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Cheater Economics

by Brent Blackwelder

Cheaters are lurking in the U.S. economy, corrupting what should be an honest game of production, commerce, and trade. “Cheater economics” refers to the corporate welfare system in which corporations are given special tax subsidies and granted access to loopholes for avoiding tax payments. Cheater economics drains away needed tax revenues, leaving governments with the lose-lose choice of running up deficits or reducing services, or both. Often this means cutbacks in environmental, health, and safety protections. Thanks in no small part to the cheaters, the debate on public finance in the United States has shifted to deficits and the need for cuts. To those seeking funds for worthwhile programs, the answer is, “Sorry, we’re broke!”

We must reframe the debate if we wish to eliminate corporate abuses and get serious about establishing a sustainable, steady state economy. And we should start by getting rid of the cheaters.

Some examples of cheater economics are blatant, such as welfare handouts to polluters. It’s bad enough that corporations are allowed to externalize the high costs of their polluting activities, but what’s worse is that taxpayer funds flow to dirty industries (e.g., oil and nuclear reactor companies) in the form of direct handouts and tax loopholes.

Other examples of cheater economics, however, are more subtle. One of the less well-known rip-offs, which benefits the top 1% of income earners, is a taxpayer subsidy for short-term speculation in derivatives. Traders, who can buy and sell complex derivatives in a matter of minutes, are allowed to claim a large portion of the resulting income not as a short-term capital gain, but as a long-term gain (which is taxed at a lower rate). Fortunately, the Senate is looking into this rip-off, and Senator Carl Levin (Democrat-Michigan) has introduced legislation to shut it down.

Republicans and Democrats alike have helped set the stage for cheater economics through financial deregulation. Today’s Republican leadership continues to push for deregulation, but prominent Democrats, going back to President Clinton’s Treasury Secretary Robert Rubin, have also been prime drivers of financial deregulation.

President Obama won the election in 2008 just as the financial system collapsed in response to the deregulatory extravaganza promoted by both Republicans and Democrats. Those that destroyed the financial regulatory framework by repealing effective laws, such as the Glass-Steagall Act of the 1930s, brought on the devastating subprime collapse.

But Obama, as a new President with tremendous support, failed to seize the initiative in 2009. Instead the aggressive right wing brilliantly framed the debate over the size of government, the tax code, and unemployment. Thus the Republican leadership established a strong message in favor of: 1) cutting government spending as the way to deal with the deficit, 2) abolishing EPA’s environmental regulations as the way to relieve unemployment, and 3) maintaining low taxes on the wealthiest 1%, because raising taxes is never the solution.

And now there’s another looming setback to efforts aimed at reining in the cheaters. The IRS, the tax collection arm of government, is being cut, which will seriously limit the agency’s reach when it comes to tracking tax dodgers and overseeing the collection of legitimate tax payments.

The election year offers a prime opportunity to push back against cheater economics by reframing the debate. Let’s start asking who is hijacking the revenue. We are not broke. Simply closing the numerous tax loopholes would bring in more than the $1.2 trillion the Republican leadership has been demanding in budget cuts over the next decade.

Annie Leonard, the creator of the popular Story of Stuff video, is leading the charge to reframe the debate. Her new video, The Story of Broke, calls for a shift in government spending to invest in renewable energy and other industries that can provide jobs and a healthy environment. Another movie, We’re not Broke, is also helping to change the message. This new film, backed by the Tax Justice Network, tells the story of how corporations are dodging taxes and how seven fed-up citizens are working to make the corporations pay their fair share.

Another way to reframe the debate is to showcase the benefits of environmental regulations. A review of the scientific literature on the causes of job loss shows that environmental compliance costs are small. Only among a handful of the big polluting industries are the costs greater than 2%. Furthermore, the health benefits of environmental regulation are enormous.

The U.S. Bureau of Labor Statistics notes that safety and environmental regulations are responsible for only 0.1% of job losses. Frank Ackerman’s Poisoned for Pennies provides more details on this story. Despite the facts, various Presidential candidates and the Congressional Republican leadership persist in attributing the loss of jobs to environmental regulations and call for the elimination of the EPA.

So the question to both Republican and Democratic candidates this year should not be, “What are you going to cut or deregulate?” The question should be, “Why aren’t you getting rid of cheater economics?” Now is the time to demand the honest economy we all deserve.

The New Congressional Debt Panel: An Opportunity for an Essential Economic Debate

by Brent Blackwelder

The debt ceiling debacle was temporarily resolved in early August with a deal that included the creation of a 12-member Congressional debt panel (officially labeled the Joint Select Committee on Deficit Reduction).  This panel is charged with producing recommendations by this November to reduce federal budget deficits by at least $1.5 trillion over 10 years.

The Congressional debt panel will be under huge pressure from the corporate-driven Tea Party to limit its consideration only to cuts in federal government spending to achieve deficit reduction. This means average Americans, the poor, and minorities are the ones who will lose important programs designed for their benefit, while the tax giveaways for transnational corporations will continue. This is a recipe for social upheaval.

Some progressives argue that this panel of six Republicans and six Democrats, along with a President who cannot drive a hard bargain, guarantees gridlock and mounting frustration; however, now is a teachable moment for steady staters and other reformers to get on the offensive and present a larger economic vision. Those concerned with a sustainable economy should seize this opportunity to demand meaningful changes, such as basic reforms of the Tax Code.  But make no mistake — it will be a big fight.  The corporate-run Tea Party is intent on forcing the Republican Party to resist increases in anyone’s taxes, especially those of the well-to-do.

Three revenue changes are urgently needed: (1) cutting government handouts to polluters; (2) instituting revenue-raising measures that move us toward sustainability, such as a carbon tax and a transactions tax on international currency trading, and (3) cracking down on tax dodgers and offshore tax havens, which cost the Treasury an estimated $100 billion a year and which undermine the ability of governments to function.

Cutting Polluter Subsidies

Both state and federal tax codes provide enormous subsidies to polluters, thereby sending the wrong ecological price signal to the consumer. After reviewing more than $100 billion in subsidies to old energy technologies, Michelle Chan, director of international programs at Friends of the Earth, notes: “We are not going to get past reliance on yesterday’s technologies if we continue to subsidize them as if they were brand new.” But a bill in the Senate this spring to cut $20 billion in oil and gas subsidies was vigorously opposed by oil companies like Conoco Phillips who labeled the legislation “un-American.” Since when did subsidies to bloated corporations become the definition of “American?”

Fossil fuel barons, like the Koch brothers who underwrite the Tea Party, understand the enormous potential of solar, wind, geothermal, and conservation efforts to undermine their polluting industries. Thus, they seek to portray the removal of these special fossil fuel subsidies as a “tax increase.” Such flim-flam must be exposed.

Raising Money through Carbon Prices and Fees on Currency Transactions

Putting a price on carbon through a carbon tax or a fuel tax, could provide major revenue. The Carbon Tax Center provides details on such taxes. In addition to fundraising potential, a strong carbon price signal would decrease pollution from fossil fuel usage.

Two huge new revenue raisers could come from the financial sector and involve modest surcharges on groups that not only could readily pay them, but also richly deserve to pay them: major banks and their superrich, often tax-dodging global corporate and individual clients (James Henry and I have suggested these measures before).

The first is a version of the Tobin tax that would apply to wholesale foreign exchange transactions (not to retail customers). Given the astonishing $4 trillion per day of such transactions, a tax of less than a dime per $1,000 of transactions would yield at least $50 billion per year. A similar low marginal tax rate on all international financial transactions, including stocks, bonds, options, and derivatives, could readily collect at least twice that amount.

The second new revenue stream is an “anonymous wealth” tax: a modest 0.5% annual withholding tax on the estimated $15 to $22 trillion of liquid private financial assets — bank deposits, money-market funds, mutual funds, public securities, and precious metals — now sitting, almost entirely untaxed, in anonymous offshore accounts, trusts, and foundations.

This tax could raise between $25 billion to $50 billion per year. Such a tax is easy administratively because these “private banking” assets are heavily concentrated in the hands of a small number of leading banks and the largest recipients of “too big to fail” assistance.

Cracking Down on Tax Dodgers and Closing Loopholes

The unwillingness of Republicans to look at revenues lost as a result of tax dodging is astonishing since the $100 billion they sought to cut is the figure estimated to be lost as a result of offshore tax havens. Fortunately Senator Levin has introduced legislation (endorsed by the Tax Justice Network) to close tax loopholes.

Many objectionable loopholes could be closed and thereby yield revenue. For example, obscenely wealthy hedge fund managers pay a lower rate on their income than regular wage earners.

Rallying for a Just Cause

Now is the time to put grassroots pressure on the media, especially in the states and districts of the 12 Senators and Representatives on the debt panel. Let’s seize the offensive and move the discussion of tax code changes under the framework of responsibility.  Below are the members of the panel, in case you’re feeling motivated to start a conversation.

Democratic Senators: Patty Murray (Washington), Max Baucus (Montana), and John Kerry (Massachusetts).
Republican Senators: Jon Kyl (Arizona), Rob Portman (Ohio), and Patrick Toomey (Pennsylvania).

Democratic Representatives: James Clyburn (South Carolina), Xavier Becerra (California), and Chris Van Hollen (Maryland).
Republican Representatives: Jeb Hensarling (Texas), Dave Camp (Michigan), and Fred Upton (Michigan).