The Congressional Blue Dog Coalition today released a letter signed by 31 House Democrat which advocates extension of all the Bush era tax cuts which are scheduled to expire in January. The letter says the nation is facing the worst economic decline since the 1930′s Depression, and it urges caution in raising taxes during a recession. The conservative and moderate Democrats believe keeping all the tax cuts will help stimulate the economy and help small businesses. Some of the Blue Dogs want a temporary tax cut while others are advocating a permanent extension. Continue reading
In his debut article as a columnist for The New York Times, Peter Orszag is urging a two year extension of the Bush tax cuts. Orszag was the Obama administration’s OMB Director until the end of July, and he previously was Speaker Pelosi’s Director of the Congressional Budget Office. Continue reading
"Fighting the Unbeatable Foe" is the biography of the late Sen. Howard Metzenbaum (D-OH). Author Tom Diemer of the Cleveland Plain Dealer praises the Senator for battling major corporations and deregulation. For the tax avoiding Metzenbaum, the real foe was the Internal Revenue Service.
The late U.S. Senator Howard Metzenbaum (D) and basketball star LeBron James are both well known names in Ohio, and they have an important message for the nation on tax policy. Metzenbaum served on Capitol Hill from 1974 until 1994, and died at the age of 90 in 2008. Continue reading
February 2009, the President and Rep. Charles Rangel (D-NY) are shown in the East Room of the White House. In the center is the late Sen. Ted Kennedy (D-MA). This was Rangel's highpoint. The next month he would lose his Chairmanship of the most influential committee on Capitol Hill.
The House Ethics Committee yesterday released an in-depth report on its 21-month investigation into the financial dealings of Rep. Charles Rangel (D-NY). Rangel is the former Chairman of the powerful Ways and Means Committee, and the report describes how he used that role to request contributions of $30 million a piece from many of the nations top corporations. The recipient was his vanity project at City College of New York (CCNY) which was intended to be similar to a presidential library. Continue reading
Whitemarsh Hall outside of Philadelphia was constructed in 1921 by J.P. Morgan's partner, Edward T. Stotesbury. It was then America's fifth largest home, and his other residences were "El Mirasol," the first Spanish style mansion in Palm Beach, Florida, and Wingwood House, his 80 room “cottage” in Bar Harbor, Maine. Stotesbury's 150 servants rotated between various residences and maintained his private railroad car, yacht and fleet of luxury automobiles. Whitemarsh Hall was over 100,000 square feet, and it had 147 rooms, 24 fireplaces, three elevators with access to six different levels (three below, three above), a movie theater, barber shop and wine cellar that remained fully stocked through out Prohibition.
The death tax is now back on top of the legislative agenda. As part of George W. Bush’s 2001 tax cut, the estate tax was reduced gradually and this year it is zero. The death duties will go back into effect next January unless Congress acts, and the old 55% rate will return. Continue reading
PHOTO: The Right Honorable Lady Victoria Hervey, 33, is the elder daughter of the 6th Marquess of Bristol. Her social life is a staple of the British photo-tabloids. To avoid UK taxes, she was brought up in Monaco and has no intention of ever being a full time UK resident.
The most popular activity of the British photo tabloids is making fun of the aristocracy, and Lady Victoria Hervey is an easy target. Last winter the socialite told the Daily Telegraph she had been contemplating the homeless problem.
Lady Victoria’s recommendation was for poor people to follow her example, “It’s so bad being homeless in the cold weather. They should go somewhere warm like the Caribbean where they can eat fresh fish all day.”
The bad news for the tabloids is that the aristocracy has been declining for decades. It is far more than the weather that has sent Lady Hervey and her family to Monaco and Los Angeles. Her story is an excellent example of the decline of the British empire, as well as the fiscal danger now impacting U.S. states such as California, New York, New Jersey and Illinois.
Wealthy Residents Have Fled New Jersey and Other High Tax States
Similar to the UK, these states thought taxing wealthy residents was the answer to their fiscal woes. They have since learned the wealthy have other options. Gov. Chris Christie (R-NJ) has repeatedly emphasized that as taxes have gone up in his state, the wealthy have relocated. The state had a $98 billion surplus from 1999 to 2003.
Then New Jersey significantly raised taxes on the wealthy, and between 2004 and 2008 they ended up losing $70 billion. The Garden State has America’s heaviest tax burden. Now Gov. Christie is trying to make massive cuts in the state budget because all the revenue projections were wrong.
The UK’s Upper Class Exodus
The New Jersey lawmakers should not have been surprised because taxing the wealthy an inordinate amount has rarely worked. Denis Healey, who was the UK’s Chancellor of the Exchequer from 1974 to 1979, was correct when he predicted “howls of anguish” from the rich. He was referring to the tax increases made by the Labour governments in the 1960s and ’70s.
The result was a huge decline in Britain’s income when the upper class fled. The UK’s biggest export turned out to be its wealthy residents. The first to leave were the rock musicians, and Dave Clark immediately followed through on his promise to abandon the UK.
The Rolling Stones had no desire to leave but they could not cope with the tax bill and were forced to relocate to France. George Harrison of The Beatles wrote the song Taxman when he learned his rate would be 98%.
Michael Caine, Tom Jones and Rod Stewart moved to Los Angeles, while Roger Moore and Ringo Starr went to Monaco. Phil Collins and David Bowie escaped to Switzerland. John Lennon and Freddy Mercury wound up in NYC. Sting went to Ireland and Sean Connery to Spain.
Other popular destinations were Hong Kong, Dubai and Singapore. About six million UK citizens now live abroad. They all have to prove they spend less than 91 days a year in Britain. Mick Jagger has been doing that for 25 years. The threshold in the U.S. is four months and it is six months in other European nations.
Margaret Thatcher Stopped The Brain Drain
Many members of the upper class including Lady Hervey’s family returned in the 1980′s. The so-called brain drain of the late seventies was reversed by the 1979 election of Prime Minister Margaret Thatcher. The 80% and 90% tax rates were abandoned, and the tax paid on income and investment earnings was capped at 40 per cent.
However, they also have to cope with a 20% VAT (Value Added Tax) and gas costs $6.50/gallon. After eight years in exile, Michael Caine returned and blasted the Labour Party for ruining the UK’s movie industry.
The UK was not alone. Belgium has long been a haven for rich of France. President Nicolas Sarkozy is now trying to cut taxes to get them back. Berlin is pursuing wealthy Germans who hold Swiss bank accounts that shield hundreds of billions of euros.
Lady Hervey and the Tax Exiles
It is easy to make fun of Lady Hervey and her frequent appearances in the London social scene. The tabloids call her Lady V, and she has been romantically linked to Prince Andrew and Lord Frederick Windsor of Kent. Her modeling photos for Dior and Elite are always displayed prominently, and she received no sympathy when her trust fund was cut off.
Lady V is a celebrity in London, but is ignored in Los Angeles. Nevertheless, LA will remain her home and she has no intention of ever being a full time UK resident. She believes National Health Insurance ruined the country, and the UK’s fiscal outlook remains dismal.
The UK has a new government, but it inherited one of the largest budget deficits in the world and they are coping with a larger structural deficit than they thought. Similar to the 1970s, a popular solution could be tax exiles.
In April of this year the tax rate went back up to 50% for individuals earning more than $235,740 annually. Now even members of the House of Lords are once again about to abandon Britain. Many of them also want to avoid inheritance taxes.
The new tax hike will not impact Lady Hervey’s family, but similar to the past, the UK’s standard of living will continue to decline.
Obama’s new bank tax was announced during the State of the Union Address and it will inevitably be passed on to consumers. The President says this is a way to recoup money dished out to banks as part of the TARP bailout. The truth, though, is that those banks already paid-back the bailouts, with interest; the real deadbeat offenders are Freddie Mac, Fannie Mae, Chrysler and General Motors, who have yet to repay their debt. This chart demonstrates who has paid. Obama is taxing those who paid back taxpayers, and exempting those who have not. Businesses passing on costs to their consumers is an Economics 101 principle which is unkown to an administration where only 5% of the decision makers have ever held a job in a profit making business.
The GM’s exemption is the result of a failure to change the original legislation. It mandated that if any TARP was not recouped by the resale of the “troubled assets”, the deficit would come from the financial industry. This meant GM was exempted since the money used to nationalize most of that company was taken from the fund originally designed for bad mortgage loans and to keep derivatives off the market.
Earlier this week the Obama Administration rolled out a new economic forecast that added $2 trillion to deficit projections from 2010 to 2019. The new total is over $9 trillion and many experts believe the President will have to eventually raise taxes on the middle class. The administration is already intent on a significant tax boost for the wealthy, so it useful to review the past results.
The most memorable soundbite from his 1988 acceptance speech at the Republican National Convention was when George H.W. Bush said: “And I’m the one who will not raise taxes. My opponent now says he’ll raise them as a last resort, or a third resort. But when a politician talks like that, you know that’s one resort he’ll be checking into. My opponent, my opponent won’t rule out raising taxes. But I will. And the Congress will push me to raise taxes and I’ll say no. And they’ll push, and I’ll say no, and they’ll push again, and I’ll say, to them, ‘Read my lips: no new taxes.’”
He regretted the strong language four years later when the phrase was endlessly repeated by opponents Bill Clinton, Ross Perot and Pat Buchanan. A tax increase, which included a new top bracket of 31%, was necessary for Bush to obtain the 1990 Budget Agreement. Among those telling Bush to go along with the tax increase were OMB Director Richard Darman, White House Chief of Staff John H. Sununu, Gerald Ford, Paul O’Neill, and Lamar Alexander. The headline of the New York Post the next day read “Read my Lips: I Lied.” Bush was raising taxes rates on the upper brackets mostly by ending their deductions and exemptions. It didn’t work: Individual income taxes brought in 8.3 percent of GDP in 1989 and just 7.6 percent of GDP by 1992.
Even though Bush was breaking his word and this would end his political career, Bush went along with the compromise because the agreement contained deficit reductions and PAYGO. PAYGO required all future spending increases to be offset by decreases. It was thought that this would control all future increases and eventually the deficit would be wiped out.
PAYGO was in effect from 1991 to 2002, and while it sounded great, the Congress had fooled Bush because numerous loopholes were discovered to avoid its restrictions. Discretionary spending was totally exempted from PAYCO. That includes programs such as defense, education, environmental protection or 38 percent of federal spending. Noram increases in entitlement spending are also not covered. Anytime PAYCO presented a problem for Congressional spenders they just waived it. “PAYGO is like quitting drinking, but making an exception for beer and hard liquor,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget.
Former President Bush now says the tax increase was one of his greatest regrets. He did not realize the PAYGO pledge was highly exaggerated and “I should have held out for a better deal.”
In fairness to Bush, PAYGO and statutory budget controls were useful in restraining entitlement increases. The situation would have been worse without them, but PAYGO was not the panacea portrayed by its advocates in 1990.
President Bill Clinton also broke his promise to pass a middle class tax cut but it had little impact on his popularity. The 1990 Budget Agreement did not reduce the deficit significantly and it remained a major issue in 1992. Independent candidate Ross Perot campaigned as a fiscal conservative. He had never held elective office and when his lack of experience was criticized in the presidential debates he responded “I have no experience in creating a $4 trillion debt.” Public opinion polls showed Perot with over 40% of the vote in June of 1992, and if the election had been held at that point Perot would have received a landslide 408 electoral votes. Republicans concentrated all of their fire on Perot in the Spring of 1992 and Bill Clinton was able to use this time to reduce his substantial negative ratings.
Similar to George H.W. Bush, Clinton’s solution to the deficit was a tax the rich plan. This was an essential part of his 1993 tax hike, which is similar to President Obama’s current proposal to raise revenue by increasing taxes on the top 5% of income earners.
No Republican voted for Clinton’s 1993 tax hike which passed the House of Representatives by one vote. It also took Vice President Al Gore’s tie-breaking vote to secure final passage in the Senate. Dozens of Democrats went down to defeat a year later for supporting the tax hike.
According to Dr. Alan Reynolds of the Cato Institute, “Clinton piled on another layer of high tax rates, 36 percent and 39.6 percent, while also greatly hiking taxes on Social Security benefits of working seniors. That failed, too: Individual income taxes brought in only 7.8 percent of GDP in 1993 and ’94, 8.1 percent in 1995. Federal revenues did not get much above the 1989 level until 1997 – when they rose because the capital-gains tax was cut.”
Similar to Bush, Clinton himself later admitted that taxes were increased too much. In fairness to Clinton, his tax hike took place when America was viewed as a low tax nation. Foreign companies were then coming to the United States because our taxes were lower than what they had to compete with at home.
This situation is far different today because so many other nations have now lowered taxes to foster economic growth. There has been no employment growth in places such as Silicon Valley in the last decade because U.S. companies are choosing to locate more employees in lower-tax areas such as China, India and Eastern Europe. This is another reason why President Obama’s tax proposals are unlikely to generate significant revenue.
The new Commander-in-Chief can be grateful that not one American soldier died in Iraq last month.
According to a front page analysis in yesterday’s “Washington Post,” many of the lawmakers I most admire are going to lose tomorrow. I will be especially saddened if Senators such as Norm Coleman (MN), Gordon Smith (OR), John Sununu (NH) and Elizabeth Dole (NC) are defeated. All of them are “work horses,” not “show horses,” and they were willing to compromise for the common good. My guess is that their successors will be intense partisans. Lets hope I am wrong.
I have been wrong in the past. Several of the predictions I made about President-elect Bill Clinton in 1992 were not correct. Of course, it can be argued that a big part of his success was due to the GOP Congress which was in power for six of his eight years in office. Nevertheless, I would not have predicted the Clinton Administration would have focused on deficit reduction, welfare reform, free trade agreements such as NAFTA, and capital gains reductions.
In 1997, in one of his best moments, President Clinton signed the law reducing capital gains rates from 28 to 20%. One of the results was growth rates of 4% for the next three years, and Nasdaq quadrupled in value. (George Bush later took the rate down to 15%). Unlike today, Clinton’s advocacy of significant capital gains reductions was an integral part of the 1996 Democratic Platform. Clinton used this repeatedly to rebut Bob Dole’s tax cut arguments during his re-election campaign. In his memoirs, Clinton himself said he could have been described as a liberal Republican.
Today, my predictions about Senator Obama could be similarly incorrect. Last month not one American solder died in Iraq, and similar to 1992, every survey indicates the economy is the dominant issue. Obama has repeatedly said he will cut taxes on the middle class, but I believe just the opposite will happen. The capital gains rate is crucial to investment decisions and it is already scheduled to increase from 15% back to the 20% of the Clinton era. The dividend rate will go back to 30 or 38%. Obama will not do anything to reverse that.
This is a major factor because over half of us own stocks and almost 80% own homes. Surprisingly, one of the few couples not investing in the stock market is Barack and Michelle Obama. In 2005, 47% of all tax returns reporting capital gains were from households with incomes below $50,000, and 79% came from households with incomes below $100,000. The increase will also put America at a great disadvantage when competing for global capital.
In addition, I really hope Obama will rethink his position regarding an additional raise beyond 20% in rates on capital gains. He wants to do this out of sense of “fairness,” and Obama calls for elimination of “tax breaks for the rich.” Obama would only be hurting low income workers. He would be reducing the amount of capital necessary to create jobs.
There is a great disparity in income in our nation, but the only way to help a blue collar worker earn more is through increased capital and training. As Jesse Jackson once said, “Capitalism without capital is just another ‘ism’.” The rate reductions made by Clinton and Bush both resulted in more income to the government, but the real benefit was for our nation’s economic growth.
American companies also have to endure the highest corporate tax rates in the industrialized world, and this will not change in an Obama Administration.
Our current corporate rate is 39.3% and even Germany has a 25% rate. Ireland cut its corporate rate to 12.5 percent and went from being the poor man of Europe to the second-richest on a per capita income basis. Despite Senator Obama’s comments about spreading the wealth around, we already have an extremely progressive income tax system. For 2006 (the latest year for which statistics are available), the share of the federal income tax paid by the top 1 percent of tax returns reached an all-time high — 40% of all federal income taxes. The top 50% paid 97% of the tax. The bottom 50% paid only 3% of it.
I was pleasantly surprised by several of Bill Clinton’s policies, and I hope I will be able to say the same thing about Barack Obama.