WONKESS

Clinton Taxes, the Boom that Wasn't and Government Reconsidered...

Three seemingly disparate topics, but let’s see if I can crescendo them into one, giant yalp for a revival of government for the people.

The Boom that Wasn’t is the title of an article published in the New York Times this week. It and a related article by the Pew Research Center on the demographic trends of the middle class reiterates what many of us suspect and some of us are experiencing first hand, that while Americans may numerically be seeing positive economic progress, what they are actually experiencing is relative economic decline. Here are some figures from the Times article:

In 2000, at the end of the previous economic expansion, the median American family made about $61,000, according to the Census Bureau’s inflation-adjusted numbers. In 2007, in what looks to have been the final year of the most recent expansion, the median family, amazingly, seems to have made less - about $60,500.

This has never happened before, at least not for as long as the government has been keeping records. In every other expansion since World War II, the buying power of most American families grew while the economy did.

Real median family income more than doubled from the late 1940s to the late ’70s. It has risen less than 25 percent in the three decades since. Statistics like these are now so familiar as to be almost numbing. But the larger point is still crucial: the modern American economy distributes the fruits of its growth to a relatively narrow slice of the population. We don’t need another decade of evidence to feel confident about that conclusion.

Numbing indeed.

And the numbers don’t even fully reflect the extent of middle class stagnation. For example, inflation figures in the US have been artificially low over the last 10 years for two reasons: the exclusion of food and energy from “core” inflation numbers (really more of an issue right now) and the surprising lack of impact that increased housing prices have had on inflation numbers. For a more fulsome discussion of why this is so, you can look here. What this means for the purposes of this discussion is the following: (1) the inflation adjusted numbers from the Census Bureau are likely low, meaning that the median income in 2000 is probably higher than the aforementioned $61,000 and (2) that in relative terms, the median family income is far less likely to be sufficient to secure that pillar of the American Dream, home ownership, than previously. Or at least without some serious borrowing.

The Times article also notes:

The tax code, meanwhile, has become far more favorable to high-income workers at the same time that they — and they alone — have received large pretax raises.

Which brings us to the Clinton Taxes. The Clintons released their tax returns for the years between 2000 and 2007 to moderate fanfare last week. The actual releases can be found on Hillary’s campaign website here. As the SNL folks satired last week, surprise! They're rich (duh).

Envy (yes, mine) aside, there is nothing wrong with making money. I’ve never begrudged John Edwards for being among the top 0.1% and I feel similarly about the Clinton’s wealth. I have no doubt they worked hard for their money. And more importantly, even all those evil, muck-sniffing MSM reporters couldn’t find any dirt from the Clinton’s returns. Silly reporters – the Clintons are lawyers. You were really expecting some kind of Al Capone?

Much more interesting, to me, is what the Clinton’s taxes tell us about the U.S. tax system. This is what you can do, legally, if you live in America and are very, very rich.

First, over the disclosed 8 year period, the Clintons gave over $10 million to charity. As the WSJ reports:

…the Clintons also made liberal use of the charitable deduction, claiming $10.2 million in charitable giving over the eight years. Intriguingly, nearly all the donations went to the Clinton Family Foundation, which has disbursed only half the money. The Clintons can thus use the foundation for, er, strategic giving, such as the $100,000 it donated last year to a local South Carolina library – the day after Mrs. Clinton debated in that key primary state. There are other examples of such politically targeted philanthropy, and it's worth noting that most of the foundation's disbursements came only after Mrs. Clinton announced her Presidential run.

WSJ's snark aside, the article is revealing. Although the structure of the Clinton Family Foundation cannot be discerned from the tax returns, it is probably a Charitable Lead Trust. What this means is that Clintons can put money into the trust on a yearly basis, and claim a tax deduction (and reduce the amount of taxes they would otherwise pay) for the amount donated. However, whereas when you or I donate, once that money is out of our hands, we are roughly powerless in using that money to our benefit, the trustee of the trust (presumably one of the Clintons) has complete power over disbursements (in terms of recipient, amount and timing, within certain guidelines) out of the trust, and at the end of the trust, the left over money is distributed back to the Clintons, or more likely, to their heirs. As my estate planning professor liked to say, these trusts are the apple in rich folks’ eyes, because who doesn’t like the social (and political) power that comes from being able to give lots and lots of money to the cause that is throwing the social fete of the year?

A second curious aspect of the Clintons' tax return is their unearned income – the money that they received from interest and from their investment holdings. I've consolidated their unearned income over the past 7 years here:

Year	2000	2001	2002	2003
interest income	1,828	16,503	37,300	12,196
dividend income	11,648	172,621	67,685	30,729
capital gains	136,046	0	-2,445	-3,000
Year	2004	2005	2006
interest income	60,684	51,546	320,060
dividend income	120,048	335,213	243,464
capital gains	57,313	27,427	155,590

Why is this interesting? Well, let's take 2006 as an example (I'm not using 2007, because those are only estimates and I'm doing very rough math, not deep combing here because, people, I theoretically have a job). In 2006, the Clinton's earned income was about $12.4 million. Assuming that they had a similar income in 2007 (and to be generous, let's say they made $25 million over 2006-2007) they would have already accrued $84 million of the total $109 million they've made since Bill's presidency as of 2006. If the only returns they made off that $84 million was the above released $719,114 in unearned income, they were roughly getting a 0.86% return on their money.

But of course, that's not really what's happening. Rather than using standard investment vehicles like you or I (stocks, mutual funds, bank accounts), the majority of the Clinton's money has been invested in various partnerships, from which, for the year 2007, they have released that they will receive $2,750,000 of unspecified "partnership income". Not to be obnoxiously boring, but one of the primary benefits of receiving your unearned income as a partner, instead of as an investor, is that investors are effectively taxed twice (once at the corporation level, and once as an investor in the form of capital gains/dividend tax) and partners only once. A more popular (among the rich) and insidious version of this is the formation of an S corporation around an individual or a family to shelter self-employed income. John Edwards has been criticized for doing this.

I am way over my head with this tax stuff, and would appreciate any comments from those who have more insight than my scant presentation above.

Bottom line – there are all sorts of ways that the mega rich don't get taxed where you and I absolutely do.

Taxes are at the heart of how we get this country back on track and they must be at the heart of any Government Reconsidered. A completely open and free market system allows for all kinds of cooperation and collusion, some which have immense benefits to society, and others which profit at the expense of society. But whereas market participants are knowing and willing participants in each and every transaction, society is, effectively, a passenger along for the ride. Some of the costs dumped on society can be reclaimed through the court system (fraud, product liability) but others are simply borne by the society as a whole (environment, poverty, health).

We need to redefine them (market participants) and us (citizens, and citizens as represented by government). We are not fighting each other. We are idiots if we think that this is a battle between New Yorkers and Californians against Texans and Georgians. And we are even bigger idiots if we think that "we" are not in actuality a little bit "them" (since I'm pretty sure every one reading this is either employed by a company, buys product from some companies, owns stock in some companies, or has some retirement plan that owns stock in some companies).

We (as citizens) pay taxes because we (as market participants) do damage to our (collective) society. And those who make more absolutely have an obligation to pay more into the system – because the mere fact that they make more means that they have placed a heavier burden on the system. Don't believe me? Then tell me why it took $30 BILLION to bail out Bear Stearns?

All of this is cribbed from Robert Reich because he got it right. Market participants are always quick to forget the benefits they receive from doing business in America. They are in a stable country, have access to a real legal system, have no fears of any impending government seizure of their assets, and have access to a well-educated workforce that wouldn't exist without the American education and health system and the American infrastructure.

For those privileges, they should pay. So that the American government can keep providing the education, the health care, the infrastructure, the environmental protection, the legal structure, the transportation networks, the social nets, &c, &c, &c… that market participants depend on.

Cross posted at Momocrats.

United State of the Arab Emirates...

God, people, sit up and listen:

RED, WHITE AND BLUE TAG SALE

By: Maureen Dowd
Published: January 20, 2008, New York Times

When President Bush finished doing his sword dances and Arabian stallion inspections, when he finished making a speech in Abu Dhabi on the importance of freedom that fell flat, when he finished lounging in his fur-lined George of Arabia robe in the Saudi king’s tent, he came home.

Or he came to what was left of home.

A Washington Post cartoon by Tom Toles summed it up best: “Great to be home,” W. enthuses on Air Force One, heading toward the East Coast. “Anything interesting happen while I was gone?” Hanging on the skyline of New York is a sign reading: “U.S.A. Now a Wholly Owned Subsidiary of Foreign Investors.”

Wherever he went, W. seemed dazzled by the can-do spirit of the J. Pierrepont Finches of the new Middle East. “It’s important for the president to hear thoughts, hopes, dreams, aspirations, concerns from folks that are out making a living,” he told Saudi entrepreneurs.

In Dubai, he commended young Arab leaders, saying, “The entrepreneurial spirit is strong.”

In Abu Dhabi, he marveled at the royal family’s plans to build a city based entirely upon renewable energy. “Amazing, isn’t it?” W. said.

You know you’re in trouble when your Middle East oil pump is greener than you are.

Even as W. played cheerleader for Arab business, the Arabs were cleaning our clocks — then buying them. Our addiction to oil has allowed our pushers in the Persian Gulf to go on a shopping spree to snap us up.

Hillary Clinton was right when she said it was “pathetic” that President Bush had to beg the Saudis to drop the price of oil.

One cascading rationale he offered for invading Iraq was the benign domino theory, that bringing democracy to Iraq would sway the autocrats in the region to be less repressive.

But when W. visited Saudi Arabia and Egypt last week, he did not have the whip hand. He could not demand anything of the autocrats in the way of more rights for women and dissidents, much less get the Saudis to help on oil production. He needs their help in corralling Iran, which has been puffed up by the occupation of Iraq.

So he was a supplicant in Saudi Arabia. The American economy is a supplicant, too.

Two decades ago, we fretted that Japan was taking over America when Sony bought Columbia Pictures and Mitsubishi bought a chunk of Rockefeller Center. But they overpaid for everything.

Now, because of Wall Street’s overreaching, our economy depends on foreign oil and foreign loans to stay afloat.

China and Arab countries have a staggering amount of treasury securities. And the oil-rich countries are sitting on so many petrodollars that they are looking beyond prestige hotels and fashion labels and taking advantage of the fire sale to buy eye-popping stakes in our major financial institutions.

Like the president, Citigroup and Merrill Lynch came with tin cups to Middle Eastern, Asian and American investors last week, for a combined total of nearly $19.1 billion, after the subprime mortgage debacle blew up their books.

Citigroup, which raised $7.5 billion from Abu Dhabi in November, raised another $12.5 billion, including from Singapore, Kuwait and Saudi Prince Walid bin Talal. Merrill Lynch gave $6.6 billion in preferred stock to Kuwait, South Korea, a Japanese bank and others.

(While the great sage Bob Rubin was advising Hillary Clinton on sound fiscal policy, he seemed to be asleep at the Citigroup switch.)

As Warren Buffett has said, we are giving ourselves a party to feed our appetite for oil and imported goods and paying for it by selling off the future, our most precious assets.

When the president got back Thursday night from a trip that made it clear he has no clout overseas, he had to rush the ailing economy into intensive care.

Next to the cool, strong euro, the dollar is a comparative runt in the world’s currencies. The weak dollar lets foreigners snap up real estate in Manhattan.

It is striking that the Bush scion, who has tried so hard to do the opposite of his father, also ends up facing the prospect of a recession in his final year in office.

Maybe if the president had spent the trillion he squandered on his Iraq odyssey on energy research, we might have broken the oil addiction.

Now it’s a race between Iraq, stupid, or the economy, stupid, to see which one will usher out W.

The country is engaged in a fit of nativism and Lou Dobbsism, obsessing about the millions of Mexicans who might be sneaking across the border when billions in foreign money are pouring into Citigroup. You figure out what might be a bigger problem.

The national boundaries that really matter are the financial ones: Who’s going to own the American economy?