One Way To Reform Tax Code

While everyone agrees we need to reform the tax code, that's about where the agreement stops.


Since it's likely that rates will not be raised beyond the recent  limited expiration of the Bush tax cuts, , the new mantra is closing loopholes and tax breaks.

 Again while everyone agrees we should close loopholes, doing so mean different things to different people.

For liberals, tax reform is code of higher taxes, mostly for those they consider to be rich. They want more revenue to grow government , combat income inequality and maybe reduce the deficit a bit.

For conservatives, it's broadening the base to lower the rates. However, the GOP wants the reforms to be revenue neutral because they don't want to grow government , and don't believe the new revenue would be used to reduce the deficit and the debt.

So what can be done that isn't actually harmful to the economy?  My guess is plenty, but we need "cracker jack" high powered corporate tax lawyers to tell us. These guys spend their lives figuring out how companies and the wealthy can minimize their tax bill. Who better to tell us what those mostly tax saving driven provisions are and how to eliminate them ?

I'm not talking about "loop holes" for home mortgage interest, charitable contributions , employer health insurance contribution, and state and local taxes. Those effect relatively ordinary people, and can have very adverse public interest consequences.

I'm talking about all the exotic stuff that only big time tax lawyers know about, but which could generate billions of dollars of revenue. So much of what businesses and wealthy people do is  tax driven. Let's just stop , or at least rein in, all of that .

Billions and billions of dollars have been saved by skilled tax lawyers for their corporate and wealthy clients. Who better to figure how that money can be freed up for the government, without curtailing vital public interests.

Example #1 of course is the treatment of carried interests as capital gains rather than ordinary income. But there are lots more examples and I'm sure they add up to big big dollars.

Even a regular real estate lawyer like me can come up with at least one big example . Eliminate the so called 1031 like kind exchange in connection with sales of property. Structuring sales in compliance with  Section 1031 of the Code ,  results in the deferral of millions and millions of dollars in taxes. I cannot think of any significant public purposes that arises from these " like kind " exchanges. People don't really exchange things much these days , and this is just primarily used a tax deferral technique.

Another easy one is the step up in basis upon death. Why can't the basis just carry over so taxes are not lost forever?

Just think what a group of high powered tax lawyers could come up with.

Those tax structures may be legal, but most don't seem to have any compelling public purpose beyond saving taxes. If that truly is the only reason, then eliminate it. Yes, I know that already is the law, but all too often the spirit of the law is sacrificed to the letter of the law. This is an area where those tax experts can really help tightened things.

Let these lawyers come up with their ideas before the politicians and special interest group get involved.

I know I'm way beyond my depth here , so I'd like to hear what more knowledgeable people think.

Eric

Generational Mobility in the USA

The current concern among many Americans is that it is no longer true that every generation does better than the one before. That no doubt is a valid concern.


However let's exam the context of this proposition a little further.

Using my family as an example, of those first generation Americans, only one of six of my mother, aunt and uncles went to college. I'm sure that many other Americans of my generation have similar experiences.

On the other hand, most of my cousins have gone to college; consequently it wasn't too difficult to financially do better than our parents. That created a lot of social/economic mobility.

Said another way, most of our kids' parents went to college; unlike the prior generation. As such it's not surprising that while our kids too have gone to college, some may not surpass their parents financially.

This generational change among families of  relatively recent immigrant status, drive a good deal of this phenomenon, I suspect.

I throw this out there once again in my role as a contrarian observer, even though I too recognize the problems our kids face.

Eric

Shrinking Middle Class - Part 2

This is a follow up regarding my post on the Shrinking Middle Class- Two Directions.


Here's a relevant quote from a Pew Research Survey:

According to the report, released Wednesday, the middle-income tier of Americans included 51 percent of all adults in 2011, down from 61 percent in 1971. It said middle-income Americans had moved into economic tiers both above and below the middle, "with slightly more moving into the upper tier."

As you may recall, my point was that the public is not aware that part of the shrinkage in the middle class is in two directions;  not just down as we are lead to believe by the conventional narrative. More than half went up and are no longer in the middle class.

We still have a problem, but it's  one of a growing division of "haves and have nots" , as opposed to the 1%-99% narrative.

Why can't we be told this by the media and our politicians?

Eric

Mortgage Foreclosure Abuse Proceeds

In my view lenders are not the only mortgage foreclosure abusers. The public has not been made aware that significant  mortgage foreclosure abuses have been perpetrated by borrowers. Many defaulting borrowers have been living in their homes (often having not put much money down in the first place) rent free for months and even years. In essence, because of the delays occasioned by "messed up" foreclosure actions or otherwise, and just the long delays in judicial foreclosure states, many borrowers have already actually benefited from this crisis.


I understand the need to discipline the lenders for shoddy, improper, and even dishonest, foreclosure processing, but if I were the judge I'd ask the complaining borrowers two questions--

Did you get the money? Did you pay it back?

According to an article in the New York Times, a Florida foreclosure defense attorney said he had basically three types of borrower clients:


1. Those who lost jobs or had medical problems and through no fault of their own and are unable to pay. Clearly the kind of borrowers who should be given loan modifications.

2. Those who can pay but don't . This happens usually where the value of the home  is currently less than the amount of the mortgage; otherwise known as "underwater". They are just staying put "rent free" for as long as they can hold out, often with an attorney's help. Afterward when the foreclosure is final, which is usually months and even years, they will just find an apartment to rent.

3. Those who could pay but won't, and in fact have rented out the homes. They are keeping the rent and still  not paying the mortgage!   Aggressive lawyering in those situations can delay the foreclosure for a long time. Hopefully this is an aberrant situation.

Even in states that allow for personal deficiency judgments after the foreclosure, the banks have not gone after borrowers for loan deficiencies. This is typical even where borrowers have substantial assets. By the way, there may be a shareholder suit somewhere out there for the failure of the banks to go after those who can pay.

The Times article said that this phenomenon of living in homes rent free has acted as a kind of "silver lining" in the financial crisis, creating  an  economic boost to the economy that had not been reported.

I believe that many lenders and their servicers acted improperly and should be heavily fined for not following proper legal procedures. The lenders, attorneys and the courts, got overwhelmed with loan defaults when the economy collapsed, and, while inexcusable, that was a big factor with regards to the shoddy foreclosure processing.

However, I don't see why borrowers should get anything, unless of course they can show actual damage.

I guess the good news is that the various multi-billion dollar settlements with the banks are more of a private sector economic stimulus, and in that sense maybe helpful for the recovery. Kind of a reverse TARP, but one that doesn't get repaid at a profit like the one the banks paid!

However, who gets the money and for what?

It's going to be like hitting the lottery for some borrowers (worthy or otherwise), compliments of the banks. The Times is already complaining that too much money may go to higher income borrowers. Excuse me, but isn't that an oxymoron? How do high income borrower even need help of this kind?

The real question is, were borrowers actually damaged by "robo" signings and other shoddy practices?

Did anyone lose their home who were paying their mortgage payments? I haven't heard about them, and believe me we would have.

Listen, I'm not saying that any borrowers wanted to default on their loans. But many who took those subprime  NINJA loan weren't completely innocent either. They did walk out of the bank with a lot of money, which they haven't paid back.

The whole economy crashed, lead by the collapse of the housing market. Maybe these lawsuits regarding improper foreclosure practices are just a proxy for  punishing banks for  having made subprime loans in the first place.

 The banks should be punished for improper foreclosure practices , but the money should be better spent and not go those who may not have been  damaged, and may even have been abusers of the foreclosure process themselves.

I have a better solution. As to what to do with the many billions of dollars of settlement proceeds from the banks, rather than giving it to borrowers (all of whom clearly defaulted on their loans, and who may or may not have suffered damages as a result of lenders' enforcement efforts), why don't we give the money to the poor, feed the hungry, shelter the homeless, educate our children or even pay down the debt and reduce the deficit?


Eric

What is a Bailout?

What is a bailout?


For example, AIG and GM. What does it mean that AIG and GM got bailed out?  Shareholders got wiped out.  All of the senior executives got fired. Creditors lost money (certainly in GM). Isn't that plenty of moral hazard?

What's left of AIG and GM beyond the name and the business that continues to operate with the jobs of  workers below senior management?  Assuming the business had intrinsic value and the shareholders got wiped out  and senior management got fired, what is the basis of complaining about bailing out "fat cats"?

I recently read a piece which said:

"A bailout (in my book) means the shareholders benefited from the government action. I don't see any shareholders of AIG and GM saved, I see them obliterated. As such I disagree with the term bailout and prefer restructure."

I dwell on this issue because I think it is important that people know the truth of what a bailout means so if needed in the future politicians' and peoples' judgment will not be distorted by the demonized use of the term.

Eric

Update

My Favorite Holiday

Thanksgiving is my favorite holiday. Why?  Because it  is the only spiritual, family based, holiday which emphasizes universal values and principles that are not based on any religion.

All Americans celebrate Thanksgiving.

 Even though we also all celebrate the 4th of July and New Years,  they don't  have the spirituality of Thanksgiving;  rather those holidays  are more celebratory  than reflective. Our other major holidays are either  religious based or more of an extra day off from work or school, rather than a real focus on values and principles.

The name says it all. We give thanks, and we do it with family and friends, without the need of religion, presents or  fireworks .

Now, I'm sure turkeys would have another point of view.

Happy Thanksgiving,

Eric

Reality Check

We keep hearing and reading everyday from our politicians and the media that we are facing unprecedented problems in this country and that things are worse now than they have ever been. In short these are the worse of times for the United States. Given the drumbeat of gloom and doom, we start to believe it.


Nonsense. Let's put things in perspective.

1929- 1939-- the Great Depression, massive unemployment , dust bowls, runs on the banks, Hoovervilles, breadlines, labor union clashes,etc.

1940-43 -- Nazi Germany marching through Europe and advancing on Leningrad, Britain under siege, Pearl Harbor and Japan sweeping through the Pacific. We were losing the war and many thousands of our men were dying.

The 1950's -- The Korean War and the expanding Communist Soviet Union and it's nuclear threat ( remember those drills hiding under school desk), culminating with the Cuban Missile Crisis in 1961. McCarthyism and its fall out.

Racism and bigotry were rampant. Eventually strife arose from the Civil Rights Movement in the 1960s and beyond , including the riots after MLK's assassination.

The Viet Nam War, with so many killed and wounded, and massive demonstrations, protests and civil disobedience in the 1960's and early 70's. The country was torn apart.

Remember all the years when we constantly lamented Urban Decay , the Rust Belt and the loss of our Farm Economy. Don't forget the era of Stagflaion and long gas lines from the Arab Oil Embargo . The Savings and Loan Crisis that we were told would cripple our economy for generations .

Our cities were crumbling , factories were closing and farmers couldn't make a decent living. The "inner cities " were dying.

Women and minorities did not have the rights and opportunities they have today.

We had some very bad recessions in the mid 1970s and early 1980s and 1990s. The stock market crashed in 1987. We had  the bursting of the DotCom bubble in 2001, with the sharp economic down turn that followed. Of course let's not forget 9/11.

Remember that in the 50s the top tax rate exceeded 70% and has been essentially falling since to where we are at today.

If we honestly examine it, the "good old days" weren't all that great.

Our current problems , while very serious, don't compare to some of the problems we have  dealt with in the past.  Maybe that is why we have to amplify the problems we  have today.

Of course the unemployment rate is a terrible problem, and our debt and deficit are very serious problems that have to be addressed.  Foreclosures and housing prices are dreadful after the sub prime lending crisis set off the housing collapse which lead to the financial melt down and resulting Great Recession.

However inflation and interest rates are low.

We are in the painful , but ultimately beneficial, process of de-leveraging our debt levels.

Those who have jobs are doing reasonably well, and are now feeling less worried about losing them.
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While home values have plunged most people are secure in their housing situation and the market is finally recovering .

The stock market , where so many Americans ( at least 50%) have their retirement accounts and the like, has come back strongly from it's lows and the main market problems today appear to be from Europe and with our politicians.

Our corporations are operating at very profitable levels and basically are awaiting increased demand ( and the election) to justify new hiring. Reportedly they are sitting on a mountain of cash but need to have confidence in the economy to invest it.

Notwithstanding Standard and Poor's, the world believes that US Treasuries are still the safest investment in the world. The only threat to our credit rating is our Congress.

Our farm economy is so strong that it should be embarrassing to them to still be getting large government farm subsidies.

The wars we are involved in are winding down and are being fought by volunteers who, for a variety of reasons, have chosen to be in the military. Therefore the rest of us really haven't had to sacrifice to fight these far off wars. The risk of a terrorist attack is real but sadly it is the nature of world we live in.

The one thing that really is broken, and is worse than our past,  is our political process.

Our politicians, abetted by the pundits, have created a toxic atmosphere over things that in reality can be relatively easily dealt with by people of good will and reason. For example, Simpson Bowles would do the job on the deficit and the debt, and relatively painlessly.

Why hasn't either party embraced it? The so called Gang of Six are on the right track but partisans on both sides of the aisle block compromise at every turn.

Since our country's strengths are so extensive and our assets are so strong , we can do the things that need to be done, if the political will is there.

We can afford to raise revenue. There certainly are areas where spending can and should be cut significantly. Meaningful adjustments to entitlements can be made in a relatively minor and thoughtful way which would have a major impact on bringing down the debt and the deficit.

Once a program which includes these things is developed and implemented, confidence in our political process will be restored and the economy will start to grow again and finish the job of solving our debt and deficit problems; as occurred in the 1990s when economic prosperity generated increased tax revenues from increased incomes and profits.

We are lucky our problem are so solvable -- think Greece and other countries in Europe .

However, there are too many politicians and pundits who don't want to solve our problems . No , they just want to win elections to gain or retain power.

When will we all wake up to the fact that they care more about winning elections , with all the spoils that provides, than what is in the best interest of the country.

Maybe that has always been true, and is just a part of human nature, but it's so much more apparent these days.

Shared sacrifice through political consensus is the answer. Compared to what we have had to do in the past, it shouldn't be all that hard.

Eric

Update : 2015

Housing prices have largely recovered; foreclosures mostly over.
The stock market remains strong.
Unemployment  at 5.5%; millions of new jobs created since date of this original post.
Inflation still tame
Deficit has been cut in half.
US economy leads the world. Dollar strong and oil prices low.
Yes, we still have some serious problems, but to hear the politicians and media ( from all sides) things have never been worse in this country.
How crazy is that. Why must we always beat ourselves up?