’s to downgrade his state. I think that’s pretty fucked up, but I’m sure his hedge fund buddies taught him all about it. It’s about as evil as I would expect from Rahm as an elected politician.

It's pretty clear that Chicago's business class was pushing for the downgrade.  Yves links to this video of the head of the Civic Committee of the Commercial Club of Chicago, stating that he had personally contacted the ratings agencies about the ratings of state and city bonds, and essentially exhorting others to do so (the relevant portion begins at 46:30).  The idea that Rahm might have been behind is implied here as well.

Therese McGuire, a professor of management and strategy at Northwestern University's Kellogg School of Business, told Tribune business reporter Phil Rosenthal the Moody’s credit downgrade can be used as a political scalpel by Emanuel. "For Chicago, (Mayor Rahm) Emanuel is probably happy that Moody's downgraded the debt because he's going to be able to get concessions from the unions and whoever to make things happen." 

Really, can they recall politicians in Chicago?  This man has got to go.

The Fed Chairmanship: History Repeats Itself

Dean Baker reminds us of Fed battles past:

The current efforts by Larry Summers' acolytes to have him replace Ben Bernanke as Fed Chair reminded me of a past battle. Back in the first term of the Clinton administration it was not assumed that Alan Greenspan had a lifetime position as Fed chair. Some folks thought that the Democratic president might want to take the opportunity to appoint a Democrat as Fed chair. The Vice-Chair at the time, Alan Blinder, was an obvious choice. Blinder had been a highly respected Princeton professor before joining President Clinton's Council of Economic Advisers and then moving over to the Fed at the start of 1994.

Anyhow, Alan Greenspan wanted to head off this possibility. Towards this end, he managed to get a major piece in the NYT over a Blinder scandal. At a speech at the annual meeting of central bankers in Jackson Hole, Blinder suggested that central banks, instead of focusing exclusively on inflation, might actually worry a bit about unemployment (the horrors). Anyhow, the resulting outcry sent Blinder back to Princeton and left Greenspan in charge of the Fed for another decade.

Ah, the good old days!

ht/Atrios.

Holder Invokes Section 3

Good on him.  But in fact it is the only logical way to proceed after Shelby County.

Really, I'm kind of surprised that anyone is surprised by this.  I was aware of Section 3 by the numerous stories that came out around the time Shelby County was decided, which stated that there were a number of localities outside of the old Confederacy that were subject to pre-clearance because of the bail-in provisions.  Hell, New York City voting rules are subject to pre-clearance because of Section 3.

The only question in my mind was whether Obama and Holder would have the balls to use it.

Glad to see they do...

Ron Wyden's NSA Speech

It's very chilling.  Watch the whole thing:

Richard Wolff on Detroit

Economist Richard Wolff on Democracy Now this morning, speaking about the Detroit bankruptcy:

Tax Reform, Part 5: The Secret Process by which Tax Law is Made

A couple of weeks ago Baucus and Hatch sent out a call to all senators for their ideas regarding which tax expenditures should be kept and which should be jettisoned. The goal was to get "input" from their colleagues so they can see where there is consensus and where there isn't. Apparently, some Senators have been reluctant to respond. From Bloomberg/BNA:

Senators who fear their tax reform proposals to the Senate Finance Committee will be leaked can rest assured: The committee plans to lock them away for decades.

In a July 19 memo to tax aides in Senate offices obtained by BNA, the committee's staff promised that submissions on which tax expenditures to keep or jettison will be clearly marked as confidential and will not be released until Dec. 31, 2064. The submissions are due by July 26.

The memo details the measures the committee plans to use to protect the confidentiality of the submissions. Some senators have been reported to be reluctant to answer the committee's call for submissions, because of concerns they could become public–even though committee Chairman Max Baucus (D-Mont.) has said he will not release them.

A spokesman for the committee, Sean Neary, told BNA July 24 that 50 years' confidentiality is “standard operating procedure.”

The call for submissions is part of Baucus's and ranking Utah Republican Sen. Orrin Hatch's “blank slate” approach to tax deductions, credits, and other breaks. The senators have said they will begin tax reform deliberations by wiping the tax code clean of such provisions, asking senators to recommend what should ultimately be retained.

Hatch told reporters July 25 that the response to the call for submissions has been “mixed.”

Submissions will be kept in a locked safe and limited copies will be available to a select number of Finance Committee staffers, according to the memo.

Note the source for this is an email alert I just received. I googled it and can find no stories on this in the general press so far.

Note the committee spokesman said that 50 years' confidentiality is SOP. I doubt that - if it were true, the committee wouldn't have had to send a memo to Senators telling them this.

At some point we're going to have to come to the conclusion that we are ruled by a bunch of whiny kids that can't stand to have their constituents know what they really think.  These people don't want to do anything in the open.  They want the entire process to happen behind closed doors, and have a single up or down vote on a gargantuan bill that only they will really know what's in it when it's voted on.

What a bunch of chickenshits.

Reining in the NSA

Every once in a while the Republican House gets something right:

The Hill reports that the House is expected to vote on an amendment to a Defense Appropriations bill that is aimed at limiting the National Security Agency’s powers to collect information on Americans’ telephone and internet traffic.

One measure — put forward by Rep. Justin Amash (R-MI) — will prevent the NSA from using the PATRIOT Act to collect records of people who are not under investigation and another says the Agency cannot target U.S. citizens.

I especially love this statement from the White House:

[W]e oppose the current effort in the House to hastily dismantle one of our Intelligence Community’s counterterrorism tools,” a statement from White House press secretary Jay Carney says. “This blunt approach is not the product of an informed, open, or deliberative process. We urge the House to reject the Amash Amendment, and instead move forward with an approach that appropriately takes into account the need for a reasoned review of what tools can best secure the nation.”

Seriously, they want to have "an informed, open and deliberative process" about all this?  Are you kidding me?

The right time to have that kind of process was before we created this surveillance monstrosity in the first place.

And if you're going to have an "informed, open and deliberative" process about this now, you have to tell us what you are doing. But instead of doing that, you are doing everything in your power to make sure we don't know what you are doing.  How can the process be "informed, open and deliberative" under those circumstances?

I feel like I'm living in Orwell's world...

Austerity Bites

These people will never learn:

Official figures showed Monday that the debt burden of the 17 European Union countries that use the euro hit all-time highs at the end of the first quarter even after austerity measures were introduced to rebalance the governments’ books.

Eurostat, the EU’s statistics office, said government debt as a proportion of the total annual gross domestic product of the eurozone rose to a record 92.2 percent in the first quarter of 2013, from 90.6 percent the previous quarter and 88.2 percent in the same period a year ago.

Taxing Multinationals - A Primer

I figure before I get into the latest OECD pronouncement, it may be a good idea to give some of my readers a little primer on how multinational corporations are taxed, so you can understanding the tricks companies engage in and what the OECD is proposing to fix them.

Almost all countries follow the same pattern of taxation of corporations.  First, there are "resident" corporations and "nonresident" corporations - terminology differs but the concepts are the same (in the U.S. we use the terms "domestic" and "foreign").  Resident corporations are generally taxed on all of their income.  Nonresident corporations are generally taxed only on the income they earn within the country.   So, for example, the federal income tax is imposed on JP Morgan Chase, which is a domestic corporation, on all of its income wherever earned, and its imposed on HSBC, which is a foreign corporation, only on the income it earns in the US.

The first thing you should know is that most countries respect the "fact" that corporations organized elsewhere are separate entities.  If JP Morgan Chase has a subsidiary in Ireland that is wholly owned by Chase U.S., then the income earned by Chase Ireland isn't taxed by the U.S. when Chase Ireland earns it.  It is only taxed when Chase Ireland pays a dividend to Chase U.S., which, of course, is something that Chase U.S. has total control over.

So what makes a corporation resident or nonresident?  Well, that varies from country to country, and this is one of the disconnects that companies can exploit.  Under U.S. rules, residency is determined by looking at the country where the corporations is organized.  So if a corporation was formed in Delaware for example, it is considered a domestic (resident) corporation under U.S. tax rules.  If it is formed in the Cayman Islands, it is considered a foreign corporation.  Most other countries determine "residence" by reference to the place the corporation is "managed and controlled."  This might sound like an ephemeral concept.  Certainly if a British bank forms a subsidiary in the Cayman Islands it is still managed and controlled in the UK, right?  Well, no, generally management and control is located where the major business decisions are made, and believe it or not that means where the board of directors meeting is held.  So that British bank can assure that the Cayman Island subsidiary is not resident in the UK simply by flying its executives to the Caymans one or two times a year for board of directors meeting, and viola, they are nonresident.  Pretty cool, eh?  Under U.S. rules its even easier - all you have to do is form the corporation there and have an address (some law firms in the Caymans are the headquarters for thousands of companies) and poof, your a foreign corporation.

Obviously, residency is something that can be easily manipulated.

The third thing that you should know is that multinational corporations generally have total control over how much income is earned by each of their subsidiaries in the various countries.  They do this through a mechanism known as intercompany pricing.  Consider Apple - the component parts of an iPhone are manufactured in various countries in Southeast Asia, shipped to China for assembly into a final product, then shipped to the U.S. for sale.  How much of Apple's profit is taxed in each country?  That is determined by the prices charged when the goods move from one company to another.  And it also depends on how you set up the arrangement.  For example, when the iPhone is assembled in China, who owns it?  Does the Chinese company actually buy the component parts, assemble them and then re-sell them to Apple US?  Or does Apple US own the components and the Chinese company is just a "service provider" putting them together on Apple's behalf?  More likely, Apple has some other subsidiary organized in a tax haven like Mauritius that owns the components, pays the manufacturers of the components and the Chinese assembler, then sells the finished product to Apple US at a mark-up, taking some of the profit for itself.

But the real value of the product is not in the physical components - it's the technology and the name.  Where is that located?  Well, you would think that's an easy question to answer, but it's not.  Technology is not a physical thing, it's an idea, and when you have a large multinational with subsidiaries organized all over the world, it's kind of easy to manipulate which of those subsidiaries "owns" the idea.  Once you decide that, then the other subsidiaries can use the idea under licenses from the owner, and the licensees then pay royalties to the owner for the use of the idea.  Royalties are generally deductible expenses, so if the licensees are in high tax countries and the "owners" are in low tax countries or tax havens, the effect is to shift income to the havens and lower the overall taxes paid by the multinational.

Now, one could argue that, to the owner, the royalties are income earned in the country where the royalties are paid from.  And in fact most countries treat them that way.  Under US tax law, when a U.S. person pays a royalty to a foreign person, tax is supposed to be withheld on the royalty and paid over to the U.S. government at a rate of 30%.  BUT, of course, there is a catch.  The US has income bilateral income tax treaties with 58 countries that reduce that tax, in a majority of cases to 10%, but in many cases to zero.  Most other countries have the same.  And if Apple India pays a royalty to Apple Mauritius, its the tax treaty between those to countries that determines the rate of tax paid on the royalties.

One other thing companies can manipulate is the manner in which they invest in their companies.  They can form a corporation in France, for example, and invest by buying its stock, with the French company then using the money for its operations in France.  But they can also loan money to its French company as well.  When the French company pays back the loan, it's not considered dividends (even though, logically, it is paid back out of the earnings of the company).  Even better, interest on the loan can be deducted in computing the income subject to tax in France.  So let's say that Apple has a pile of cash in Apple Ireland which loans it to Apple France.  Apple saves taxes merely by paying interest on the loan.  Actually, the interest doesn't have to be paid - since most countries allow you to account for interest when it accrues rather than when it is paid, Apple France gets a deduction even if it doesn't pay the interest.  The holy grail, of course, is the so-called "hybrid" investment.  This is when the "investment" qualifies as a loan under French tax law, but is treated as stock under Irish tax law.  Dividends are never "accrued" - they only count as income if they are paid.  So with a hybrid investment and no actual payments being made, you get the deduction in France and no income in Ireland at all.  Viola!

I could go on and on about this, but you get the idea (I hope).  A multinational is basically a large group of companies operating all over the world, and much of what goes on is that they are buying and selling physical goods, services and technology and loaning funds among themselves up until the time that the final product is sold to the consumer.  And the amount of income that is taxed in each country is determined by the prices charged on these transactions - something that the corporation has total control over.  There are rules that exist to are designed to combat the shifting of income by manipulative pricing, but these rules are proving to be totally inadequate to combat the problem.

And that, my dear readers, is what the OECD report - entitled "Base Erosion and Profit Shifting" is all about.

OECD Report on Tax Avoidance by Multinationals

The OECD today released its Action Plan on Base Erosion and Profit Shifting. Those of you who would like to read it can find it here. From the Press Release:

National tax laws have not kept pace with the globalisation of corporations and the digital economy, leaving gaps that can be exploited by multi-national corporations to artificially reduce their taxes.

OECD’s Action Plan on Base Erosion and Profit Shifting (BEPS) offers a global roadmap that will allow governments to collect the tax revenue they need to serve their citizens. It also gives businesses the certainty they need to invest and grow.

Produced at the request of the G20 and introduced at the G20 Finance Ministers’ meeting in Moscow, the Action Plan identifies 15 specific actions that will give governments the domestic and international instruments to prevent corporations from paying little or no taxes.

“This  Action Plan, which we will roll out over the coming two years, marks a turning point in the history of international tax co-operation. It will allow countries to draw up the co-ordinated, comprehensive and transparent standards they need to prevent BEPS,” said OECD Secretary-General Angel Gurría. “International tax rules, many of them dating from the 1920s, ensure that businesses don’t pay taxes in two countries – double taxation. This is laudable, but unfortunately these rules are now being abused to permit  double non-taxation. The Action Plan aims to remedy this, so multinationals also pay their fair share of taxes. 

The preliminary word is that a formulary approach - which I think makes the most sense - has been rejected. That is the approach used by almost all states in the United States.  Under this approach, each state starts with taxable income as determined at the federal level, then taxes a portion of that income based on a formula that takes into account where the company's sales, property and employees are located.  Most of the states use the same formula, with the result that almost all federal taxable income is taxed at the state level as well.

Regular job permitting of course, I'll have more on this later today or tomorrow....

Leadership Style

A lot of stuff today about who will succeed Ben Bernanke as Fed chair. According to Bill McBride (and a number of other stories I have seen), it seems to be coming down to Larry Summers v. Janet Yellen.  And it seems to be coming down to a matter of leadership style:

Unfortunately most of the focus now seems to be on leadership style (I prefer Yellen's style), from a Bloomberg article: Yellen or Summers: Who'd Be Better at Running the Fed?

Where Yellen and Summers may differ most is in their leadership style. That may be the critical issue for a Fed that's trying to be more open about its thinking despite disagreements among its top policy makers. The Fed's minutes show Yellen as influential but not particularly loud and outspoken. It's safe to say Summers would be loud and outspoken -- and authoritarian rather than merely influential.

And from the LA Times: Obama may choose between two economists to replace Bernanke at Fed

President Obama's choice for replacing Federal Reserve Chairman Ben S. Bernanke probably comes down to a quiet consensus builder, who would be a historic pick, or one considered brilliant but difficult to work with.

As it happens, I have a some experience in addressing the question of leadership style.  Some years ago I was very much involved in the school system in my town and one year I ran and won a seat on the Board of Trustees.  During that election season I participated as a member of a search committee that was seeking a new Superintendent for the District, since ours had just resigned in a scandal.  We had also, just a year before, seen a proposal for a bond issue to make improvements to the district's facilities go down in flames. We whittled the field down to 3 candidates, and then brought them in to make public presentations prior to the school board making a final decision.  For each of the candidates I just had one question: how would you describe your leadership style.  Amazingly, two of the three described a style that was fairly authoritarian. Only one of the three said they looked to bring in all affected constituencies and build consensus.  Need I say that the third candidate was also the only woman candidate?  It was very close, but ultimately the third candidate (who I strongly supported) was appointed by the board.

And she has been a grand success.  Three years later - in 2009 at the height of the financial crisis, we were actually able to cobble together a bond issue to make the improvements that was passed by the voters - an amazing feat (I think we were one of the very few who even asked our voters to do this, let alone get their approval). She continues to serve as Superintendent, and has succeeded on a number of fronts where prior supers failed.  And the primary reason for her success (and the district's success), has been her leadership style.

Of course, the financial world is a man's world, and it seems that Yellen may have an uphill climb.

But as far as I am concerned, between Yellen and Summers, its absolutely no contest.

Another Aspect of our Broken Health Care System

Earlier this year Steve Brill's article in Time Magazine laid bare the ways that hospitals milk the system.

This week, Haley Edwards in the Washington Monthly shines a light on the way we  pay doctors.

It's unfortunate that this didn't appear in Time as well, only because the Washington Monthly does not command the attention that Time does.

We need to have a real discussion about this.

Transparency

Yves Smith has linked to a post by Frank Ackerman about the lack of transparency regarding global climate change:

One day in May, climate change got a lot more expensive. The price tag on emissions – the value of the damages done by one more ton of CO2 in the air – used to be a mere $25 or so, in today’s dollars, according to ananonymous government task force that met in secret in 2009-2010. Now it’s $40, according to an anonymous government task force that met in secret in early 2013.

It really is insidious what is going on.  Yves comments:

This post illustrates yet another sign of decay among the ruling classes: that of not even bothering to go through the motions of following stipulated political and regulatory processes.

It’s one thing to cut corners now and again and hope you don’t get caught out, and quite another to not even pretend to go through the motions. More and more examples are coming to light: the Snowden revelations have led some Congresscritters to engage in horrified finger-wagging over how the FISA court has served as an enabler of the installation of a massive surveillance state.

But why should they be surprised? The Administration is about to implement a patchwork version of Obamacare to make sure they can say they met the sacrosanct October 1 deadline, with little apparent concern as to how much of a train wreck results. We pointed out the other day how the SEC in its JOBS Act implementation simply ignored the requirement to consider alternative regulatory approaches, even though they were in the record and thus the SEC should have been required to address them. And of course, we have the bizarre classified status of the draft texts of the TransPacific Partnership and EU-US Trade and Investment Partnership negotiations while at the same time big corporations and lobbyists get to read and help write major sections of the drafts. In other words, formalities that were once deemed the heart of proper process are openly ignored in the mad rush to oblige the interests of the financial and business elites.

As a tax professional, I have always questioned the extent to which anonymity is such a priority in the tax area.  One of the that has arisen in connection with the 501(c)(4) "scandal" is that apparently the IRS released some information regarding applicants before they made the final decision on whether or not they qualified.   But why should this information be confidential in the first place?  I mean, these are people who are applying to the government for special dispensation - an exemption from income taxation.  Why should the fact that they are making this application be kept secret?

I have often thought the same thing about private rulings from the IRS.  Why are these things kept secret?  Does the public not have a stake if the IRS is ruling that a particular company doesn't have to pay tax on a transaction it is entering into?

There has been a growing recognition that secrecy when it comes to information about companies is one of the prime mechanisms by which people can avoid taxes.  We should be looking to find ways to increase transparency, not dilute it.

Two Boys

Two boys:

Age:  19
Citizenship: American
Crime: "Terrorism"
No. of Deaths: 3

Age:  20
Citizenship: American
Crime: Murder

No. of deaths: 26

We need to think long and hard about our reaction to the actions of these two young men.

With respect to the first one, over the last 12 years we have built up a vast surveillance state designed to identify and track people who might commit crimes such as the one he committed.  We have been willing to sacrifice our privacy and our rights to due process, and consented to the creation of what can only be described as an increasingly militarized police state, in order to prevent people like him from being able to harm us.

With respect to the second one, over the last 30 years, we have made it increasingly easy for people to commit crimes like the one he committed.  We have been totally unwilling to concede an inch as far as our rights to arm ourselves to the teeth, and have made it illegal for the government to identify and track people who might commit crimes like the one he committed.

Can somebody please explain this to me?  

Representation in the Senate

David Atkins links to this post by Nate Cohn on the ridiculousness of Wyoming having 2 senators.

Yes, I’m aware that the Senate represents the states. I've even known this for a long time: I got to play Roger Sherman—one of the Connecticut delegates who proposed the “Connecticut Compromise”—in a mock constitutional convention in seventh grade. I'm also aware that the only remedy is another constitutional convention. But it is preposterous that Wyoming’s 570,000 people get two Senators:

• There are at least 100 counties with more people than Wyoming.

• Rhode Island’s largest county has more people than Wyoming.

• Fairfax County has twice as many people as Wyoming. There are more Romney voters in Fairfax County than voters in Wyoming, the second reddest state.

• There are almost as many Romney voters in wildly Democratic Brooklyn as there are in Wyoming.

• The student body of the University of Wyoming (13,992) would be the state’s seventh largest town.

My colleague Alec MacGillis has documented the serious political and policy implications of a deeply anti-democratic Senate, but Wyoming deserves special mention as the worst culprit. To take concerns from his piece, Wyoming has thehighest gun ownership rate and the highest level of carbon emissions per capita—the latter by a wide, wide margin. It is the least populous state: California has 66 times as many people, and an equal number of senators. And Wyoming, along with the other small states, is 90 percent white. The Senate reduces the representation of non-white voters, who are concentrated in the most populous states, by about one-third.

This is an issue on I have been harping on for a while.  The only thing Nate says that I really object to is this:

I'm also aware that the only remedy is another constitutional convention. 

This is not entirely accurate.  There are three remedies for dealing with the disproportionality issue.  The first is amending the constitution to provide for proportionality, something which I agree ain't gonna happen.  But the Constitution (Article IV, section 3) also provides for the admission of new states and the combination of states. And here there may be some wiggle room:

New States may be admitted by the Congress into this Union; but no new State shall be formed or erected within the Jurisdiction of any other State; nor any State be formed by the Junction of two or more States, or Parts of States, without the Consent of the Legislatures of the States concerned as well as of the Congress.

Here we see the two other methods of dealing with disproportionality.  First, combine the small states into big ones.  Second, split the big ones into smaller ones.

Now I agree that the first method, combining small states to make bigger ones, ain't gonna happen either. The main reason for that is I can't see any state voluntarily giving up its right to equal representation in the Senate.

But splitting up a big state?  Hmm.  Well, that would take a lot of intestinal fortitude on the part of its politicians, but I'm not really sure why it couldn't be done.  As near as I can tell, all the Constitution requires is that the legislature of the state involved approve and Congress approve.  And there doesn't seem to be any supermajority vote requirement at either level.

So, for example, if California decided it want to break itself up into 2 (or more) states, all the Constitution requires is that the California legislature and both houses of Congress approve it, in each case by the normal legislative process.

So get on it!

Tax Reform, Part 4A - Oh, Well, What Did You Expect?

Just a short note on an article Yves Smith linked to yesterday:

U.S. Blocks Crackdown on Tax Avoidance by Net Firms like Google and Amazon

Any thought of something serious coming out of tax reform really is pie in the sky.  Our multinationals are wedded to the current system, and apparently the Administration is happy to do their bidding.

Oh well,  I guess I'll trudge on....

Tax Reform Part 4: Taxation of Business Income

At the end of my prior post I mentioned that Herman Bouma that five of his listed 12 items really relate to the same basic issue, which is how we tax income generated in business entities.

Generally, the Internal Revenue Code imposes a tax on two kinds of "persons":  individual human beings, and corporations.  There is one other kind of "business entity" that the Code recognizes: partnerships.  [There are also "nonbusiness entities" - estates and trusts - that are subject to separate rules.]  A partnership is recognized as a business entity but is not subject to tax.  Instead, its owners (partners) are subject to tax on their shares of the income of the partnership, whether or not they actually withdraw the income from the partnership.  A corollary of this treatment of partnerships is that if the partnership has a loss for a year, the partners are permitted to deduct the losses in determining their own tax liability.  [This aspect of partnerships is what has made them the traditional vehicle for "tax shelters" since investors in partnerships are able to deduct the losses they generate, sometimes well in excess of the amount they invest.  But again, that is a story for another time.]  

Double Taxation of Corporate Income.  A corporation pays tax its earnings.  Dividends, which legally are distributions of the corporation's earnings to its stockholders, are also income to the shareholders.  This is the "double taxation of dividends" that  Bouma talks about. 

Even if the corporation does not distribute its earnings (which many do not), a shareholder who sells his shares is in effect "realizing" the earnings, since presumably the purchase price paid by the the buyer of the shares reflects those retained earnings.  Nevertheless, there are times when the earnings of the corporation can escape the double tax.  The most obvious is when shareholder holds the shares until death (one of the tax expenditures listed here is "exclusion of capital gains at death" - if you hold your property until you die, your heirs can treat the cost of the property as its value on the date of death, which means that any gains disappear and are never taxed).  You can also give those shares to an exempt organization, which of course pays no tax when it sells the shares or receives dividends.

Conceptually, the reduced rate of tax on interest and capital gains that we provide under current law are designed to mitigate this double taxation of corporate income.

The Lesson of California - Will the GOP Heed It?

There's been a lot of chatter lately about how the GOP is having second-thoughts over their "makeover" strategy and thinking of "doubling down" on the white vote.  Keith Humphreys has a history lesson:

Younger Americans are often surprised to learn that California was a Republican-friendly state for decades. Other than in the 1964 LBJ landslide win over Goldwater, Californians supported a Republican for President every cycle from 1952 through 1988. However, by the early 1990s, the increasing diversity of the state began to alter the political landscape, just as it is doing now nationally.

The debate within the California GOP at the time was eerily similar to that happening within the national Republican Party today. Virtually all Republican leaders conceded that the rise of Latino and Asian-American voters required some response, but what that response should be was the subject of intense disagreement.

California GOP reformers, noting that a Democratic Presidential Candidate (Bill Clinton) had broken the GOP lock on the state in 1992 with strong support from minority voters, argued that the party had to modernize by reaching out to people of color. A different faction, who pointed out that Clinton had captured only 46% of the popular vote and that Ross Perot had attracted many conservative white voters, insisted that the Republican party needed to go hard right, including by making race-based appeals to white voters.

The two GOP factions battled each other in the lead-up to the 1994 gubernatorial election and the “double-downers” won. Anti-immigrant ballot Proposition 187 was the central issue of the contest, and like any Californian I can attest to the venomous, racially-divisive nature of the debate that surrounded it. Republican Pete Wilson publicly embraced the measure at every campaign stop, and rode anti-immigrant sentiment to re-election with strong support from White voters.

In the process, Wilson and those who advised him to double-down on white voters did lasting damage to the California Republican Party from which it has never recovered. In the minds of much of the population of this minority-majority state, the GOP is the party of white people who don’t like non-white people, a branding that — fair or not — repulses most minority voters and no small number of white voters as well.

Coates

I agree with a lot of what Ta-Nehisi Coates says here, but the bottom line for me is this:

I don't think the import of this is being appreciated. Effectively, I can bait you into a fight and if I start losing I can can legally kill you, provided I "believe" myself to be subject to "great bodily harm." 

This is the part of the case that I just can't understand.  It seems to me quite clear that Zimmerman was the instigator here.  That he got off scott-free to me just doesn't make sense.

Tax Reform, Part 3: Bouma's list of Problems to be Addressed

Herman Bouma of Buchanan Ingersoll & Rooney has a short article in today's Daily Tax Report entitled "Twelve Major Deficiencies of the Internal Revenue Code That Should Be Rectified as Part of Tax Reform."  It's behind a firewall so I'm not going to post a link, but I will list the deficiencies he lists in the article:

1.  Confusing use of the terms "corporation" and "partnership"
2.  Two different taxation regimes for business
3.  Elective, rather than mandatory, "disregarded entity" treatment
4.  Distinction between U.S. and foreign corporations
5.  Use of the arm's-length standard
6.  Failure to piggyback onto financial accounting rules
7.  Double taxation of dividends
8.  Application of capital gains rates to income from sources other than the sale of corporate shares
9.  Taxation of nonresident individuals
10.  FATCA
11.  Override of the Tax Code by bilateral income tax treaties
12.  No clear vision of reality

I agree generally that virtually everything he lists here is problematic, although some of his proposed solutions to the problems are not ideas I agree with.  There are also a number of areas that he leaves out of this list.  Most prominent in my mind is the realization requirement.  And a lot of these concepts are related and beg for a comprehensive view.  For example, items 1, 2, 3. 6 and 7 all relate to the issue of how we tax income generated in business entities - legal fictions like corporations that are viewed legally and from a tax perspective as separate from their owners.

Much of what is listed here is not familiar to most people who don't do this stuff for a living.  My goal in this series of posts is to try to explain these concepts to the average citizen, so that he or she knows what's at stake in the tax reform fight.  This post about Bouma's deficiencies, and my previous post about Tax Expenditures, will serve as a starting off point for some of these discussions.

Up Next:  Taxation of Business Income

Tax Reform, Part 2: Tax Expenditures

I was perusing the most recent Joint Committee on Taxation report on Tax Expenditures. These are special tax breaks in the Internal Revenue Code that represent a departure from the normal rules in calculating a person’s income tax liability. Conceptually, these special breaks represent a subsidy paid by the government with respect to activities which the government presumably wants to encourage.  Set forth below is a list of the largest tax expenditures - those that exceed $20 billion per year.  The numbers shown are for 2012, in billions of dollars::

Exclusion of Employer-Provided Health Benefits	117.3
Retirement Plans – Exclusion/Deduction of contributions and deferral of gains	111.2
Reduced Tax Rate on Dividends and Long-term capital gains	108.4
Mortgage Interest deduction	68.5
Exclusion of Medicare Benefits	64.0
Earned Income Credit	59.0
Child Tax Credit	56.8
Deduction of State and Local Taxes (other than real property taxes)	43.5
Deduction for Charitable Contributions Exclusion of Capital Gains at Death Deferral of Income Earned by Foreign Affiliates Exclusion of Interest on State and Municipal Bonds Exclusion of Untaxed Portion of Social Security Benefits	38.1 37.8 36.8 32.0 31.5
Accelerated Depreciation on Machinery and Equipment	31.4
Exclusion of Investment Income on Life Insurance Policies	29.2
Exclusion of Cafeteria Plan Benefits Real Property Tax deduction	26.8 24.5
Exclusion of Capital Gains on Residences	22.3
Tuition Tax Credits	20.3

These items alone total to nearly $960 billion, out of an estimated total tax expenditures of $987 billion.  Just a couple of notes - I have combined a few items from the JCT report for simplicity sake, such as combining several line items relating to retirement plans, and addition together all the charitable deductions (the report separates out deductions for contributions to universities and hospitals).

Note that there are a number of tax benefits that the JCT does not consider to be "tax expenditures."  The tax exemption granted to organizations under subchapter F of the Code - universities, hospitals and other charities - is not considered to be a tax expenditure. This report estimates the benefit to Northeastern University for one year (2011) of its exemption from federal income tax at $33 million.  This means that Northeastern, a supposedly non-profit educational institution, in fact made a profit of about $100 million in 2011. With a student body (undergraduate and graduate combined) of a little less than 20,000, that amounts to about $5,000 profit per enrolled student. Northeastern is a midsize university with an endowment size ranked 134th in the nation.  Is there any doubt, then, how large the benefit of the tax exemption is to these kinds of organizations?

The JCT also does not consider the benefits of using a pass-through entity to be a tax expenditure.  More on that later.

There is also a long list of items in the report for which the benefit cannot be quantified.  More on that later, too.

Anyway, take a look at this list.  And when you hear talk of "base broadening," remember that these are the items where reform could operate to "broaden the base." And listen to the ones they are actually talking about.

Mike Lux Nails It

Seriously, I have never understood how these people can actually believe themselves to be Christians:

Most of the conservative Republicans in the House, the ones who yesterday refused to include food programs for the poor in the farm bill where it has for many decades been embedded and thereby endangered passage of any money to deal with hunger in this country, publicly and loudly proclaim at every opportunity that they are fervent, passionate Christians. But having been raised in a Christian household, and having read my bible more than a few times over the years, it is impossible not to conclude that either these Republicans have not bothered to read the book they claim to believe in. Either that, or their reading comprehension skills are remarkably low.

What the era’s Republicans have become obsessed with appear to be sex, helping the wealthy become wealthier, and cutting back assistance to anyone “dependent” on government (check out this video where a Republican congressman channels Mitt Romney’s 47% message, of for that matter, just look at that 47% video again. The man Jesus these conservatives claim to follow, at least according to the Bible they all claim to believe, had the exact opposite set of passions.

In spite of the fact that a variety of forms of abortion and contraception were frequently used in Biblical days, Jesus never mentioned it. In spite of homosexuality being a very common and sometimes quite celebrated practice in ancient Greece and Rome, Jesus never mentioned that either. And while he occasionally listed adultery in a long list of other sins, his most famous and noteworthy comment about that subject is that he who is without sin should cast the first stone. This was not a man obsessed with sex.

What he was obsessed with was justice for the poor and making sure the hungry got fed.

In the 4 Christian Gospels, the ones that tell about Jesus’ life and ministry, the ones conservative fundamentalist Christians tell us they believe word for word, Jesus spoke about mercy and kindness to those weaker and in need 24 times; he tells people to love and help their neighbors 19 times; he either speaks with disdain about rich people or tells people to help the poor or both a grand total of 128 times. Just to circle back and help y’all with your math, that’s 0 times for abortion, 0 times for birth control, 0 times attacking homosexuality, and 181 where he talks about helping the poor, the weak, the hungry, and your neighbors.

It's one goddamned crazy kind of Christianity these people practice, if you ask me.

The Martin Case

I intentionally haven't written about the Trayvon Martin case, mostly because it just touches too close to home for me.  You see, my now-deceased brother in law was black, and my two nephews certainly would be characterized as black by almost anyone who meets them.

So I just have one thing to say:

If you're walking down the street and you feel fear when a young black man is walking behind you, but you don't feel fear when a young white man is walking behind you, then you are a racist.

Period.

How Statistics Makes Success Look Like Failure

Kevin Drum has a couple of posts looking at the most recent results of the National Assessment of Educational Progress, the "Nation's Report Card."

By the way, did you know that last month the Department of Education released the most recent data for the NAEP?  Yeah, neither did I until I saw these posts.  The NY Times does not have one single story about this year's test scores, which were released on June 20.  Amazing.  More on this below.

Anyway, Kevin makes a great point about how statistics can make it look like we're making very little progress when, in fact, we're doing a lot better than we used to:

[W]hat's really important—and what I forgot to mention—is that you have to disaggregate test scores to really understand what's going on. Let me give you an example from a different area: English literacy. Suppose you have 100 residents of the country, 90 of them native and 10 of them recent immigrants. Among the natives, English literacy runs at 90 percent. Among the immigrants it's 70 percent. This means that a total of 88 residents (81 + 7) are literate in English.

Now suppose the composition changes: we have 80 natives and 20 recent immigrants. And both groups are doing well! Native literacy has improved to 91 percent and immigrant has improved to 75 percent. That sounds great, doesn't it? But what if you lump everyone together? Then it turns out that 88 residents are literate (73 + 15). It looks like there's been no progress at all. Literacy is up among all groups, but the rising share of immigrants has pushed down the average.

This is exactly what's going on with the NAEP.  Here is a table from Kevin's post (note that a 10 point increase is approximately 1 grade level):

The age 17 level shows the phenomenon most clearly.  All races are seeing their scores improve, and we have seen astounding improvements among black and hispanic students.  But they are still behind whites, and as a their numbers grow relative to whites, they bring down the average despite their dramatic improvements.

Bob Somersby points out that at least one major news outlet talked about the scores when they came out:

On NBC Nightly News, Brian Williams described “a grim report card on our nation’s high school seniors,” who were said to be “leaving high school no better in reading or math than students in the 1970s.”

This is just about as false a picture as one can paint about how American students are doing.  Now I'm not one to engage in conspiracy theories about why all we hear is bad things about our public schools, but....

Public schools are doing an outstanding job.  Too bad you'll never hear about it from the MSM.

Felix Salmon Gets Onboard

Universities Shouldn't be Tax Exempt.

But it's not just Universities Felix.  How about hospitals?  Think tanks? Political groups?

No one should be tax exempt.

Modern Banking

There have been a lot of stories lately about some of the practices banks engage in to make profits from their individual customers, including this one from David Atkins yesterday.  It reminded me of this story by Felix Salmon about how "overdraft protection" works - which is is also instructive of the tactics modern banks engage in.

I came face to face with this fact when I was out on Friday and found myself with no cash attempting to make a purchase at a store that only took cash (you would be amazed how many of these stores exist in NYC).  No, they didn't take cards there, but they did have an ATM in their store.  And I discovered it cost me $5.00 to make a withdrawal from my checking account using that ATM - a $3 charge at the machine itself, plus a $2 charge by the bank.

Can someone explain to me why I can make a purchase using my debit card at a store that accepts cards with no fee, but I have to pay $5 to withdraw cash?  [Never mind - I know.  It's because the merchant pays the fee, not the cardholder - but really, we pay it anyway, right?]

This story comes on top of employers increasingly paying their employees by giving them debit cards.   And of course, states are now issuing debit cards as tax refunds.  It seems like everyone, even our government, is taking the opportunity to part us from our money.  The American way, right?

Atkins points out that one of the things that the banks are doing now is trying to remove the tax exemption for credit unions.  Now I think this is a good idea - I don't like the idea of tax exemptions anyway.  But I understand the idea behind the exemption for credit unions, which is that they are owned by their accountholders.  People forget that, years ago, many banks were so-called "mutual" associations, meaning that they were owned by their accountholders.  The Bailey Building & Loan in the movie "It's a Wonderful Life" is an example of a mutual financial institution.  In the late 1980s and 90s, there was a wave of "de-mutualizations" with many banks converting from mutual to stock companies.  I know - I was personally involved as a tax lawyer with working on these transactions.

In the long run, this has been a huge mistake as a policy matter.  Both mutuals and stock companies have boards of directors and CEOs and other officers.  The big difference is who are they working for. In a mutual, they are working for their accountholders - who are both their customers and owners.  In a corporation, the directors and officers owe their duty only to their stockholders.  The de-mutualization rage had the effect of totally changing the incentives of the bank executives in how they do their business.

The same thing happened in the insurance companies of course, While there are more mutual banks than mutual insurance companies these days (mutual banks tend to be smaller, community banks), there are a number of very large insurance companies, including Northwestern Mutual, Mutual of Omaha and Nationwide.  Nationwide advertises the fact that they are owned by their policyholders, something I think should be a bigger selling point than it is.

As a side note, it is apparently - and shockingly - possible for a bank to use the word "mutual" in its name even though it is not a mutual bank.  The notorious Washington Mutual was a stock corporation, not a mutual association, having converted from a mutual in 1983.

If You Want an Example of What's Wrong with our MSM....

This is it:

TV Report Identifies Pilots of Plane Crash with Fake Racist Names

Somebody should get fired for this.

California

I have often thought that equal representation of the states in the U.S. Senate was an anachronism.  Seriously, does it really make sense that California, with a population of 60 times that of Rhode Island, have the same number of representatives in the Senate?  But up to now, the only alternative I have considered is to amend the constitution to allocate Senate seats proportionately, which of course the smaller states wouldn't stand for.

Seeing this:

and this....

....makes me think of an alternative.   There should be a requirement that any state that reaches a population of 10 million people should be broken up into two states.  

Today, 7 states meet this requirement:  California, Texas, New York, Florida, Illinois, Pennsylvania and Ohio.  Under this rule, California would be broken up into at least 4 states, Texas at least 3, and the rest at least two.

Honestly, I don't understand why politicians in California have never considered breaking their state up. Don't they know their people are getting screwed?

Patraeus

Corey Robin, who happens to be a teacher at CUNY, on the course that David Patraeus will be teaching there this fall:

David Petraeus’s course description is up. The course is called “Are We on the Threshold of the North American Decade.” That sounds like a question to me, but there’s no question mark.

Here’s the description:

In this interdisciplinary seminar, students will examine in depth and then synthesize the history and trends in diverse public policy topics with a view towards recommendations for America’s leadership role in the emerging global economy.

This is what we’re paying $150,000 for?

 To which Paul Krugman responds:

[T]here are, I think, things I might want to hear David Petraeus talk about. But “recommendations for America’s leadership role in the emerging global economy” definitely don't fit.

Just to give you a flavor of how obscene this is, check this out, from the website of the CUNY Professional Staff Congress:

On the same day that news broke of CUNY’s plans to pay Petraeus $150,000 via the CUNY Research Foundation, employees represented by the PSC were on a one-day strike outside the Foundation’s central office. They have been without a contract for six months, and the Foundation management is offering below inflation salary increases, demanding excessive concessions for new hires and increasing heath care costs for employees.

Over a hundred research Foundation workers and their supporters took part in the walk out, including Anthony Dixon, chair of the Professional Staff Congress chapter at the Research Foundation's central office.

“That $150,000 for Petraeus is almost enough to cover a 3% salary increase for our entire bargaining unit,” said Dixon.

This is a joke, right?  This is a public university for godsake!  I mean I expect this kind of BS from private universities like NYU, but CUNY?

Seriously, our college education system is royally screwed up.

The Nuclear Option

Mitch McConnell:

"Senate Democrats are getting ready to do permanent damage to this body,” McConnell warned, and made a morbid reference regarding Reid. “No majority leader wants written on his tombstone that he presided over the end of the Senate.”

You know, minority leaders shouldn't want this either.  Particularly minority leaders that used to be majority leaders.

And as far as I'm concerned, the "end of the Senate" occurred when you, as minority leader, decided that nothing would pass without a 60 vote majority.

You want to maintain the Senate as it was, Mitch?  Stop screwing around and start doing the people's business.

So, Can We Stop Worrying about Deficits Now?

Marketwatch:

U.S. Posts Record $117 Billion June Budget Surplus.

Oh, and I loved this sentence:

Both the Obama administration and the Congressional Budget Office are expecting the government to record a deficit of below $1 trillion for the first time since 2008. In 2009, the year President Barack Obama took office, the U.S. posted a record $1.4 trillion deficit as the country struggled with the recession. Budget gaps since then have narrowed as the economy has gradually improved.

Of course, they neglect to mention that Obama only served 8 of the 12 months of that 2009 fiscal year, and that the country basically operated under the final budget of the Bush Administration.

But hey, you know, it's all Obama and the Democrats' fault.  If you don't believe that, read the comments.

What Makes America America

What makes America America is not the skin color or the religion of its inhabitants. It's the Declaration of Independence, the Constitution of the United States, the principles they are based on and the institutions they establish. And as long as those endure, so will America.

Yeah, That'll Work

Based on everything we now know about the so-called targeting scandal, this is about as stupid a response as I can imagine:

Bloomberg:  IRS Gets 24% Budget Cut

Tax Reform

As Congress starts getting into tax reform in earnest ( I know, I'll believe it when I see it, too), I've decided to do a few posts on tax reform ideas you won't see.

And I promise I won't harp on tax exempts in these posts. I will say, though, that this article in the Times today beautifully illustrates what I'm talking about. I mean, like I've said so often, can somebody please state to me the rationale for exempting so many activities from income tax?
Anyway, where we stand now is that the tax writing committees of both houses have said they are moving forward with reform. The Senate Finance Committee has come up with a number of papers which list reform options. A link to those papers is here. The House Ways and Means Committee has come up with its own lists, which you can see here.  In May, the Joint Committee on Taxation came out with a report that described a number of tax reform options and various comments received from the public on many more specific proposals.  A link to that report can be seen here.

Frankly, none of these reports are very helpful.  The senate papers are particularly bad, because they really do not present any kind of comprehensive analysis of what the law is, where the problems are and the proposals to fix them. Literally, each one is about a page of bullet points which can be boiled down to "some people say X and other people say Y." 

The House is a little better, but not much.  There are actually a little draft legislation on the W&M site, but still very little explanation of what needs to be changed and why.  Just to explain, generally reports on legislative changes (at least, in tax legislation) contain three sections: (i) an explanation of present law, (ii) an explanation of what the problems in present law, and (iii) a description of the legislation and how it addresses the problems.  These reports provide (i) and part of (iii), but there is no "reason for change" section, and the description of the legislation doesn't really explain it either.  So for example, in their report on financial products, without telling you what the problems in current law are, how can you evaluate the actual proposal?  I know there are issues in the field of international taxation, but how moving from the current system to their proposed territorial system solves those issues is really not explained (although, to be fair, I doubt Chairman Camp and I would even agree on what the problems are).

Back in the Saddle

I know, I know, it's been way to long since my last post.  For my part, let me just say that when you do as much writing and online research as I do in my regular job, sometimes the though of facing the computer screen and keyboard in my spare time is more than I can bear. 

Still that's not excuse, I guess.  Sometimes I just get lazy.

I will say it does bolster my admiration for those who do this for a living. 

Lot's of interesting stuff goin on.  Beyond the couple of posts that will follow on this one, here are a few noteworthy items:

Felix Salmon got my laughing with his "Adventures with "Free" Checking."  But really, this is no laughing matter.  The manner in which our financial institutions are nickle-and-diming us all the way to the poor house is beyond disgusting.  This practice came into the news the other day, which is just kind of emblematic of how the biggest companies in the world are conspiring to separate us all from our hard-earned cash.  Wasn't the Consumer Financial Protection Bureau supposed to protect us from this sort of thing?  I suppose they'll get around to it, after they've finished compiling their database on every transaction we have ever engaged in.  After all, how can they protect us if they don't know what we're doing, right?

CIA insists that torture is ok because it works....

US Median Wealth is only 27th in the world.  I was kind of shocked when I read this, especially since I knew we are ranked much higher when looking at average wealth (7th).  Of course, the reason for the vast difference in rankings is economic inequality in the U.S. is greater than in just about any other developed country in the world.  But clicking through this various articles on this topic I came across this one which kind of stunned me.  It says the global household wealth is $$226 trillion, or an average of $49,000 per adult person in the world.  Compare this to the median wealth per adult in the U.S. at $38,800 per adult.  We really are becoming a third world country....

Here is an interesting article in the Wall Street Journal about the kind of people hired by companies for employee training conferences.  Apparently, these kinds of things work very well when companies use them to train their employees, but if the government uses them to train its employees, they are a total boongoggle and waste of time.  Speaking of which, this article, which goes into the details of the IRS training conference that created such a hoopla, does a good job of exposing why the whole issue is a molehill disguised as a mountain.  And it points out something that nobody mentions about the IG report that started the whole thing:

"Was the conference a boondoggle with no value? "We did not evaluate the appropriateness or relevance of the training provided at the Anaheim conference. It was beyond the scope of this review to assess the merits and effectiveness of the conference agenda,"

In other words, our job is not to say whether the money spent on this conference was money well spent.  Well, fuck, then, what are you good for?  I'm starting to think that somebody really needs to investigate the Treasury's Inspector General.

And finally, speaking of the Wall Street Journal, Paul Krugman toots his own horn a bit (that's ok, he's entitled to) by linking to this survey of the top business thinkers in the world, where he's listed as number 1.  And surprise, surprise, Joseph Stiglitz is listed as number 2.  Two DFHs at the top of the list.  So tell me why at this point are people in Washington still not listening?

Pinochet, that Beacon of Freedom

Digby points to this from the WSJ editorial board today:

Egyptians would be lucky if their new ruling generals turn out to be in the mold of Chile's Augusto Pinochet, who took power amid chaos but hired free-market reformers and midwifed a transition to democracy.

Yes, that beacon of freedom Pinochet should be a model for every military dictator!

Almost immediately after the military's seizure of power, the junta banned all the leftist parties that had constituted Allende's UP coalition. All other parties were placed in "indefinite recess" and were later banned outright. The government's violence was directed not only against dissidents but also against their families and other civilians. The Rettig Report concluded 2,279 persons who disappeared during the military government were killed for political reasons or as a result of political violence, and approximately 31,947 tortured according to the later Valech Report, while 1,312 were exiled. The latter were chased all over the world by the intelligence agencies. In Latin America, this was made in the frame of Operation Condor, a cooperation plan between the various intelligence agencies of South American countries, assisted by a United States CIA communication base in Panama. Pinochet believed these operations were necessary in order to "save the country from communism". In 2011, commission identified an additional 9,800 victims of political repression during the Pinochet regime. This led to the total number of victims being revised to approximately 40,018, including 3,065 killed.

Some political scientists have ascribed the relative bloodiness of the coup to the stability of the existing democratic system, which required extreme action to overturn. Some of the most infamous cases of human rights violation occurred during the early period: in October 1973, at least 70 people were killed throughout the country by the Caravan of Death. Charles Horman, a US journalist, "disappeared", as did Víctor Olea Alegría, a member of the Socialist Party, and many others, in 1973.

Furthermore, many other important officials of Allende's government were tracked down by the DINA in the frame of Operation Condor. Thus, General Carlos Prats, Pinochet's predecessor and army commander under Allende, who had resigned rather than support the moves against Allende's government, was assassinated in Buenos Aires, Argentina, in 1974. A year later, the murder of 119 opponents abroad was disguised as an internal conflict, the DINA setting up a propaganda campaign to accredit this thesis (Operation Colombo), campaign that received diffusion by the leading newspaper in Chile, El Mercurio.

You've got to be seriously mentally ill to think that this guy is a model for anything.  I wouldn't wish that kind of regime on anybody.

Except, perhaps, the members of the WSJ editorial board.