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Mon Apr 20, 2015 at 09:00 AM PDT

Wall Street's stealth tax break

by Gerald Scorse

A tax break that could be the biggest in America is essentially hidden from view. The break on stock market losses flies under the radar, unseen and uncounted, shifting up to 39.6 percent (the top marginal rate) of investment losses onto the U.S. Treasury.

And nobody suggests that this tax break should be reined in. For that matter, nobody pays it any attention at all.

Let’s see how the break operates, and how it’s totally overlooked. Then let’s give it the scrutiny it deserves—especially with Congress signaling that it might be getting serious about tax reform.

Stock market losses turn into tax breaks when the losses are written off against gains on tax returns. This costs the Treasury revenue, and effectively shifts part of the cost onto other taxpayers. All tax breaks do likewise, but this one has bells and whistles besides.

Each year, in addition to unlimited, direct write-offs, losses up to $3,000 can be deducted from ordinary income. Then there’s the cherry on top: any losses that still haven’t been written off can be carried forward indefinitely.

They are, and the total is staggering. The Internal Revenue Service recently estimated capital loss carryovers on 2012 returns at $581 billion ($369 billion long term, $212 billion short term). The Treasury will be picking up part of that $581 billion. Year after year, it picks up part of those $3,000 deductions. With every Wall Street loss, in every regular, non-retirement account, it loses more revenue somewhere down the road.

Yet Treasury shortfalls from market losses aren’t even listed on a definitive ranking of tax breaks compiled by the bi-partisan Joint Committee on Taxation. When lawmakers target these breaks (or tax expenditures, as they’re sometimes called), they tend to focus on the supposed biggest: employer-provided health insurance ($143 billion in 2014), tax-deferred retirement plans ($109 billion), and preferential rates on capital gains and dividends ($91 billion). In truth the unlimited write-off of capital losses could top them all—but the pieces have never been added up and compared to other breaks. Capital losses reported to the IRS include non-market losses too, muddying any possible comparison.

All that aside, it’s time for President Obama and Congress to reform this long-ignored drain on the Treasury.

The president’s 2013 budget proposed capping two other tax breaks, mortgage interest and charitable contributions, at 28 percent; he could propose the same for stock market losses. Limits on the losses that can be written off by individual taxpayers could be phased in. Time limits could be laid down. The yearly $3,000 deduction could be ended. There’s a case for allowing stock market losses to be written off against gains; there’s no good reason, though, to allow the write-off against ordinary income.

Could Wall Street survive without a morphine-drip tax break to help ease the pain of losses? It’s hard to imagine. All the same, with economic inequality at Gilded Age levels, Congress could at least throttle back on one of the policies that drive inequality higher.

For Wall Street itself, the tax break on stock market losses is simply a fact of life. It’s always been touted, especially during tax season. Financial advisors continually urge investors to lower their tax bills by “harvesting” tax losses. It’s a telling use of the word “harvesting”—in this case, harvesting what could well be the biggest tax break of all.

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This piece originally appeared at thehill.com

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You know the safety net is in danger when lawmakers fire away and claim they’re trying to save it. On the first day of the new Congress, the House warned that Social Security benefits might need “saving”. The Congressional Budget Office twice ran the numbers on “saving” Medicare by raising the starting age from 65 to 67. It’s a shame, the story goes, but the money just isn’t there.

It isn’t? The far-sighted authors of the 1974 Employee Retirement Income Security Act might beg to disagree. The bill created tax-deferred retirement savings accounts, a landmark win for workers—and, over the long run, for the nation as well. The Treasury is closing in on a golden payback, and it could make the safety net much safer.  

Let’s follow the money, and see how the 1974 law is rewarding America. Then let’s see how Congress could make the rewards even greater.

On the front end of the retirement bargain, workers get decades of tax-free investment. On the back end, they cash in but so does the Treasury: it gets revenue each year from taxable withdrawals. Payouts can begin at age 59 1/2 but can be put off until age 70 1/2. From then on, minimum required distributions (MRDs) kick in. Starting next year, it’s MRD time for an affluent demographic—the best-off of the baby boomers, waiting as long as they legally can to touch their retirement nest eggs.

Over 76 million boomers were born from 1946 to 1964. From 2016 on, those with untapped accounts will be paying back each year (joining, of course, the millions of others already taking taxable distributions). For decades to come, year after year, tens of billions in long-deferred taxes will be streaming into the Treasury.

Congress should dedicate those receipts to shoring up the safety net. It’s only fitting that revenues generated by retirement accounts should be reinvested in the safety net; after all, that’s what the 1974 bill set out to strengthen.

In addition, to lessen the long-range fiscal threat, lawmakers could take an effectively painless step. They could revisit the MRD rules, and make two changes that would raise added revenue without raising taxes. Here they are, and the policy reasons for making them:

65, not 70 1/2: It never made fiscal sense for MRDs to begin at age 70 1/2; it makes no sense for the common good either. Gradually, say in half-year increments, move up the starting age to 65. When it’s Medicare time, it’s also time to begin paying back Uncle Sam for those retirement tax breaks (and helping Medicare in the process).    

Raise the percentages: The withdrawal rates for MRDs start out low and creep up slowly. The formula that applies to most accounts calls for a starting MRD of under 3.7 percent. Twenty-five years later, at age 95, the rate is just 11.6 percent. Congress should phase in higher rates for required withdrawals. The social contract would reach a new level of fairness: by paying back faster for their tax breaks, recipients of MRDs could help shore up Medicare, Social Security, whatever.  (No, higher rates wouldn’t cause retirees to exhaust their savings. If MRDs were doubled, the rate at age 95 would still be only 23.2 percent—leaving 76.8 percent still invested. Minimum distributions can’t clean out accounts; only larger, voluntary withdrawals can do that.) Speeding up MRDs would hurt no-one. It would help millions. It would raise billions. It would also pour more money into the economy, and likely create more jobs as well.

The United States is the richest country in the world. Politicians should stop poor-mouthing the safety net, and use some of our riches to mend it. The coming windfall from boomer MRDs would be a good place to start.

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This piece first ran at thehill.com. If you agree with the suggested changes, pass them along to your U.S. Senators and Representative.

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Investigative reporter David Cay Johnston has a new piece  up at Al Jazeera on a trend he's long been documenting: the increasing share of national income that goes to corporations, while labor's share shrinks.  

Analyzing the first IRS data on incomes for 2013, Johnston reports that average income fell 2.6% even though the economy grew 3.2% year-over-year. As Johnston puts it,
"This is the latest sign of a disturbing trend. An ever-shrinking share of national income flows to individuals while corporate profits expand."

It's been happening for more than a generation: "(L)abor’s share of national income has been trending downward since 1980, except for a spike during the second term of President Bill Clinton. The decline accelerated after the Bush tax cuts took effect..."

For more of the hard numbers and the reasons behind them, click on the link and read the complete Johnston piece. It's an indictment of the policies followed by both political parties.

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Despite serious backsliding ever since the Reagan era, the federal income tax remains modestly progressive; tweaks by President Obama even made it more progressive in 2014.

Not so, though, for taxes imposed by states and cities all across America: they're regressive, more regressive and really, really regressive. Here's the complete story, written by Patricia Cohen, published in the January 13 New York Times:

When it comes to the taxes closest to home, the less you earn, the harder you’re hit.

That is the conclusion of an analysis by the Institute on Taxation and Economic Policy that evaluates the local tax burden in every state, from Washington, labeled the most regressive, to Delaware, ranked as the fairest of them all.

According to the study, in 2015 the poorest fifth of Americans will pay on average 10.9 percent of their income in state and local taxes, the middle fifth will pay 9.4 percent and the top 1 percent will average 5.4 percent.

“Virtually every state’s tax system is fundamentally unfair,” the report concludes. “Unfair tax systems not only exacerbate widening income inequality in the short term, but they also will leave states struggling to raise enough revenue to meet their basic needs in the long term.”

The trend is growing worse, said Meg Wiehe, state policy director at the institute, a nonpartisan research organization based in the nation’s capital. Several states have adopted or are considering policy changes that further lighten the tax load on their wealthiest residents, she said.

States and localities have regressive systems because they tend to rely more on sales and excise taxes (fees tacked onto items like gas, liquor and cigarettes), which are the same rate for rich and poor alike. Even property taxes, which account for much of local tax revenue, hit working- and middle-class families harder than the wealthy because their homes often represent their largest asset.

The federal income tax system, by contrast, primarily taxes individuals at a graduated rate, and those who earn more pay a larger share. (The federal system also uses payroll taxes to raise large sums for Social Security and Medicare, dipping into the pockets of many low- and moderate-income Americans who pay little, if any, income tax.)

In the institute’s “Terrible 10” states, the bottom 20 percent of earners pay up to seven times as much of their income in taxes as the top 1 percenters, the report says. These include Washington, where the poorest residents pay 16.8 percent of their income in taxes while the wealthiest sliver pays just 2.4 percent, followed by Florida, Texas, South Dakota, Illinois, Pennsylvania, Tennessee, Arizona, Kansas and Indiana.

Here's a one-sentence sum-up, a caption on a map that illustrated the piece:

In virtually every state, the lowest fifth of earners pay a greater share of their incomes toward state and local taxes than the next three-fifths and considerably more than the top 1 percent.

So, strange as it sounds, it's not really the rich who are over-taxed in America: it's the poor.

(For a related discussion, see my diary of January 8.)

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Co-authored with Ronald M. Glassman

Nothing is more central to the American Dream than equality of opportunity. In today’s world, that usually means a college education—and, for most families, the challenge of paying for it. Congress could help meet that challenge. It could pass a financial transaction tax (FTT), and dedicate the proceeds to providing equal opportunity for college.

The midterms showed a country in a sour mood. They also showed a country hungry for a sense of purpose. In 1961, heralding a New Frontier, President John F. Kennedy called on the nation to send a man to the moon. In 2015, pointing to The Dream, President Obama could call on the nation to send the sons and daughters of working- and middle-class families to college—and do it without leaving them deeply in debt. An FTT would provide the rocket fuel propelling America toward that goal.

Financial transaction taxes are small fees levied on sales of stocks, bonds, and other commonly-traded instruments. They serve two purposes: they raise revenue and discourage Wall Street speculation. Twenty-three countries currently levy FTTs, and 11 member states of the European Union are closing in on a version of their own. The U.S. is the world’s only major financial center without one.

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Thu Jan 08, 2015 at 07:07 AM PST

Who really bears the tax burden

by Gerald Scorse

How many times have we heard the canard that it's the rich who bear the tax burden, carrying all the takers along? Not quite in Connecticut, one of the richest per-capita states in America. Here are the figures from an item in today's newsletter from the Tax Policy Center:

A new report from Connecticut’s Department of Revenue Services shows that 725,202 households that earn up to $48,000 a year paid $3.5 billion in state and local taxes. As for the 4,003 households with incomes over $2 million? They paid $1.9 billion.  DRS commissioner Kevin Sullivan noted that the data highlight the state's reliance on income taxes and the regressive nature of Connecticut’s sales tax.
The TPC newsletter also had this item on the sources of Americans' income over the years:
The latest TPC Tax Fact by Bob Williams and Lydia Austin, shows that the composition of reported income on federal tax returns has changed a lot since 1952. While wages and salaries remain by far the biggest source of reported income, their share dropped from 80 percent in 1952 to 71 percent by 2012. Investment income rose steadily from the 1950s through the mid-1980s but has fallen somewhat since in part due to low interest rates. Business income sagged from the ‘50s to the mid-‘80s but has rebounded since, probably because so many business owners report income on their 1040s.
Investment income, of course, is taxed at preferential rates (though a bit less preferential, starting in tax year 2014, for those making really big bucks.) Is there any good, public policy reason for lower rates on investment income than on wages and salaries? None whatever.
Discuss

Wed Dec 17, 2014 at 09:00 AM PST

A hug for our two sons

by Gerald Scorse

My wife and I love Christmas in New York. She's Jewish and never had a proper Christmas until gentile me came along. I grew up Catholic and left the church in my early 20s, but the holiday still holds me tight. I cherish those Christmas memories: the joy I could almost feel in the air, the trees aglow with lights, the choir at midnight Mass singing "hail to the newborn king." It lifted me out of myself and took me to another place.

So what was it that made Christmas 2012 our best Christmas ever? You'll see very shortly.

On that Christmas our older son Jason was in from California. Joining us was our younger son Daniel from Brooklyn and his toddler son Ari, a year and four months, our first grandchild. When our kids suggested a stroll in Central Park, right across the street from where we live, off we went.

We entered the park at West 100th Street and started down the sidewalk. Not far in, if you hang a left, there's another sidewalk with three benches. We'd just started walking, so I was surprised when our older son said we should turn left; okay, sure.

And there, on the upper slat of the middle bench, was a mounted silver plaque with black lettering. There were three lines, unpunctuated. This is what they said:

To Gerry and Gloria Scorse
Have a great morning walk
Love Jason and Dan

Our sons knew, of course, that we regularly walk in Central Park, five days on and one off. We're among the early birds, emphasis on the plural; you'd be surprised how many people are out by 6 in the morning, putting in the miles.

Now, all those mornings, we see once again the surprise that gave us our best Christmas ever. I reach down and touch their names with my index finger, giving each of them a hug.

(With slight revisions, this diary first appeared on December 17, 2013.)

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Mon Nov 24, 2014 at 09:00 AM PST

The Roth blunder barrels on

by Gerald Scorse

The Roth IRA, created by Congress in 1997, resulted from "'a conscious, contemptible manipulation of the budget rules.'"--John Buckley, former chief of staff for the Joint Committee on Taxation and former chief tax counsel, Committee on Ways and Means
What was true then is truer now. Roths have become a bi-partisan affliction: they came in under President Bill Clinton, but Presidents George W. Bush and Barack Obama have added their own wrinkles. Thanks to all three, nobody has to go to the Cayman Islands to find a tax shelter; all they have to do is get their money into a Roth. Legislators continually dream up new ways to make it happen. Even the Internal Revenue Service has become an enabler, issuing a ruling that creates one more route to a federally-sanctioned tax haven.

On to that "conscious, contemptible manipulation of the budget rules." What's it about, and why are Democrats and Republicans alike only too happy to do it? It's simple: all the money that goes into Roths is post-tax, not pre-tax, so the tax revenues from the accounts show up immediately. What doesn't show up (but what starts piling up from the beginning) are the deficits that Roths are constantly creating. Fudging the numbers with upfront revenue can make budgets look good, but it's all smoke and mirrors. The taxes on contributions are the only revenue that Roths will ever raise. Unlike all other retirement accounts, Roths pay no taxes on capital gains; unlike all other accounts, they will never pay back Uncle Sam for their tax-free growth.  

Len Burman directs the non-partisan Tax Policy Center in the Capitol. He's called Roth accounts a numbers game, "'bringing in more now, but giving up much more in the future'" via foregone revenues. As he sees it, "'Passing on more financial problems to our kids is really irresponsible. We’re leaving them a weak budget situation to begin with. Cutting off a major source of revenue [taxes on retirement account capital gains] makes no sense.'”

None at all, and the accounts are inherently unfair as well.

Compare Roths to regular IRAs, 401(k)s, 403(b)s, and all other retirement accounts. All except Roths ultimately pay tax both on contributions and capital gains. Roths pay no taxes on gains. All accounts except Roths require minimum distributions from age 70 1/2 onward. It's possible for Roths to be passed on, undistributed and tax-free, into the 22nd century.

In addition, the income limit that formerly kept the rich from having Roth accounts at all was removed by President George W. Bush  (though the removal didn't take effect until after he left office). Obama has made Roth moves as well. As part of the "fiscal cliff" deal in 2012, he opened the door to earlier conversions from regular 401(k)s to Roths. His new myRA accounts, set to debut by year's end, are also Roths.

Taken together, all these steps are costing the Treasury untold amounts every year in foregone revenue. The total can only grow larger, and add immeasurably to the federal deficit, as the years go by. Here, from an earlier Daily Kos diary, are three simple ways to rein in Roth losses:

Abolish conversions. The largest Treasury losses will come from the largest Roth accounts, i.e., conversions. Congress should put a stop to all Roth conversions. At a minimum, it should restore the $100,000 adjusted gross income ceiling that kept Roth conversions out of the hands of the rich.

End Roth startups. Other retirement plans are genuine two-way bargains: savers enjoy tax advantages, but repay the country via taxable distributions. Roths eat away at America’s fiscal future, taking ever-bigger bites as more accounts come on-stream. The second reform, just as important as the first, is to stop opening new Roth IRAs.

Require distributions.  Minimum distribution requirements—standard on all other retirement plans—have never applied to Roths. Accounts created under the "fiscal cliff" agreement were set to require distributions, and Congress should extend the rule to all Roths. [Such a provision was, in fact, included in President Obama's 2014 budget proposal.] Tax-free payouts could pump extra money into the economy, and give governments at all levels a chance to recoup at least some of their lost revenues.

Roth accounts were a deception from the start, and everyone knew it. It's time for the Elephants and the Donkeys to do the right thing: to dial back on the Roth blunder.

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1. If you agree with the recommendations you've just read, email your U.S. Senators and Representative and let them know (especially if they sit on the Senate Finance Committee or the House Ways and Means Committee).
2. This piece first appeared at truthout.org.)
3. Here's the latest regarding the possible reform of mega-IRAs, Roths included.

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Mon Nov 03, 2014 at 09:00 AM PST

MyRA: nothing here but IRA lite

by Gerald Scorse

Obama's new retirement account comes in underweight

President Obama’s legacy will scarcely mention retirement savings accounts, but he did point the way to a promising option this year:  a government-sponsored account, aimed at the millions of workers without access to an employer plan. As with so much else in his presidency, it’s an example of high hopes trumped by mediocre execution.

But cheer up. The Obama creation does have some positives, starting with the cleverest name yet. It’s called myRA, shorthand for “my Retirement Account.”  A lot snappier than 401(k)
or 403(b).

Let’s see what’s good about myRA, what’s not so good, and how it could have been so much better—for retirees, for the Treasury, for the country.

Statistics show that roughly half of all workers, predominantly low earners, have yet to set aside a single retirement dollar. Turning those non-savers into savers is sound policy. Where employers make myRA available, workers will be able to open an account with a minimum deposit of $25 and automatic deductions as low as $5 per payday. All monies will be invested in Treasury bonds. The accounts have no fees, and guarantee total safety of principal and interest. MyRAs will close out after 30 years or at $15,000, whichever comes first, and convert to private-sector holdings.  

Now for the many shortcomings of an account the Treasury Department describes, correctly, as “simple, safe, and affordable.”

The first problem is that guaranteed securities generate small returns, especially these days. Yields on Treasury paper have been sitting at or near historic lows ever since the financial meltdown. Of course rates will eventually rise; so too will inflation, leaving real returns more or less permanently negligible.

MyRAs, scheduled to roll out by the end of 2014, could have been far more rewarding. Contributions could have gone into an index fund, tied to a broad market measure like the S&P 500 or the total market. The risk could have been neutralized by guaranteeing both the principal and an inflation-matching return. Such a guarantee might never have to be invoked, and it wouldn’t cost that much even if it were. The accounts are geared to small savers, and that keeps any downside small as well.

Contributions to myRAs could have been in pre-tax dollars, the same as contributions to 401(k)s, regular IRAs, and other retirement plans. Instead, myRAs were set up as Roth accounts and require contributions in post-tax dollars. At first glance this appears to raise federal revenue—for budget purposes, the upfront taxes count as a fiscal plus. In fact Roths guarantee federal red ink far into the future: the accounts never pay taxes on capital gains, costing the Treasury untold billions in foregone revenue.  Other retirement accounts ultimately pay back Uncle Sam with taxable withdrawals; with Roths, the payback never comes.

One last problem. Given the target audience, the income eligibility limits are bizarrely high. The plan is open to singles making up to $129,000 and couples making $191,000. Why would people with incomes like that choose a myRA?  The financial services company The Motley Fool touted myRA as “the best place” for short-term and emergency savings. Yields may be low, but they far exceed those of bank savings accounts or CDs. In addition, the principal can be withdrawn anytime. That’s shrewd thinking, but it has little to do with retirement. It also suggests that myRAs could easily be gamed by the relatively well-off.

It’s good for government to help workers save for retirement, all the more so those who need help the most. It’s not good when the help turns out to be so little (or so lite, you might say).

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(This article first appeared as an op-ed in the Los Angeles Times.)

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Imagine the government pushing a retirement plan that’s guaranteed to raise the federal deficit. Imagine that the same plan inherently favors the already-favored. Far from imagining, you’re describing Congress’s growing embrace of Roth individual retirement accounts (IRAs).

The lure of Roths is the upfront revenue they bring in. Contributions to Roths are after-tax, unlike the pre-tax contributions to regular IRAs, 401(k)s, and other traditional plans. In fact Roth accounts are costing the Treasury billions upon billions. Let’s see what drives the losses, and why they’ll be climbing far into the future.

All the money in retirement accounts gets preferential tax treatment going forward. Capital gains grow untaxed, lifting balances year after year. Traditional accounts pay the country back through taxable withdrawals—voluntary starting at age 59 1/2, mandatory at age 70 1/2. The inflows to the Treasury square the books on a win-win bargain: decades of tax-free growth for retirement savings, coupled with decades of growth in downstream tax revenues.

There are no downstream revenues from Roths. Capital gains are permanently tax-free, creating Treasury shortfalls that erase and ultimately far outstrip the initial boost. There are no required distributions (which might at least spin off some revenue). Losses from Roths grow endlessly; the only question is how large the final numbers will be. Such are the accounts that Congress has chosen to promote—most directly to the affluent, whose incomes once barred them from owning Roths.

The red ink has effectively been flowing ever since the accounts were created in 1997. It turned a deeper red when Congress did away with the $100,000 adjusted gross income limit for Roth conversions. These are paperwork transactions that turn regular IRAs into Roth IRAs. To do this, account holders first have to pay the taxes on the converted amount. The tax bill discourages conversions—but for the well-off, not so much. Investment giants Fidelity and Vanguard reported conversion bonanzas when the income limit came off in 2010.

Roth conversions were back again as part of the 2012 “fiscal cliff” budget deal. The agreement opened the door to immediate conversions by 401(k)s and the like; until then, holders couldn’t convert to Roths before age 59 1/2.

Earlier this year, the Republican majority on the House Ways and Means Committee unveiled the most sweeping tax reform plan in a generation. It makes the first direct attack on traditional accounts, and would sharply increase Roth ownership. It would prohibit any further contributions to regular IRAs. It would limit annual contributions to other traditional accounts to $8,750, half the current maximum; contributions over $8,750 would be channeled into Roth accounts. The income limit for start-up Roths would disappear, just as it has for conversions. According to the GOP plan, these changes would raise about $160 billion over the period 2014-2023. The number is just the latest Roth hocus-pocus: the losses would eventually swamp the apparent gain.

It’s good to help workers save for retirement, as traditional accounts have been doing since the mid-1970s. In contrast, Roths are no help for those who need it but a windfall for those who don’t. They cost the Treasury untold billions. They’re also plainly unfair: why should Roths pay taxes only on contributions, while all the other accounts pay on gains as well? Why should the others require distributions, but not Roths?

Howard Gleckman edits TaxVox, the blog of the nonpartisan Tax Policy Center. In 2010, with Roth conversions booming and talk of more Roths already in the Capitol air, he flashed a warning signal: “This infatuation with all things Roth bears close watching.”

The infatuation keeps growing, and the red ink just keeps rising.

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The article originally appeared at The Hill.

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Jamie Dimon took high heat over his 74% mega-raise, but he’s not at fault. The blame goes to a 1993 boondoggle for bigwigs—a boondoggle that’s cost taxpayers by the billions ever since. Congress should call a halt, and the country’s mood could push it to do just that.

Ironically, the law that launched the boondoggle started out aiming to do the opposite. Lavish corporate pay packages had turned off many Americans as the 1990s began. To fight the trend, the ’92 Clinton-Gore campaign proposed a $1 million cap on the tax deductibility of salaries paid to a firm’s top echelon. Companies have an absolute right to set executive pay. Congress likewise has the right to limit the amount that qualifies as a corporate tax write-off. Once elected, Clinton moved to enact the reform.

The final result—Section 162(m) of the Internal Revenue Code—ended up delivering gold to the corporate elite and a slap in the face to America’s taxpayers. The statute did impose a $1 million deductibility cap on publicly-held corporations, but it also created a huge loophole. It wrote into law what quickly became the most gilded words in the gilded world of executive compensation: performance-based pay.

As long as the pay meets IRS benchmarks for “performance-based,” its deductibility is unlimited. Boards of directors routinely find ways to hand out mega-million packages of stock grants, stock options, profit-sharing, stock appreciation rights, every imaginable kind of executive sweetener. Twenty years on, after three presidencies and six Administrations, Section 162(m) stands as a classic example of good intentions leading to bad endings.

A 2012 study by the Economic Policy Institute estimates that Section 162(m) is costing the Treasury about $5 billion a year. A fair number of companies ignore the salary cap and pay more in taxes, but that revenue gets swamped by the shortfall from deductible corporate pay. The Treasury’s wounds from 162(m) have festered forever. With inequality soaring, a few in Congress are finally going after a law that works overtime to drive it higher.

In August 2013, Senators Jack Reed (D-RI) and Richard Blumenthal (D-CT) introduced the Stop Subsidizing Multimillion Dollar Corporate Bonuses Act. Blunt title, blunt purpose: “This legislation would close a major loophole in current corporate tax law by putting an end to unlimited tax write-offs on performance-based executive pay.” The bill calls for a blanket $1 million deductibility cap. As Senator Blumenthal noted, corporations are free to “pay their executives whatever they wish, just not at the expense of American taxpayers…”  (The same thinking, under the heading “Stop Subsidies for Excessive Compensation,” appears in the tax reform plan unveiled late last month by the GOP members of the House Ways and Means Committee.  That plan takes aim as well at the huge salaries paid out by non-profits. )

Rep. Lloyd Doggett (D-TX) introduced a House version of the Reed-Blumenthal bill earlier this year. “Most Americans,” the Congressman said, “would probably be surprised to learn that multimillion dollar executive bonuses are currently tax write-offs.”

Most Americans might be surprised, but legislators in both parties know only too well. Chuck Grassley (R-IA) formerly chaired the Senate Finance Committee. As the 2006 chair, he admitted that Section 162(m) “really hasn’t worked at all. Companies have found it easy to get around...It has more holes than Swiss cheese. And it seems to have encouraged the options industry.” Options play a big part in performance pay; in 2009, Senators Carl Levin (D-MI) and John McCain (R-AZ) co-sponsored a bill which would have extended the current $1 million cap to options awards.

Section 162(m) has failed as tax policy, but it does two things to perfection: it runs up federal red ink, and it shows contempt for taxpayers. Better late than never, Congress should act to stop the bleeding and end the long, long insult.

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(This article originally appeared at TheHill.com.)

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The founders’ path to shared prosperity, less inequality

George W. Bush talked the talk of an “ownership society,” but the laws he passed shifted income upward into the hands of the few. Three professors would rather see income flowing into the hands of the many, and they’ve written a book to point the way. The authors are Joseph R. Blasi and Douglas L. Kruse, both of Rutgers, and Richard B. Freeman of Harvard. The book is The Citizen’s Share: Putting Ownership Back into Democracy.

The nation’s founders wanted workers to have a piece of the pie, wanted widespread sharing of America’s bounty. The challenge of restoring the cod industry, laid low by the Revolutionary War, gave them the chance to set the national tone. George Washington, Thomas Jefferson and Alexander Hamilton played key roles in shaping legislation that split tax credits between ship owners (a three-eighths share) and crews (a five-eighths share). Further, owners could collect only if they had “a written, profit-sharing contract with all the sailors…covering the entire catch.” The law helped turn the industry around and remained in effect for nearly 20 years.

That was on the sea. On land, the government parceled out pieces of America itself to tens of thousands of early settlers. Starting with the Northwest Ordinance in 1787 (covering an area that became the states of Ohio, Indiana, Michigan, Illinois, Wisconsin, and part of Minnesota), Congress followed Jefferson’s lead: “distributing public lands to landless citizens, to give them a direct capital stake in society.” The land commonly went for bargain-basement prices with easy credit terms. The capstone was the Homestead Act of 1862, which turned over 160-acre plots west of the Mississippi. In Alaska, a law similar to the Homestead Act was on the books until 1986.

Today, of course, capital has replaced land as the primary source of wealth. For the authors, the nation’s beginning holds a lesson going forward: just as America itself was once divided up and shared, so capital (and the income it generates) should also be shared.

A template already exists in the form of employee stock ownership plans (ESOPs), pioneered by the financier Louis Kelso. ESOPs were included in the omnibus retirement bill passed by Congress in 1974. It offered tax incentives to companies to establish ESOPs, and to banks to lend set-up funds. Both incentives were later stricken. Today, with income inequality “the defining issue of our time” (President Obama’s words), there’s powerful reason to restore them. Corporations are awash in record profits; Congress should again encourage a cut for workers.

It’s surprising to discover how many already get one: “[T]here are an estimated 10,300 corporations with ESOPs and similar plans, with about 10 million workers and almost a trillion dollars in total market value….about 3,000 closely held companies are majority or 100% owned by their employees, about 3,000 are 30% to 51% owned, and the rest have ownership ranging from about 5% to 30%.” Employee equity is part of the culture at companies of all sizes, including roughly a tenth of the Fortune 500. Equity stakes and start-ups were made for each other.  Annually, nobody shares equity better than Google: “Each year a stock pie is cut up…Less than one percent goes to the top executives. The other 99 percent goes to the broad group of workers.”

Equity takes various forms: stock ownership, profit-sharing, gain-sharing (e.g., setting goals and reaping rewards for meeting them), stock grants, and stock options. The key is that all boats rise, not just the yachts.

“The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes.” Keynes wrote those words about England in 1936. To deal with the same faults, America needs more “citizen’s shares” in 2014.

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(If you agree, email your Senators and Representative and tell them to restore tax incentives for ESOPs.)

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