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Camp Bank Tax

Thursday, 27 February 2014 06:06

My friend Jared Bernstein makes many of the right points on the Camp tax reform proposal, but let me add a few.

First, it is good to see the proposal for taxing the large banks. The logic is that these banks are benefiting from implicit government guarantees through too big to fail insurance, which the tax would in part offset. The problem is that the tax is an order of magnitude too small.

The tax is projected to raises $64 billion over a decade. By comparison, Bloomberg News estimated the size of the too big to fail subsidy at $83 billion a year. That estimate is likely too large, but even cutting it in half still implies a subsidy that is more than six times the size of Camp's tax. Most of us might think it's reasonable that our tax dollars help low income families buy food or get health care for their kids. It's a bit harder to make the case for an implicit tax to support the Wall Street fraternity parties at the St. Regis. In other words, Camp's bill would hardly mitigate the desirability of breaking up the big banks.

It is also worth noting that the financial sector as a whole is hugely under-taxed compared with other sectors, a point that has even been acknowledged by the International Monetary Fund. It recommended a tax of roughly 0.2 percent of GDP (@ $400 billion over the next decade) to redress this imbalance. The financial transactions tax proposed in a bill by Senator Tom Harkin and Representative Peter DeFazio would pretty much hit this target according to the calculations of the Joint Tax Committee. Anyhow, the point here is that Camp deserves credit for attempting to address some of the special privileges granted to the financial sector, he doesn't come close to solving it.

A second related point is that his proposal would not address one of the main sources of tax gaming that allows the Mitt Romneys of the private equity industry to get extremely rich. Specifically, it doesn't limit the deduction for interest paid by corporations. This is important to private equity because one of their standard tricks is leverage up the mid-size companies they purchases in order to increase after-tax profits. This incentive to make firms highly indebted serves no public purpose (it hugely increases the risk of bankruptcy), but it can make private equity partners enormously wealthy. Camp's plan does nothing about this distortion.

Finally, people should be aware that the proposal to end the tax deduction for state and local income taxes is a direct attack on states like New York and California which have high tax rates on their wealthy residents in order to provide a higher level of services to their citizens. These tax rates will be considerably harder to maintain politically, if they were not deductible against federal income taxes. This is a reason why many opponents of state level social spending want to end this deduction. (Those wondering why the rest of the country should subsidize services in these states might want to consider the fact that these states are still huge net payers of tax -- their tax payments exceed their receipt of revenue -- to the federal government.)




Comments (11)Add Comment
Flatter Isn't Fairer
written by Robert Salzberg, February 27, 2014 6:54
Republicans are saying that Americans agree that we want a tax code that is fairer, flatter and simpler. Simplicity and fairness are accurate, but flatter? The tax code needs to be more progressive, not less, to rebalance the upward distributions of income built into our current Free Market economy that favors management over labor and investment income over wages from work.

In particular, the rates at the top of the tax code should be much more progressive which is impossible to achieve without more tax brackets. Someone making $100,000 a year shouldn't be lumped into a bracket with someone making $100 million.

A flatter tax code is fairer only to simpletons and is being used as a way to sell increasing taxes at the bottom and reducing taxes at the top.
written by DJB, February 27, 2014 7:30
so how did bloombergs net worth go from 4 billion dollars when he first took office of mayor of new york to 31 billion dollars when he left

i would suggest that it was a result of ultrarapid trading by computer algorithms

which adds nothing of value whatsoever to our society

just diverting more and more of money supply to the otherwise extremely wealthly

this increased skewing of the distribution of the money supply is clearly behind all or our current man made "financial crisis"

the financial transaction tax would stop this socially extremely harmful practice in its tracks

however the resistance to such as tax would not be viewed by the extremely wealthy as a very small percentage tax on transactions say .....25 percent or something

instead it would be viewed as "tax" that keeps them from making 27 billion dollars over 10 years or less

the rest of us should view ultrarapid trading as a "tax" that robs us of a large percentage of our life savings,

don't you think??
written by DJB, February 27, 2014 7:34
sorry 0.25 % or something
written by DJB, February 27, 2014 7:39
or even less 0.03% as harkins bill proposes

still would have same effects

1000 trades per second times 0.03 percent = 30 percent per second tax

that should stop those ultrarapid trades
fair division
written by Squeezed Turnip, February 27, 2014 8:05
A cake is to cut into two pieces and split between two people. The fairest solution is obtained by having one person to cut and the other person choose which piece they want. But the 1% gets to cut the cake and choose the piece the as well. No wonder they're taking 99% of the cake.

Ain't it funny how banks seek to profit from inefficiencies in the marketplace, yet seek to prevent the elimination of inefficiencies that the government creates because of macro/systemic inefficiencies that banking creates?
PE Question
written by pcm4, February 27, 2014 11:52
Can someone explain to me how the deduction on corporate interest allows PE firms to increase after tax profits. I get that the interest payments are tax deductible, but isn't that more than offset by the principal payments that have to be made on the outstanding debt? What am I missing here?
From the link Dean Baker provided to answer ur question pcm4
written by jaaaaayceeeee, February 27, 2014 6:28

"Because the law views private equity firms as investors rather than employers, private equity owners are not held accountable for their actions in ways that public corporations are. And their actions are not transparent because private equity owned companies are not regulated by the Securities and Exchange Commission. Thus, any debts or costs of bankruptcy incurred fall on businesses owned by private equity and their workers, not the private equity firms that govern them".

One reason I find it hard to understand is that I can't find any news media yet reporting on this or increasing other destructive taxpayer subsidies, including for offshoring.
The Corporate Interest Deduction
written by John Glover, February 27, 2014 6:35
I understand your concern about the incentives PE investors have to lever up companies. On the other hand,
The Corporate Interest Deduction
written by John Glover, February 27, 2014 6:41
I understand your concern about the incentives PE investors have to lever up companies. On the other hand, a major incentive for doing this was the double tax on corporate income. The double tax is reduced to the extent corporate earnings are paid out as interest rather than dividends.

The double tax is also one justification for taxing dividends and capital gains at reduced rates.

I have always felt it better to address this problem by permitting corporations to deduct dividends distributed to shareholders.

Would this have the effect of reducing corporate tax revenues? Most assuredly. But the tax reduction is offset by an equal increase in the tax paid at the shareholder level.

I would gladly trade the deduction for taxing capital gains and dividends at ordinary income rates. And it would eliminate one incentive for levering up corporate businesses with debt.

Think Outside the Box
written by Steve Lightner, February 28, 2014 9:30
I am wondering why we are gaming the existing complicated mess and calling it reform? Why not tax consumption like most other countries and greatly simplify any tax on income to account for the disparities?
Corporate taxation and dividends
written by John Wright, February 28, 2014 11:42
I'm concerned that the USA will end up with a tax system that provides the benefits of incorporation (strict limited liability) at no cost to the shareholders.

Limited liability is certainly valuable to shareholders, so allowing corporations to escape taxes at the corporate level or at the individual level invites problems.

For example, a corporation could be formed to exploit a very damaging to the environment process that was very profitable in the short term. The short term profits could be quickly remitted to the shareholders but the subsequent environmental costs would be bourne by the general population.

If dividends were to become a deductible expense for a corporation then this argues for a HIGHER tax on them at the personal level than the regular income rate to price in the valuable limited liability the shareholder receives.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.