Blog on the Run: Reloaded

Friday, January 27, 2012 8:32 pm

How the game is rigged

Filed under: I want my money back. — Lex @ 8:32 pm
Tags: , , , ,

Economist Jared Bernstein of the Center for Budget and Policy Priorities explains:

One reason multi-millionaire investors like Gov. Romney face 15% tax rates is because they engage in corporate activities but avoid corporate taxes.  They do so by taking advantage of policy changes that have made it easier to pass capital gains through the corporation to their personal income, where, in the case of PE managers, they tap a double loophole.  First, capital gains are taxed at less than half the rate of normal income, and second, even though these gains are really earnings for the fund managers, they get to claim them as capital gains (this is the notorious “carried interest” loophole).

As my CBPP colleagues Chuck Marr and Brian Highsmith wrote here:

Although businesses operating through C corporations [standard corporations] are subject to corporate taxes, the capital income of non-incorporated businesses is “passed through” to the business owners.  These owners benefit from the same tax deductions and credits as do corporations, but are taxed only at the individual level.  Over the past half century, and particularly during the 1980s and 1990s, states and the federal government significantly expanded the legal benefits of pass-through entities.  These changes have made it easier for firms to operate through such legal structures as S corporations, partnerships, limited liability companies, and sole proprietorships — while also benefiting from limited liability and other provisions that formerly were available only to corporations.

As you see in the figure, the share of receipts passed through to non-incorporated business has almost tripled since 1980s, up from 13% to 35%.

Source: IRS, (h/t: BH)

Moreover, it’s a good example of what happens when you open up these loopholes.   The elasiticities attached to changes in tax rates are wildly exaggerated by conservatives and trickle downers who argue that the slightest increase will end the economy while any decrease will trigger boom times.  The evidence belies their view in terms of jobs, investments, and growth.

But when it comes to sheltering your income (e.g., passing through corporate income to the personal side to tap loopholes like carried interest), how you structure your investment vehicles, your preference for debt over equity financing (debt financing is very much favored by the tax code)—there you see very significant responses.

The question is, as posed above, does any of this add value—real value—to the economy beyond further enriching the rich?  It’s not a simple question and the answer is probably less obvious than it sounds.  There are unquestionably examples of PE firms that have taken over companies and discovered new efficiencies.

But neither is it a coincidence that the ascendency of this type of economic activity and the policies that support it have occurred during a period of sharply increasing inequality, weak job creation, and stagnant incomes for the middle class.

And Republicans think we need more of this, not less.

And don’t whine at me about “double taxation” (corporations paying income taxes, then investors having to pay taxes on dividends). If there weren’t huge benefits associated with being incorporated, not the least of them being the right to buy politicians without having to go to prison if what you do kills a lot of people, then businesses wouldn’t incorporate.

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