ataxingmatter

Taxes to support public universities

When you think about the various public goods that taxes support, certainly public colleges and universities are high on the list.  The availability of higher education opportunities at great public universities was one of the drivers of economic growth in the post-WW II era--through the GI bill , through direct subsidies from state coffers, and through indirect subsidies through federal funding for basic research.  Today more than ever it is clear that opportunities for education are important to the ability of individuals to climb out of poverty or near-poverty and become productive members of society.  Public education in particular is important to this endeavor, since private institutions have tended to have higher tuition.

But these days, it is becoming harder for public institutions to offer the kind of education that they have been known for, because state support has declined to very low levels.  Whereas in the past state schools got the large majority of their financing from the state and were able to keep tuition levels low, today the typical state school may receive no more than 30% of its funding from the state, relying on private fundraising and tuition, in addition to federal and private funding for research, to bridge the gap.

California is now at a crisis decision point regarding its public universities--schools that have stood among the most elite in the nation, yet because of the state support permitting Californians (and outstaters) to get superb educations at reasonable cost.  Now the state university system has cut class sizes and course offerings while increasing tuition, and it could get even worse if Californians aren't willing to tax themselves to support this important public good.  See California Cuts Threaten the Status of Universities, New York Times (June 2, 2012), available here http://www.nytimes.com/2012/06/02/us/california-cuts-threaten-the-status-of-universities.html (the link function is temporarily missing from my typepad account).  California universities used to have extremely low tuition, but cuts to state funding have meant that this year revenues from tuition exceed revenues provided by the state (a position many state universities reached years ago).  As a result, libraries, student services (like academic advising), and student health care have been shortchanged already. 

A modest tax increase could make a huge difference.  But the constant drumbeat about cutting taxes and spending has invigorated the taxpayer groups that don't want to fund higher education until they are personally convinced that no money is being wasted.  That's a foolish standard:  there's no consensus on what amounts to "waste" in higher education spending, and even if there are still some things that could (and maybe even should) be cut--such as excessive administrative salaries, those things generally won't be enough to forestall the real degradation in educational opportunity if the short-term thinking leading to year-after-year of cuts continues.  The suggestion in the article (by the President of the Howard Jarvis Taxpayer Association) that college funding by the state should only extend to programs that directly benefit the states shows the poverty of understanding that such groups have for the value added by education to a state. 

One in 189 of those with $200,000 or more in AGI paid no federal taxes in 2009

[edited 5/30 to correct "one in four" goof]

 The IRS recently released another "statistics of income" report.  This one has news that should make most ordinary Americans think twice about the GOP agenda of reducing taxes for the rich while cutting back on all kinds of programs that serve ordinary Americans--the fact that a large percentage of the upper crust--one out of every 189 Americans with $200,000 or more in income --pay no federal income taxes whatsoever.  See Rubin, IRS Finds One in 189 High Earners Paid No U.S. Taxes in 2009, Bloomberg.com (May 29, 2012).

  How does someone with $200,000 or more in income pay no taxes, when ordinary folk with jobs who make $50,000 to $75,000 pay 15% to 25% of their income in taxes? 

• As I've often discussed here (see items under charitable contribution deduction), rich folk can easily afford to give away more to charity and they get a tax bonus that is much more than that available to poorer folk when they do so.  They get an especially big break if what they give away is appreciated stock that they bought a while ago--and rich folks own most of these financial assets, so they are the ones that get almost exclusive enjoyment of this lucrative loophole:  they get to deduct the full value of the stock they donate, without having ever paid taxes on the appreciation.  That's one of the boondoggles in the Code that Congress can and should get rid of, no matter what else it does about taxes. 
• Another way rich folk pay less in taxes is by ensuring that the income they earn is of a type that isn't subject to tax.  Big CEOs generally have rich pension plans and other forms of deferred tax compensation that facilitate lowering their tax bills.  Rich folk are the buyers of municipal bonds, which again enjoy a specific tax break in section 103 of the Code that excludes the interest income from the owners' tax returns.  This is supposed to help municipalities, since the tax break gives the wealthy an incentive to buy the bonds even though they pay lower rates, since all the interest is tax free.  But it is a costly break that provides an advantage only for the rich.  Wouldn't it be better to eliminate it and tax wealthy people on all of their interest income at ordinary income rates?  Maybe the tax money could also fund programs for important municipal projects--like intracity rail transportation in Detroit, a much needed idea whose time has come.....
• A third way that rich people avoid taxes is by having so many deductions--high-end medical "equipment" (like swimming pools for arthritic patients), lots of interest on mortgages on high-end homes, and other deductions of special value to those who would otherwise pay tax at a higher rate.

 As the Rubin article notes, the IRS announced that for 2009 there were 10,080 households with "adjusted gross income" of $200,000 or more who paid no US or foreign income taxes. Adjusted gross income is not economic income--AGI does not reflect items that are excluded from the calculation of income for tax purposes and is reduced by certain "above the line" deductions that are especially beneficial to the wealthy. "Using an expanded concept of income that includes some nontaxable items and looking only at U.S. income taxes, there were 35,061 households, or 0.88 percent, that paid nothing."  Id.

The Alternative Minimum Tax was initially enacted to deal with the general unfairness of having extraordinarily well-to-do people be able to avoid tax entirely.  As it was modified over time, it came to function as a way to ensure that those who accumulate lots of different deductions nonetheless pay tax, by treating some of those deductions as unqualified preferences for AMT purposes.  But the AMT has lost a lot of its punch as Congress has eviscerated its provisions, such as the limitation on foreign tax credits.   This is one of the reasons that many progressives have supported two things--elimination of the preferential rate for capital gains (a type of income especially enjoyed by the ultra rich) and adoption of a new type of minimum tax on some high level of gross income (the Buffett Rule).  This new information about the number of rich people who end up paying nothing in federal income taxes should result in more people telling Congress that it's time to pass these two proposals.

Business or Hobby Losses? GOP spouse Todd Palin's snowmobile racing; GOP spouse Ann Romney's dressage horse ownership

Remember when Sarah Palin was the GOP vice presidential candidate and we finally got to see two tax returns (2006 and 2007)?  They showed that Todd Palin claimed significant losses from his snowmobile racing activity, which the Palin's claimed as a business.  Since various publicity items made it look more like a hobby, some tax experts expressed an interest in seeing more past returns.  Did he really have a business or was this a hobby, for which losses from the hobby activity in excess of income from the hobby activity are nondeductible under the "basketing"rules of section 183?  The crux of the matter is distinguishing a business activity from a hobby, and one of the most significant factors in doing that under the relevant regulations is whether there is income in a significant number of years (under the regs, 3 out of 5 years of income suggest a business, whereas only rare years of income suggest a hobby).  We didn't see enough of the Palins'  returns to reach a firm conclusion during the campaign, nor is there any way to know whether the IRS audited the returns and reviewed those issues.  There are other factors that suggest a business, including the fact that the activity is undertaken for profitmaking.  Todd Palin's activities seemed more for pleasure and PR purposes, from the coverage and friends' comments at the time, but of course that would require a fact-intensive investigation to be sure.   For  contemporaneous discussion of this issue, see Rangel's Villa; Palin's Home Away from Home (A Taxing Matter, 2008); Sarah Palin's Tax REturns Part II (A Taxing Matter, 2008); Bryan Camp, A Brief Analysis of Governor Palin's Tax Returns for 2006 and 2007, TaxBlog (originally published 2008 but republished on the blog Feb. 12, 2012).

I [Bryan Camp] have no idea what the answer is, but here are some data points that lead me to conclude that snow-machine racing is not Todd Palin’s business but is his hobby. First, I cannot find any websites for “professional“ snow machine racers. Of course, I might have just missed it. But if there is no professional association, that suggests that there is not enough money in the sport for folks to do it as a business. Second, I cannot find any references to Todd Palin being a “professional“ racer that predate Governor Palin’s selection as McCain’s VP running mate. For example, here is a story about his crash in the Iron Dog, but does not suggest that anyone thinks he is a professional racer. http://www.adn.com/news/alaska/story/316352.html Again, I might just be a lousy researcher, however.

Third, and most importantly, what does Todd Palin say and do? The determination of whether the racing is a business is really about Todd Palin’s personal intent. Why does he do it? Love of sport or love of lucre? Some more clues may be found in the following interview he had on FOX News, available here: http://www.foxnews.com/story/0,2933,423102,00.html :

VAN SUSTEREN: I take it that you like where you lie. Look at this spectacular view. How long have you lived here?

PALIN: About six years. And we’re very fortunate to be here. And it is nice for the kids in the summertime. It’s a big playground in the wintertime. About five months out of the year, it’s a big playground, as well, where we snow machine and ice skate on the lake.  Id.

So why raise this old issue again?  Because Candidate Romney has been similarly stingy in the number of returns released. And the 2010 return shows a $77,000 loss from an activity that raises similar questions whether it is a business (for which a loss would be deductible) or a hobby.  See Trip Gabriel, In rarefied sport, a view of the Rommey's world, New York Times (May 26, 2012).

Here's the issue.  Mrs. Romney grew up riding horses and when she was diagnosed with multiple sclerosis, she took up riding dressage (a fancy demonstration of horse techniques with a rider in formal gear).  Dressage is a sport generally engaged in by the wealthy or by people who are "sponsored" by wealthy people.  The Romney's wealth meant that they could provide deep support to their chosen tutor and horse caretaker, Jan Ebeling, a dressage rider who runs a horse farm (the Acres) that is one of the Romney's many vacation spots.  The Romney's have provided loans to their friends/tutors the Ebelings.  Mrs. Romney is also a partner in a partnership with Amy Ebeling and another Romney friend that owns a star mount, Rafalca, used by Ebeling in his dressage competitions and hoped to be used in his try for the Summer Olympics.  These horses cost about $200,000 a year to own and maintain. The Romney's reported a $77,000 loss from the partnership owning Rafalca on their 2010 return.  As the Times reports, "sponsorship arrangements are not unusual in dressage, where riders who want to climb to the top look to wealthy backers." The question is, is the partnership really a business that is out to make a profit, or is it just a part of an expensive hobby for wealthy people like the Romneys that provides them an "in" to an elite sport?

The article describes Romney's activities as traveling with Ebeling to Europe to buy horses for herself and her tutor; boarding her horses at Ebeling's farm; spending time at the farm riding; engaging in amateur competitions; and supporting Ebeling's sporting efforts related to his objective of competing in the Olympics.  It doesn't sound like the partnership would have much hope of profits--Ebeling would have to make more than the cost of maintaining the horse annually in winnings from competitions, and he is apparently primarily engaged in training for the Olympics.  Certainly there is enough here to suggest the same sorts of questions that arose around Palin's tax returns--is this really a business or is it a hobby for which the loss shouldn't be deductible.  If  the Romneys would release more of their earlier tax returns as other presidential candidates have done (most release 10 years of returns), the question would be easily answered.  But without more, this looks like another one of those cases where the rich engage in pursuits unavailable to ordinary folk and then end up claiming a significant tax break for what appears to be a hobby.

The LA Times' earlier article on Romney and her relationship with the Ebelings provides more context but still doesn't answer the specific question about the partnership that owns Rafalca.  See Robin Rabcarian, On a Trail of Her Own, LA Times (May 22, 2012).  It suggests that Mrs. Romney's sponsorship of her dressage tutor is much more extensive than the partnership with Amy Eberling and the Romney friend that owns Jan Ebeling's star mount Rafalca.  According to the LA Times article, Mrs. Romney is a partner in the horse training and boarding farm itself and in another company (a foreign corporation!) that breeds and trains dressage horses.

For nearly 10 years, Romney has trained and ridden with Jan and Amy Ebeling, who own the Acres, an immaculate, Mediterranean-style ranch in Moorpark, about 45 miles northwest of downtown Los Angeles. Romney is a partner with the Ebelings in the Acres, and she and Amy Ebeling own Rob Rom Enterprises LLC, a foreign corporation registered in Delaware that buys and trains dressage horses.

Assuming that the Acres and the breeding company are indeed businesses, that still leaves questions about the partnership that owns Rafalca, questions that would be clarified by seeing more of Romney's earlier tax returns:  has that partnership actually made profits for a majority of the last 5 years?  is the primary objective of that partnership to make profits or to sponsor a friend in, and stay connected to, a beloved activity?  The costly nature of this elite sport suggests that any business profitmaking would be  in providing services (horses, boarding, training) for the wealthy people who can engage in it, not in owning and maintaining a horse used by someone who is training for the Olympics.

Dressage is not for the faint of wallet; it requires healthy outlays of cash for upkeep, training, transportation and veterinary care. It attracts some of the world's richest people -- the daughter of billionaire New York Mayor Michael R. Bloomberg competes. Yahoo co-founder Jerry Yang and his wife own dressage horses.  On a Trail of Her Own, LA Times (May 22, 2012). 

Curious about Feminist Tax Policy? Learn more at the Law & Society workshop, June 4

 Applying Feminist Principles to Tax, Benefit, and Budgetary Policies: An Economic Justice Workshop,  International Socio-Legal Feminisms (CRN 38) FemTax Working Group, June 4, 2012, at the International Law and Society Conference, Honolulu, Hawai’i

Coordinators:   Asa Gunnarsson (Umea, Sweden); Ann Mumford (Queen Mary, UK);  Paloma de Villota (Complutense, Madrid); Kathleen Lahey (Queen’s, Canada)  

Workshop Program

Kahili Suite (Kahila Tower), Hilton Hawaiian Village Waikiki Beach Hotel; 2005 Kalia Road, Honolulu

Another US District Court finds no rational basis for DOMA treatment of same sex couples

 In a case that will add weight to the likelihood that the Supreme Court will finally take a case to decide the constitutionality of the so-called "defense of marriage act" (DOMA), the U.S. district court for Northern California District concluded on May 24th that sections of DOMA and the internal revenue code that incorporate it (here section7702B(f), which excludes participants in same sex relationships from long-term care insurance coverage) violate the equal protection rights of same-sex couples and registered domestic partners and are therefore constitutionally invalid to the extent they exclude such state employees from enrollment in California's insurance program.  Dragovich v. United States, No. 4P10-cv-01565-CW (N.C. Cal 2012).

Because the Obama administration announced in 2011 that it had concluded that DOMA was unconstitutional and therefore it would no longer defend DOMA in court, the Bipartisan Legal Advisory Group of the United States House of Representatives (BLAG) argued in defense of the statute. 

 The judge concluded that BLAG failed to establish a rational relation of Section 3 of DOMA to a legitimate government interest and granted summary judgement regarding the plaintiffs' claim for access to CalPERS long-term care insurance program.

Other cases are also wending their way up the appeals ladder. 

In California,  a Ninth Circuit staff attorney employee proceeding for same-sex couple benefit coverage was decided in her favor by Chief Judge Kozcinski but the federal Office of Personnel Management ordered the insurer not to cover her.  She took her case to court, winning in the US district court for Northern California in a decision by Judge Jeffrey White.  The defendants appealed to the Ninth Circuit .  See, e.g., Golinski v. Office of Personnel Management  (N.D. Cal.)(order available on Lambda Legal); Karen Golinski Wins Health Care Benefits as Court Declares Defense of Marriage Act Unconstitutional, HuffingtonPost (Feb.  2012);  the amicus brief by Eagle Forum opposing an initial en banc hearing (Ninth Circuit, Apr. 30, 2012). 

In Boston, the First Circuit in April heard an appeal from two cases in which DOMA was also ruled unconstitutional by district court Judge Tauro.  See Appeals Court Hears Arguments on Gay Marriage Law, New York Times (April 4, 2012).  In one case, the judge concluded that DOMA compels states to discriminate--by denying funding if they don't-- against same sex couples who are permitted to marry under state law but whose marriage is not recognized for federal law purposes because of DOMA.  The other case focussed on the issue of federal discrimination in the provision of federal benefits like Social Security, in contravention of the equal protection clause. 

The fate of DOMA is likely ultimately to rest on the Supreme Court Justices and possibly on whether the Court applies "rational basis" or "heightened scrutiny" as the standard for consideration.  Gender discrimination has ordinarily been thought to require more than a mere "rational basis" justification.  Even the lower rational basis standard, however, should not be satisfied by DOMA: it is an arbitrary law put in place with the sole purpose of ensuring that the benefits of federal laws could not apply to one particular group of Americans--those who have formed same-sex couples.  A  purpose of discriminating among individuals based solely on their sexual orientation does not appear to be any kind of rational basis for a law.

I have always thought DOMA represented a regressive moment of legislative history and that it should be seen as violating the equal protection guarantee.  Marriage is something clearly defined by law and not something inherently defined by some external authority.  Hence, for a state to discriminate against its own citizens in denying them the benefits that accompany the legally sanctioned union is problematic.  The arguments of the religious right to the contrary are unfounded--the state can sanction marriage between any two individuals and the churches can dictate whatever additional limitations they choose as necessary to the church's religious doctrine. The rights of same sex couples to marry does nothing to hurt the rights of opposite sex couples or their marriages. People can avoid a church if they don't agree with its doctrine, but they can't so easily (in many cases not at all) avoid their state or nation.   I hope that the Supreme Court, when it eventually takes one or another of these cases, reaches the correct decision to eliminate this example of blatant invidious discrimination . 

Michigan State: GOP pushing tax cuts over education and other needs

Michigan is run by the Republican Party, and it looks like the state's government is set to continue policies that cut taxes for busineses and cut income taxes--all of which primarily benefits the better off--while drastically cutting back on things that the state should be funding, such as public higher education.

The first budget under Gov. Snyder gave business a tax cut o $1.8 billion by eliminating the Michigan Business Tax and replacing it with a corporate income tax that doesn't apply to most businesses.  The GOP dominated legislature and government coupled the tax cut for business with an increase in taxes on pensioners and a reduction in some personal tax credits and deductions, so that individuals will now pay $1.4 billion more in 2013 than in 2012.  Michigan has a flat individual income tax, which is scheduled to be cut from 4.35% to 4.25% next January.  The House speaker, Jase Bolger, wants to accelerate the cut, moving it up to July, which would cost the state about $96 million.  Typical taxpayers making $50,000 would see only $23 more in their pockets from that cut.

Meanwhile, the state is cutting its support for public  education.  Significant cuts were made to K-12 education and public colleges and universities are dealing with multiple years of cutbacks to support for higher education.  Part of the way that cutback has happened has been in making funding provided to universities one-time.  Money allocated in that way can't be used for anything permanent but only for gap filling, making it very hard for long-term planning necessary to support classes and research.  Wayne State University, located in Detroit and serving the southeast region and with many students who try to work and go to school and thus take longer than students from well-heeled middle class families, suffers particularly from that kind of funding.  It generally means more use of part-time faculty rather than hiring of new tenured faculty.

Now, you may be one of those people who think that's just fine.  There's been a lot of criticism of tenure lately, and many people who think tenured faculty don't really work hard.  But funny thing.  When Wayne did some studies of student success to try to determine what factors make a difference, it learned that students do best when they are taught by tenured faculty rather than adjuncts!  That's likely because tenured faculty are committed to the institution, are around more to deal with students beyond the classroom, and have an interest beyond just the subject matter of the class, bringing their research and scholarship into the classroom.

What if Michigan took the $96 million that Bolger wants not to collect and instead used it to fund public education and to build a state of the art surface rail system for the city of Detroit?  I'd gladly give up my tax cut for that, and I expect many another Detroiter would too.  The problem, of course, is that the rest of the state doesn't understand how important it is to help Detroit and to create modern public transportation systems.  In the long run, the entire state would benefit and it would be well worth the additional tax dollars.

But I'm not holding my breath.

EITC: Mulligan (economic theory) vs. Seto (empirical evidence)

TaxProf today noted the article in the New York Times about the EITC:  Casey Mulligan, Do Tax Credits Encourage Work? New York Times (   2012).  Mulligan, an econ prof at the University of Chicago (home, of course, to Milt Friedman's "free" market theories) noted that the EITC "could" discourage work.

The earned-income tax credit is often said to encourage work, but it may do just the opposite. ...

The chart below shows the credit’s schedules for the 2011 tax year as a function of annual earned income for a given family situation (other family situations have the same basic shape). The schedule shown illustrates [a] mountain-plateau pattern ... an increasing portion for the lowest incomes, a flat portion, a decreasing portion and then finally a flat portion of zero. 

... For the same reasons that the credit encourages more work among people who might otherwise earn close to zero during a year, it can also influence some people to work less — those with earnings at or slightly above the downward-sloping or “phase-out” portion of the schedule, where people lose about 20 cents of their credit for every additional dollar earned during a year. In other words, for households on the downward-sloping portion of the earned-income tax credit schedule, the credit acts as an extra 20% tax on the income they earn in that range. The work-encouraging potential of the credit occurs only on the upward-sloping portion. ...  [emphasis added]

Now, Mulligan surely knows that this theory about whether the credit encourages or discourages work is just that--a theory.  Much of the assumptions about when people will stop working and substitute leisure don't seem to hold up in practice, partly because there are so many other factors at work besides the rather simplistic assumptions in freshwater economics (such as the joy of working, status of work, self-esteem of work, etc.).  Nonetheless, Mulligan can't help adding another line that makes the overall comment suggest that he thinks the EITC will on the whole discourage work.

[I]t is more common for families to be on the part of the earned-income tax credit where it acts as a tax, rather than a reward to additional work. 

 

 Of course, when economists talk, policy makers often listen.  This is a good example of when they should say--huh?  and get a second opinion.  What we should care about as a tax policy matter--which, I remind you, is distinct from what we might care about purely as a question of economic "efficiency"--is whether the EITC will generally work to encourage those who otherwise have tended to be left out of the work force but should be in it and whether the potential negative effect at the drop-off would be likely to be genuinely detrimental to that group or rather impact groups for whom the difference may not matter so much.

 

Ted Seto, a fellow tax prof in sunny California, commented on the Tax Prof item to point out the important empirical evidence that the EITC is mostly working as we want it to. 

 For a useful summary of recent empirical work, see Nada Eissa & Hilary W. Hoynes, Behavioral Responses to Taxes: Lessons from the EITC and Labor Supply, published in 2006 by NBER...

"The overwhelming finding of the empirical literature is that EITC has been especially successful at encouraging the employment of single parents, especially mothers. There is little evidence, however, that the EITC has reduced the hours worked by those already in the labor force. The empirical literature on married women is somewhat smaller but again consistent in its findings. The studies show that the EITC leads to modest reductions in the employment and hours worked of married women."

The latter problem -- the one area identified in which the EITC does seem to have a negative effect on paid work -- is not an EITC problem at all. It's the same secondary worker problem Ed McCaffery has written about, (Taxation and the Family: A Fresh Look at Behavioral Gender Bias in the Code, 41 UCLA LAW REVIEW 983 (1993)), and it affects secondary workers up and down the income range.

 

Offers in Compromise made easier

The IRS has announced more flexible offer in compromise terms, in an effort to make it easier for financially distressed taxpayers to get a "fresh start" by erasing their tax liabilities, and may also result in less time taken for the process (2 years instead of 3-5 years).  See  IR-2012-53 (may 21, 2012).  See also Form 656-B, Offer in Compromise Booklet, and Form 656, Offer in Compromise and Interim Guidance Memorandum

The main changes include:

Revising the calculation for the taxpayer’s future income.

Allowing taxpayers to repay their student loans.

Allowing taxpayers to pay state and local delinquent taxes.

Expanding the Allowable Living Expense allowance category and amount

 The revision to calculations of future income are significant.  In the past, the Service attempted to look forward 4 years.  Now, if the liability will be paid within 2 years, the Service only looks one year ahead.  Further, permitting delinquent federal taxpayers to repay student loans and pay local and state taxes due seems a worthy step.  If there isn't enough money to pay all of the federal taxes, it makes sense to allow the taxpayer to pay local taxes due.  States and municipalities are still suffering from the recession, and this will be a small measure of benefit there as well as to the individual taxpayers.

Calculating the Cost of Bailouts

A recent New York Times includes a piece on the Treasury's study of the various bailouts or "rescues" of distressed financial and other institutions.  Gretchen Morgenson, Seeing Bailouts Through Rose-Colored Glasses, New York Times (May 19, 2012).

The Treasury study, The Financial Crisis Response--in charts (April 13, 2012), is  positive about the way that government handled the bailouts. 

Collectively, these programs --carried out by both a Republican and a Democratic administration--were effective in preventing the collapse of the financial system, in restarting economic growth, and in restoring access to credit and capital.  They were well-designed and carefully managed.  Because of this, we were able to limit the broader economic and financial damage.  Although this crisis was caused by a shock larger than that which caused the Great Depression, we were able to put out the financial fires at much lower cost and with much less overall economic damage than occurred during a broad mix of financial crises over the last few decades.

Reading that, one might conclude that everybody now is sitting fairly pretty, and that it was all done in a very upfront, fair and damage-free way.  That ignores the fact that the bank bailouts treated the banksters with kid gloves--letting managers continue to receive their customary overcompensation and allowing banks generally to continue their predatory practices even while the taxpayers were providing them extraordinarily low-cost financing with practically no strings attached.  Meanwhile, ordinary Americans--especially those in the lower half of the income distribution--suffered enormously.  Congress--at the behest of the banksters--refused to enact mortgage clawback provisions in bankruptcy, the one law that would have done wonders at saving families and neighborhoods from unprecedented deteroioration and blight.  

To be fair, the report does include a bevy of charts that attempt to show how the crisis played out for the banks, the economy in general, and ordinary Americans (unemployment, depressed home sales market, etc.).  But then the Treasury goes on to claim the following:

[T]he latest available estimates indicate the financial stability programs are likely to result in an overall positive financial return for taxpayers in terms of direct fiscal cost.  These estimates are based on gains already realized and on a range of different measures of cost and return for the remaining investments outstanding.  These estimates do not include the full impact of the crisis on our fiscal position.  And they do not include the cost of the tax cuts and the emergency spending programs passed by Congress. 

Now, it is good to know that at least the "direct fiscal cost" of the bailouts is likely to be positive.  But note the gaping hole between that amount and the overall true cost of the bailouts--the "impact of the crisis on our fiscal position" and "the cost of the tax cuts" and "the emergency spending programs."  Now, at least the emergency spending programs generated economic activity and made real differences for individual people a good number of whom one can assume weren't in the top 1%.  The tax cuts are a big cost item and one that may well not have had the benefits assumed, except for those that went to the lower and lower-middle income working classes (such as the payroll tax relief).   And the impact on our fiscal position is ongoing and still strongly felt, as we struggle to rebalance an economy that already consumed too much from outside and produced too little here at home.  So how much comfort can we take from the idea that the direct fiscal cost may be significantly less than some had initially expected it to be?

Here's where the Times story comes in. Morgenson notes that "As the battles over financial regulationrage in Washington, it’s crucial that American taxpayers understand the costs associated with rescuing behemoth institutions."  We cannot take wise action for or against reduction in size of banks or other issues unless we are dealing with full information about the crisis and its aftermath.  That won't be easy in the politicized environment in which the Obama administration understandably wants to showcase how its efforts have helped the economy and the GOP seens intent on a "my way or the highway" approach to governance that cares more about winning a race than about doing what's good for the people.

Morgenson reports on an interview with Edward Kane, Boston College finance professor and economist, who thinks that the public needs to see a more thorough cost-benefit analysis of the TARP and other expenditures.  Kane calls the analysis "deficient" (one might even say misleading) for counting as gains the interest income the Fed made from holding Treasuries (this is like money passed from mom to dad to put in the allowance jar for the kids--in other words, Treasury interest is paid by the US fisc to the Fed, and the Fed's profits are paid into the US fisc, so it's all the same pot).  But the bigger deal is a genuine evaluation of the opportunity cost of the subsidy provided to bailout recipients.

The programs provided enormous amounts of money at below-market terms for extended periods, he said. Had those guarantees been priced at their true market value — what a private investor would have charged to lend during those dire days — taxpayers should have received far higher returns. Morgenson, Seeing Bailouts Through Rose-Colored Glasses

Charles Calomaris, a Colombia Business School prof and NBER research associate who worked with Kane on the study, noted the cost-benefit concern.

“We are not saying that the benefits weren’t there,” Mr. Calomiris said. “We’re not saying that it wasn’t worthwhile to create these programs. Maybe it was, maybe it wasn’t. But it requires a fuller analysis of what the benefits were.” Morgenson, Seeing Bailouts Through Rose-Colored Glasses

Nurses Support Financial Transactions Tax

Perhaps the JPMorgan Chase debacle has caught enough attention to alter the debate.  JPMorgan of course claimed to be entering a type of hedge that would be permitted under the Dodd Frank reforms. ( Apparently there were hedges on overall portfolio positions, and then those hedges were themselves hedged writing credit default swaps.) The authors of the legislation beg to differ, noting that the statute was drafted to permit hedges of specific asset but not portfolio-wide heding practices that become almost indiscernible from speculative "bets" on the direction of markets.  Perhaps there will be one good result of the $2 billion plus and growing loss that JPMorgan encountered on its complex trades--regulators may finally quit paying so much attention to the banks' "trust our judgement" lobbies and start making it less possible for banks that get federal support to bet with other people's money in big ways that can cause systemic risk.   This seems to be a no-brainer--we need to more tightly regulate the activities of commercial banks and prevent them from gambling with huge bets that can swing the marketplace  and place the entire system in jeopardy.  That means banks will need to accept more staid profit scenarios--and the compensation for managers and traders should be downsized as well.  They made fortunes out of wrecking the economy.  They should be content with reasonable compensation when they do good jobs, and salary cuts--or being fired--when they don't.

Another action that might help to calm the too-reckless bankers and their desire for super-high profit margins would be to enact a financial transactions tax.  It seems that lots of GOP candidates and economists think sales taxes make sense for ordinary folk--from Herman Cain's 9-9-9 plan (that would eventually convert to a flat national sales tax) to the GOP push to cut income tax rates in states in favor of sales taxes.  But when it comes to a financial transactions tax, all of a sudden the same folks seem to change their minds, suggesting that such a tax on financial transactions would discourage investment in the capital markets and be bad for America. 

There are some singificant factors in favor of a financial transaction tax that would reap a few pennies from each transaction.  First, it would raise much needed money from a group that generally can afford the cost.  Second, it could act to discourage flash trading, where computer-run programs arbitrage the markets in a way that only those with the sophisticated programs can take advantage, leaving ordinary folk out in the cold.   Third, it could be one factor in returning everyone to more prudent approaches to investment--investing for the long term, rather than profiting from arbitraging tiny differences in multiple trades.

The National Nurses United organization has taken out a full page ad in the New York Times in favor of a financial transactions tax.  Here's part of the text:

"I pay a sales tax every time I make a purchase.  We all do--but not the financial services industry, the bankers who sunk [sic] our economy.  A financial transaction tax would cost banks and investment firms just pennies on the dollar for transactions such as stock trades, like a sales tax.  Those pennies would add up to create jobs and fund vital programs and services in this country--education, healthcare and rebuilting our deteriorating infrastructure.  The big banks will never miss this money, while the revenue generated will provide a better life for millions of Americans. "

Maybe the nurses are on to something.  But don't look for Congress to act on this anytime soon.