Category: Tax Issues

Tariff Collections Are Climbing

The Daily Escape:

The cash flow of Customs and Excise Taxes has doubled in the past two months. From Wolf Street:

“Collections from customs and excise taxes spiked by 81% in April from March, to $17.4 billion, more than double the average monthly collections in 2023 and 2024, according to Treasury Department data today.”

This is the amount in customs and excise taxes that the Department of Homeland Security (which includes Customs and Border Protection) transferred in April into Treasury’s checking account at the Fed. Here’s a graphic representation:

The chart shows that something substantive is starting to happen. Tariffs are taxes paid by businesses to our government. And it adds up:

“For example, GM just announced that the new tariffs would cost it $4 billion to $5 billion this year and lowered its earnings forecast with respect to that. It has also begun to shift production to the US to dodge some of those tariffs.

GM manufactures components in China, it manufactures its Buick Envision at its joint venture in China and imports it, it imports vehicles and components from Mexico and Canada, it imports components and materials from around the world. After its bailout out of bankruptcy by the US government in 2009, GM focused on China and Mexico and shed dozens of US production facilities for components and vehicles. So now there’s a price to pay.”

Today’s automobile market is such that GM cannot pass on these tariffs to consumers. Automakers are having to discount their models and provide incentives to the market to sell enough vehicles to keep their production lines going.

More from Wolf:

“After the massive price hikes during the pandemic, there is no more room left to hike prices. Consumers have had it.”

But profit margins in the auto industry were huge following those massive price hikes. And the companies can eat those tariffs, show up with lower profits, and still be fine.

And not just in the auto industry. Non financial companies in the US made out like bandits during the Covid era of massive price increases. Their balance sheets have plenty of room to absorb the tariffs.

Mere mortals like Wrongo can’t keep up with all the tariff chaos. The governments of China and US are at least now talking about talking about tariffs. Numerous negotiations are apparently underway with governments of other countries, each one trying to get their special deal with Trump.

Under the Biden administration, there were numerous announcements of large investments in US manufacturing facilities by manufacturers. These investments will take time to play out: Years of big investments in the US before mass production can start. These investments alone are a big boost for the US economy. And companies such as GM that already have plants in the US have started to shift more production from their foreign plants to the US plants.

Trump has misplayed his own China tariffs strategy. In 2024 he said that if China tried to invade Taiwan he would impose tariffs:

“I’m going to tax you, at 150% to 200%.”

But today he already has tariffs at 145%. A trade war is about who can take the most economic pain, and that is a fight China clearly thinks it can win.

Trump’s trade protectionism is also harming America’s allies. Trump is pressing Taiwan and others to shift plants to America. Australia, Japan and South Korea face tariffs and demands to decouple from China, a large trading partner for each.

While no Asian country is about to break its security alliance with America. However, countries will be even more queasy about being dragged into a fight over Taiwan.

Trump’s problem is twofold. First, people are smarter than he thinks. They know the economy has worsened since the chaos of Liberation Day. They can see the demarcation in time when the vibes shifted. Second, of all the insanity of the first 100 days of Trump, nothing broke through to the broader public besides tariffs.

From the NYT:

“By late May or early June, consumers could start to see some empty shelves, and layoffs could occur for retailers and logistics industries. The major effects on the US economy of shutting down trade with China will start to become apparent in the summer of 2025…”

Trump desperately wants to evade blame. People have soured on his economic leadership devastatingly early into his presidency. It puts his power — and the Republican majorities’ power — at risk. Trump is very good at getting out of messes. But can he escape this one?

The stated dual purpose of tariffs is to first, change the math for manufacturing in the US. That was already underway with Biden. Second, to increase tax revenues.

Tariffs were the original tax revenues in the US, predating income taxes. And Trump mistakenly wants to take us back to that.

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Political Advertising: How Effective Is It?

The Daily Escape:

Wrongo’s calendar says there’s just 29 days to go until Election Day. The campaigns are in high gear, but what are they saying? And is what they’re saying getting through to both their base voters as well as to those who are “persuadable” enough for them to get out to the polls and vote? Time is running out.

Timing is a point raised in this NBC story, which describes that, after having taken the last 76 days to introduce the Vice President to voters, the campaign now plans to ratchet up negative advertising about how unfit Trump is to be President (emphasis by Wrongo).

“Leaning more heavily into negative campaigning is a strategic shift for Harris. While she has routinely been critical of Trump since becoming a candidate in July….Harris campaign officials said they intend to continue laying out her policy positions, background and plans…But emphasizing what Harris campaign officials view as Trump’s major vulnerabilities is seen as possibly one of the only ways to finally win over some voters who haven’t made up their mind in a static race that Democrats want to push in their direction.”

A recent poll by the Associated Press-NORC Center for Public Affairs suggests that Harris’ attacks on Trump’s brand of hyper-masculinity appear to be working. As the Daily Beast summarized the findings, respondents:

“…chose Harris 59% over Trump’s 57% when it came to which candidate they felt was tough enough to be president…and favored Harris 55 to 46 % on “which candidate would change the country for the better,” and by 54 to 43% on who “was more likely to fight for them.”

Harris also is micro targeting the message of Trump’s weakness. From the WaPo:

“For the millions of football fans who tuned in from home for Saturday night’s much anticipated matchup between the University of Georgia and the University of Alabama, she also ran a new ad nationally on ABC that hammers home her point.”

The ad says:

“’Winners never back down from a challenge. Champions know it’s anytime, anyplace. But losers, they whine and waffle and take their ball home,’ the narrator says at the start of the spot, over images of a football game and washed-out footage of Trump missing a golf putt. The 30-second ad ends with footage of Harris challenging him to another debate, with the words “When we fight, we win” hanging on a sign in the background.”

The money quote:

“Well, Donald, I do hope you’ll reconsider to meet me on the debate stage. If you’ve got something to say, say it to my face,…

Harris also posted the ad on Trump’s Truth Social media platform.

Marcy Wheeler quotes CNN’s David Wright who tracks political spending by the candidates about where the money is headed in this final month as the ad wars intensify:

“You can see how each side is placing bets on their best path to 270 electoral votes. In the first week of October, the Harris campaign is spending the most in the critical trio of “Blue Wall” states – they’ve got more than $5 million booked in Pennsylvania, about $4 million booked in Michigan, plus about $2.7 million booked in Wisconsin. And that makes sense – if Harris wins all three of those states, plus Nebraska’s up-for-grabs electoral vote in the swingy second congressional district (where the campaign also has more than $300,000 in ad time this week), she’s the next president.”

Turning to Trump:

“…he’ s looking to the Sun Belt. This week, Trump’s campaign is spending the most on ads in Pennsylvania, $3.8 million – it’s really the linchpin to both sides’ strategies. But in addition to that, the campaign is also spending $3.4 million in North Carolina and nearly $3 million in Georgia, its other top targets, and if he wins those two states plus Pennsylvania, he’s heading back to the White House.”

The Electoral College will come down to which of the two campaigns potential voters consider more trustable, probably mostly on their personal economic situation and where that’s heading with each potential president. From the WaPo:

“Americans are finally starting to feel better about the economy, invigorating Vice President Kamala Harris’s pitch for the presidency as she narrows her Republican opponent’s longtime lead on an issue that is foremost on voters’ minds.”

More:

“Although voters still favor former president Trump over Harris on handling the economy, his advantage has dropped dramatically in recent weeks. Trump now averages a six-percentage-point edge on the economy…”

But Trump’s only answers for the economy are lower taxes on the rich and more tariffs. Yet, like everything else, Trump has no idea what tariffs actually do.

However, a new survey by Data For Progress’s top line finds Harris leading Trump by 3 points among likely voters nationwide. Nearly half of voters (49%), including a plurality of Independents (46%), choose Harris, while 46% choose Trump.

On the all-important economy, Harris has a trust advantage on most of the economic measures tested, including: supporting small businesses (+10 points), taxes on middle class Americans (+9), increasing wages (+5), lowering housing costs (+5), handling labor union policy (5%), improving our infrastructure (+3), lowering grocery costs (+2), creating jobs (+1), and protecting domestic manufacturing jobs (+1).

That says her campaign messaging is getting through.

Also the survey finds Trump with just a +1-point trust advantage over Harris on “reducing inflation,” an issue that voters have consistently ranked as their most important when deciding whom to vote for. Here’s their chart:

They also surveyed candidate favorability, which now tilts towards Harris. Harris’ rating is +2, while Trump’s is -12:

Is this poll on the money? Difficult to tell. A shorter election season makes it harder for campaigns to assess where to place their bets. And which of their cohorts in the electorate demand the most attention. We’ve focused on Gen Z and younger voters as being primarily swayed by economics. Messaging to women is another important element. Harris can run ads attacking Trump’s hyper-masculinity, (which will help with women).

From The Economist: (emphasis by Wrongo)

“And Harris needs to focus there. In the Obama years the gap between young men and women identifying as liberals was just five percentage points, during the Trump-Biden years this has tripled to 15 points, according to Gallup. This change has been caused almost entirely by young women moving to the left, rather than young men tacking to the right. The fact that this generation’s formative years were during the #MeToo movement, the Trump years and the decision to overturn Roe v Wade helps explain it.”

In 2020 a majority of white women voted for Trump. He will be in the minority in 2024. Leading among women is a real advantage. Since the 1980s a greater share of women than men has turned out to vote. In 2020 women made up 54% of the electorate. A final indicator that Democrats might be winning this battle of the sexes: in battleground states, according to Target Smart, a data firm, between July and September, twice as many young Democratic women registered to vote than young Republican men.

Trump’s bet is that Harris is the one with the turnout problem. They think their base is more committed to their candidate than is Harris’s. But Marcy Wheeler points to Harris’s investment in the Dem ground game:

“The Harris campaign claimed in late September to have 330 offices and more than 2,400 staff. They completed 25,000 weekend volunteer shifts on the final weekend of last month, contacting over 1 million voters over three days and completed the 100,000th event of the campaign.”

BTW: Ms. Oh So Right got a postcard from Harris to vote early this week.

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Can We Make Billionaires Pay More Taxes?

The Daily Escape:

Sunrise, Cundy’s Harbor, ME – May 2024 photo by Eric Storm Photo

Economist Gabriel Zucman is a proponent of a global wealth tax. His column in the NYT explains what that is and how it would work:

“Until recently, it was hard to know just how good the superrich are at avoiding taxes. Public statistics are…quiet about their contributions to government coffers….Over the past few years…scholars have published studies…attempting to fix that problem. While we still have data for only a handful of countries, we’ve found that the ultrawealthy consistently avoid paying their fair share in taxes.”

The problem of billionaires paying very little in taxes is international. In the US, the problem is that billionaires rarely have any salaries to speak of:

”Why do the world’s most fortunate people pay among the least in taxes, relative to the amount of money they make? The simple answer is that while most of us live off our salaries, tycoons like Jeff Bezos live off their wealth. In 2019, when…Bezos was still Amazon’s chief executive, he took home an annual salary of just $81,840. But he owns roughly 10% of the company, which made a profit of $30 billion in 2023.

If Amazon gave its profits back to shareholders as dividends, which are subject to income tax, Mr. Bezos would face a hefty tax bill. But Amazon does not pay dividends to its shareholders. Neither does Berkshire Hathaway or Tesla. Instead, the companies keep their profits and reinvest them, making their shareholders even wealthier.

Unless…Bezos, Warren Buffett or Elon Musk sell their stock, their taxable income is relatively minuscule. But they can still make eye-popping purchases by borrowing against their assets. Mr. Musk, for example, used his shares in Tesla as collateral to borrow $13 billion to put toward his acquisition of Twitter.”

Slashing the corporate tax rate and getting rid of the estate tax have also had dire effects in terms of wealth distribution:

“Historically, the rich had to pay hefty taxes on corporate profits, the main source of their income. And the wealth they passed on to their heirs was subject to the estate tax. But both taxes have been gutted in recent decades.”

In 2018, under the Trump administration, the US cut its maximum corporate tax rate to 21% from 35%. And the estate tax has almost disappeared. Relative to the wealth of US households, it generates only a quarter of the tax revenues it raised in the 1970s.

The effective tax rate (the percentage of someone’s total income that they paid in taxes in all forms) is now lower for the 400 richest American billionaires than it is for the bottom 50% of income earners. Here’s the effective tax rate in 1960 and 2018 for these two groups respectively:

Source: NYT

The US national debt is $35 trillion, almost all of which we acquired during the same period as the reduction of taxes on the rich. That isn’t a coincidence. And since capital and people are both completely mobile, the problem of taxation of wealth doesn’t end at our borders. More from Zucman:

“There is a way to make tax dodging less attractive: a global minimum tax. In 2021, more than 130 countries agreed to apply a minimum tax rate of 15% on the profits of large multinational companies. So no matter where a company parks its profits, it still has to pay at least a baseline amount of tax under the agreement.”

Zucman is proposing we apply a similar minimum tax to billionaires:

“Critics might say…this is a wealth tax, the constitutionality of which is debated in the US. In reality, the proposal stays firmly in the realm of income taxation. Billionaires who already pay the baseline amount of income tax would have no extra tax to pay. The goal is that only those who dial down their income to dodge the income tax would be affected.”

Critics of a minimum tax say it would be hard to apply because wealth is difficult to value. But according to Zucman’s research, about 60% of US billionaires’ wealth is in stocks of publicly traded companies. The rest is mostly ownership stakes in private businesses, which can be assigned a value by comparing them to the value of similar firms.

But the big issue is how to get broad international participation in this billionaire’s minimum tax. In the current multinational company minimum tax agreement, participating countries are allowed to overtax companies from nations that haven’t signed on. This incentivizes every country to join the agreement or lose tax revenue.

The same mechanism could be used for billionaires. For example, if Switzerland refuses to tax the superrich who live there, other countries could tax them on its behalf. Countries such as Brazil, have shown leadership on the issue, and France, Germany, South Africa and Spain have recently expressed support for a minimum tax on billionaires.

This is far from a done deal, although Biden has proposed a billionaire tax with similar objectives. And Zucman’s proposed tax wouldn’t impact the ordinary rich. He says there are about 3,000 people who would be required to give a relatively small bit of their profits back to governments.

Zucman’s closing words:

“The idea that billionaires should pay a minimum amount of income tax is not a radical idea. What is radical is continuing to allow the wealthiest people in the world to pay a smaller percentage in income tax than nearly everybody else.”

Great idea, one that almost everyone agrees with, EXCEPT those who have the power to do something about it. We’re looking at you, Republicans! Also, when a significant percentage of the (relatively) poor in this country support Trump who is dedicated to cutting taxes for the rich, is there any hope that taxes will be raised on the wealthy?

That’s more than enough thinking for this week. It’s time for our Saturday Soother, where we attempt to ignore the latest about the campus protests, or whatever else Gov. Kristi Noem is training her gun at, and gear up for another week in the political and cultural wars.

Here on the Fields of Wrong, the crab apple trees are in full bloom along with our weeping cherries. There is still plenty to do if we are to finish our spring cleanup before summer.

But, before we start down that backbreaking path, let’s grab a mug of coffee and a seat outside. Now watch and listen to Luigi Boccherini’s “Guitar Quintet No. 4 in D major “Fandango”, G.448”, recorded in the Unser Lieben Frauen Church, in Bremen Germany in 2019. Boccherini was an Italian composer and cellist. He wrote a large amount of chamber music, including over one hundred string quintets for two violins, viola and two cellos:

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Dark Money Keeps Flowing Into Our Politics

The Daily Escape:

Cranberry Bog, Old Sandwich Road, Cape Cod MA – October 2023 photo by Ken Grille Photography

As usual, we’re enjoying our time on Cape Cod. We visited a cranberry bog operator yesterday and learned that the number one use of cranberries in America is making crasins. Those packages of whole cranberries you purchase at Thanksgiving make up just 1% of US cranberry sales.

Two topics today: First, as much as Wrongo would like, he can’t ignore the escalating war between Israel and Hamas. Many have written about the conflict. Wrongo wants to spend a few minutes on this week’s hypocrisy by House Republicans. Ja’han Jones wrote for MSNBC:

“In February, several Republicans signed on to a bill, introduced by Rep. Matt Gaetz, R-Fla., that was aimed at ending US military and financial aid to Ukraine.”

At the time, Gaetz said:

“America is in a state of managed decline, and it will exacerbate if we continue to hemorrhage taxpayer dollars toward a foreign war…”

But on Sunday, Gaetz said on Meet the Press that we should up our support to Israel:

“The reason we have this multibillion-dollar commitment…to Israel is because we want Israel to have a qualitative military edge over everyone in the region…”

Just last week Gaetz and other Republicans were willing to shut down the federal government over aid to Ukraine. Aiding Ukraine means spending to assist in a fight against Russia, which the MAGAverse is apparently supports only very weakly. But aiding Israel, which this time means spending to assist in a fight against Hamas, is ok. Republicans like spending money fighting Muslims.

Anne Applebaum in The Atlantic warns that the “rules-based world order” is on the verge of breaking down:

“Open brutality has again become celebrated in international conflicts, and a long time may pass before anything else replaces it.”

This applies to both Ukraine and to Israel. We can’t afford to ignore one in favor of the other.

Our second issue today is that the billionaire Charles Koch is using a tax dodge to fund his ongoing political activities. From Judd Legum:

“…Charles Koch…is funneling his wealth into two organizations that can continue his right-wing political advocacy for years. Koch structured more than $5 billion in donations to…allow him to avoid paying capital gains or gift taxes. It’s not surprising that Koch is familiar with the loophole — he spent hundreds of thousands of dollars lobbying to create it.”

Legum cites a Forbes article which states that in 2022, Koch donated $4.3 billion in Koch Industries stock to Believe in People, a newly formed 501(c)4 nonprofit organization. The organization is run by Koch’s inner circle, including his son, Chase Koch along with Dave Robertson, co-CEO of Koch Industries, and Brian Hooks, the co-author of Charles Koch’s last book.

From Forbes: (brackets by Wrongo)

“ [Koch] has already quietly transferred $5.3 billion of nonvoting stock to a pair of nonprofits….Forbes estimates those shares account for nearly a tenth of the 42% stake previously held by Charles (though he still has 42% voting power).”

The other Koch nonprofit is called CCKc4. In 2020, Koch also donated $975 million in Koch Industries stock to CCKc4, controlled exclusively by Charles’ son, Chase Koch. Legum reports that in its 2020 IRS filing, CCKc4 listed its mission as “N/A.” The gift to Believe in People is now the largest publicly disclosed donation to a 501(c)4–a type of nonprofit with fewer restrictions on lobbying and politics than traditional charities.

Unlike a traditional 501(c)3 nonprofit, a C4 can own an entire for-profit company indefinitely and (so long as these activities support its principal purpose) benefit private individuals; engage in an unlimited amount of issue lobbying; and get directly involved in politics.

Since Congress exempted donations to C4s from the usual 40% federal gift tax in 2015, a number of billionaires have donated 100% of their companies to C4s. Before Koch’s gift the largest of these C4 donations was by Patagonia’s founder Yvon Chouinard, who transferred all of his outdoor clothing and gear retailer’s nonvoting stock to an environmentally-focused C4 in 2022. At the time of the gift, Patagonia was reportedly valued around $3 billion.

Legum reports that Koch’s main political spending vehicle, Americans for Prosperity Action (AFP Action), in the 2022 election cycle spent 95% of its money on Republican candidates who were formally endorsed by Trump or who actively campaigned as Trump supporters. AFP Action spent just $3.5 million on candidates not aligned with Trump and zero dollars supporting Democratic candidates.

This is America in the 2020s: $ billions “donated” by billionaires to protect other billionaires. The tax dodge was enacted in 2015 during the Obama administration. This expansion of tax-free funding of political action is something that is unknown to average people, yet it impacts our politics through its substantial invisible influence. It strips money from the government’s coffers while simultaneously further poisoning US democracy. The only way to take back control of our politics is to take back control of the flow of money into our politics.

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Two Writers Who Speak To What America Needs

The Daily Escape:

Wukoki, Wupatli National Monument, AZ – September 2023 photo by David Erickson

September is underway, and we’re about to have a negotiation about government spending. But that doesn’t mean that the news this month will be any less stupid than last month’s. Also, as the Republican presidential candidates demonstrate every day, we don’t actually know whether the GOP is a dying Party or, the rising single Party of an authoritarian state.

Unless and until the traditional press presents these as the stakes, it is very unclear which it’ll end up being. With this as an introduction, Wrongo wants to introduce two writers who are attempting to break through our chain of bad policies and the bad ideology that threatens our democracy.

First, from Wesley Lowery in the Columbia Journalism Review:

“We find ourselves in a perilous moment. Democracy is under withering assault. Technological advances have empowered propagandists to profit through discontent and disinformation. A coordinated, fifty-year campaign waged by one of our major political parties to denigrate the media and call objective reality into question has reached its logical conclusion: we occupy a nation in which a sizable portion of the public cannot reliably tell fact from fiction. The rise of a powerful nativist movement has provided a test not only of American multiracial democracy, but also of the institutions sworn to protect it.”

Lowery is a Pulitzer Prize-winning reporter. He goes on to say:

“In 2020, I argued that the press had often failed this test by engaging in performative neutrality, paint-by-the-numbers balance, and thoughtless deference to government officials. Too many news organizations were as concerned with projecting impartiality as they were with actually achieving it, prioritizing the perception of their virtue in the minds of a hopelessly polarized audience…”

Lowery also says that news organizations often rely on euphemisms instead of clarity in clear cases of racism (“racially charged,” “racially tinged”) and acts of government violence (“officer-involved shooting”). He says that these editorial decisions are not only journalistic failings, but also moral ones:

“…when the weight of the evidence is clear, it is wrong to conceal the truth. Justified as “objectivity,” they are in fact its distortion.”

Lowery concludes by saying:

“It’s time to set aside silly word games and to rise to the urgent test presented by this moment.”

Second, Bob Lord is a tax attorney and associate fellow at the Institute for Policy Studies. He also serves a senior advisor on tax policy for Patriotic Millionaires. At Inequality.org, he proposes a graduated wealth tax on the rich:

“The United States is experiencing a level of wealth inequality not seen since the original Gilded Age. This yawning gap between rich and poor has unfolded right out in the open, in full public view and with the support of both political parties.

A malignant class of modern robber barons has amassed unthinkably large fortunes. These wealthy have catastrophically impacted our politics. They have weaponized their wealth to co-opt, corrupt, and choke off representative democracy. They have purchased members of Congress and justices of the Supreme Court. They have manipulated their newfound political power to amass ever-larger fortunes.”

More from Lord:

“In well-functioning democracies, tax systems serve as a firewall against undue wealth accumulation. By that yardstick, our contemporary US tax system has failed spectacularly….Our nation’s current tax practices allow and even encourage obscene fortunes to metastasize while saddling working people with all the costs of that metastasizing.”

Lord along with the Patriotic Millionaires propose new legislation, called the Oligarch Act (Oppose Limitless Inequality Growth and Reverse Community Harms). It is being brought forward by Rep. Barbara Lee (D-CA) and Summer Lee (D-PA). The Lees have developed a graduated wealth tax tied directly to the highest wealth in America. The Oligarch Act propose a set of tax rates that escalate as a taxpayer’s wealth escalates:

  • A 2% annual tax on wealth between 1,000 and 10,000 times the median household wealth.
  • A 4% tax on wealth between 10,000 and 100,000 times the median household wealth.
  • A 6% tax on wealth between 100,000 and 1,000,000 times the median household wealth.
  • An 8% tax on wealth exceeding 1,000,000 times the median household wealth.

Per the US Census Bureau, the median household wealth in 2021 was $166,900. So the first tier 2% wealth tax would kick in at $166,900,000, and so on.

This would affect only very high levels of household wealth. To put that in perspective, according to the Federal Reserve, the wealth level that puts you into the top 0.1% of households in 2019 Q3 was $38,233,372. So if enacted, this Act would touch a really small number of outrageously wealthy households. Also, their taxable amount would be peanuts by their own standards.

The legislation would also require at least a 30% IRS audit rate on households affected by the new wealth tax. One recent estimate indicated that the richest Americans dodge taxes on more than 20% of their earnings, costing the federal government around $175 billion in revenue each year.

The immediate argument is that this tax will never pass as long as the filibuster is intact. And here’s how the work of both authors comes together. We see the “it will never pass” objection from journalists and pundits who try to appear savvy in the ways of DC. On any cable news show, someone is sure to jump up to say it.

The paradox is that if you look at the Congressional Record and flip to the special orders section and extensions of remarks, you’ll notice they’re filled with speeches and statements on behalf of recently introduced bills which the sponsors know will never pass as written. So why do they do it?

Because the point of introducing a bill is not just to pass it in the current session of Congress. It never has been. There is a tradition going back to the earliest days of Congress of introducing bills to make arguments and advance debate. Many famous members of Congress (think Ted Kennedy, Thaddeus Stevens, John Quincy Adams) sponsored or backed multiple bills they knew were not going to become laws.

They did it because they knew that debates over bills that will become laws don’t occur in a vacuum. They happen in the greater context of the debate in Congress over issues which are influenced by every other bill under consideration. And of course, you’ve gotta start somewhere.

Jumping to the conclusion “it will never pass” isn’t being savvy, it’s a sign you’ve missed the point. And it’s a sign of the vapidity of so many journalists and pundits that it’s the first thing out if their mouths. It’s never a good idea to take cues from the stuffed shirts on Fox, CNN and Meet The Press.

This graduated wealth tax is a good start and sets a precedent: There is an amount of wealth that is ruinous to democracy. Taxing it is a necessary condition for preserving democratic governance.

It is true that Congress, as it is presently constructed, will not pass this, or other badly needed legislation. A genuine revolution in thinking will be required. Both Wesley Lowery and Bob Love point us toward fresh thinking about how we start dealing with what we consider to be intractable problems.

Wrongo still has hope for the younger generations who are suffering the consequences of all this government sanctioned selfishness.

Change is coming.

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Saturday Soother – May 20, 2023

The Daily Escape:

Daffodils, Laurel Ridge, Litchfield CT – May 2023 photo by Dave King

The oil industry enjoys special economic status in the US. That is demonstrated by the tax breaks and outright subsidies we give them. Hannah Dunlevy notes that:

“In 2020, the explicit and implicit fossil fuel subsidies cost the United States $662 billion, around $2,006 per capita. Cutting just two tax breaks for the fossil fuel industry — the intangible drilling costs subsidy and the percentage depletion tax break — could generate $17.9 billion in government revenue over ten years, according to Congress’s non-partisan Joint Committee on Taxation.”

Biden’s fiscal year 2024 budget proposed cutting some of tax subsidies for oil and gas companies, which would save the US $31 billion over ten years. It will probably not survive the current Debt Ceiling and budget discussions.

One hidden subsidy that the oil industry enjoys is when wells are no longer productive – they are idled. If it’s no longer profitable to return idled wells to production, they need to be plugged. And the cost of plugging a well can be $100,000 or more.

The problem is that when wells start to decline, they are sold by Big Oil to smaller producers. When the well is sold, the plugging and cleanup liability passes to the new buyer. And often, the new buyer simply walks away from the uneconomic well, creating what the industry calls “orphaned wells”. But if a company doesn’t plug its wells before walking away, the cleanup costs will ultimately fall to taxpayers and current operators.

This has already happened with thousands of wells in California and may happen to millions more across the country. Pro Publica reports that there are more than two million unplugged oil wells scattered across the US. California is just the tip of the iceberg.

Petroleum reservoir engineer Dwayne Purvis laid out the reality at a recent conference. His research shows that more than 90% of the country’s unplugged wells are either idle or minimally producing and unlikely to make a comeback.

California is the canary in a coal mine. Shell and ExxonMobil recently agreed to sell more than 23,000 California wells which they owned through a joint venture, to a German asset management group IKAV for an estimated $4 billion. This means that a subsidiary of IKAV now owns about a quarter of California’s oil and gas production, largely in Kern and Ventura counties.

This ownership shift moves the subsequent environmental liability from Big Oil powerhouses to firms with smaller capitalization, increasing the risk that aging wells will be left orphaned, unplugged and leaking oil, brine and methane. For California and other states, this could repeat what was seen in coal mining, which led to taxpayers bearing all of the cleanup costs.

The oil industry has created layers of LLCs that are used to screen Big Oil from the dirty end of the oil business, like responsibility for cleaning up the messes that they make. And these firms can easily declare bankruptcy rather than pay for cleaning up orphan or idle wells.

ProPublica reports on an analysis by Carbon Tracker Initiative, a financial think tank that used the California regulators’ draft methodology for calculating the costs associated with plugging oil and gas wells and decommissioning them along with their related infrastructure.

The cost categories included plugging wells, dismantling surface infrastructure and decontaminating polluted drilling sites. That would cost California about $13.2 billion. Adding inflation and the price of decommissioning miles of pipeline could bring the total cleanup bill to $21.5 billion.

Meanwhile, Purvis estimates that California oil and gas production will earn only about $6.3 billion in future profits over the remaining course of operations; nowhere near sufficient to pay for the cleanup, even if those profits could be captured by the state.

That’s just California. These costs are what economists call “Externalities”. An externality is an indirect cost (or benefit) to a party (taxpayers) that arises as an effect of another party’s (Oil Companies) economic activity. The problem is that the price of their product doesn’t include the externalities. That means there is a gap between the profit of these corporations and the aggregate loss to society as a whole.

Republicans have a tried and true solution for this problem. Taxpayers pay the bills. We’re back to the “privatize profit, socialize the losses” game that corporations have played forever. Maybe the correct terminology should be socialism for the rich.

They prefer to call it keeping government off the backs of job creators.

Time to let go of California’s messy problem and find a few minutes to center ourselves before next week which will bring either financial Armageddon, or a diminished Biden. At the Fields of Wrong, we had a freeze last Wednesday that caused us to cover the newly planted vegetables and bring the Meyer Lemon tree indoors. Spring in Connecticut can always show up with a backtracking nod towards winter.

But on this rainy Saturday, grab a chair by a big window and listen to Debussy’s “Nuages” (‘Clouds’) from his “Trois Nocturnes”. Leopold Stokowski and the Philadelphia Orchestra made the first American recording of Debussy’s “Three Nocturnes” for a 1950 LP.

Here is the first “Nocturne”, a musical impression of slow-moving clouds:

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Links You Can Use

The Daily Escape:

Santa Rita prickly pear in bloom, AZ – May 2023 photo by Wilson Goodrich

Today Wrongo returns to his “Links you can use” format from several years ago.

First up, Bloomberg reports that Trump’s takeover of the GOP helped him to rewrite the rules on how primary delegates to the GOP presidential convention will be awarded. Since leaving office, Trump has gotten 10 more states to award delegates through winner-take-all primaries, even if the winner receives fewer than a majority of the votes. The number of winner-take-all states has grown from seven to 17.

Needless to say, if it’s crowded field and he gets the most votes, even if it’s only 30%, he’ll win.

Second, Republican governors have discovered that they’re getting significant political mileage out of championing people who have engaged in vigilante violence that dovetails with the GOP’s culture wars. Brian Klaas writes about the Right’s open embrace of political violence. In Texas, Governor Abbott has said that he was “looking forward” to pardoning Daniel Perry, who murdered a Black Lives Matter protester. Perry was sentenced to 25 years in prison. He had previously texted a friend that he “might have to kill” some people on his way to work.

Over the weekend, Florida Governor DeSantis tweeted his support for Daniel Penny (Perry and Penny?) after Penny killed the homeless Black man Jordan Neely, on NYC’s subway. DeSantis didn’t hold back:

Lots of dog whistles right there from the governor. NBC 4New York reported that the legal defense fund had raised more than $2 million after DeSantis tweeted the link to Penny’s donation page. This shows MAGAs have found another way to wealth and fame as Daniel Penny now joins Kyle Rittenhouse as a violent millionaire funded by the Republican Right.

Brian Klaas wrote about a study that shows “Who Supports Political Violence?”, conducted by Miles T. Armaly, Assistant Professor of Political Science at the University of Mississippi and Adam M. Enders, an Assistant Professor of Political Science at the University of Louisville. Their findings show some key traits that predict support for political violence:

Perceived victimhood is highly correlated with support for political violence. This is different from actual victimhood. While previous research found that people who are actually being oppressed are more likely to turn to violence, this study shows that it doesn’t really matter whether someone is actually being oppressed; instead, the feeling of being oppressed is sufficient.

This was the strongest predictor of support for violence.

The next strongest correlate was a sense of “white identity.” And the two interact, as those who buy into the Right-wing narrative that white people are under attack in America (due to their loss of social dominance), are also likely to be the same individuals who feel perceived victimhood.

Also, past military service is correlated with a predisposition for vigilante violence. People who previously served in the American armed forces were more likely to express support for political violence than those who have not. None of this is good news for the US.

Third, the Debt Ceiling negotiations are resuming today in the White House after House, Senate and White House negotiators met for three hours Saturday, and then reconvened on Monday. Benjamin Studebaker worries that Biden may be about to repeat Obama’s errors in negotiations with Republicans in 2011:

“Back in 2011…Obama faced the same problem…Biden now faces. Congressional Republicans refused to raise the debt ceiling unless Obama agreed to budget cuts….Obama….Instead…cut a deal. He signed the Budget Control Act of 2011. It committed the federal government to…enormous cuts. Over the course of 2012, it became clear that these cuts would cause serious damage to the economy. So…Obama negotiated another deal that would save most of the cuts for 2013. Over the course of 2013, the same arguments were made again, but this time Obama was unable to secure another delay, and the cuts took effect.”

Sounds like what we’re going through right now. In 2013, we escaped the economic disaster, but at the price of the Fed adding several rounds of Quantitative Easing leading to our current economic situation. If Biden agrees to cut spending, the economy will again be damaged.

And the Federal Reserve will be pressured to limit the damage via lower rates or flooding the market with more dollars.

Republicans will, of course, oppose tax increases. That means the Biden administration won’t be able to raise taxes to help offset the growing deficit or pay for future expenses. Therefore it has to rely on the Federal Reserve’s monetary policies. The weaker economy created by rate hikes is an economy where the current tax rates will generate less tax revenue. That creates more political pressure to cut spending.

All of these stories look like rinse, lather, repeat. And not to the nation’s benefit.

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Prepaying Taxes? Don’t Be Stupid

The Daily Escape:

Saguaro in bloom, Gold Canyon, AZ – May 2023 photo by Karin Ingebrigtsen Hetsler

In the discussion about the Debt Ceiling, it’s become clear that America has a problem with tax collections, which are running behind what was forecast. While tax receipts were always expected to be below 2021’s robust levels, they are even weaker than forecast, down around 35% so far.

That means absent a deal between the Parties, we will hit the Debt Ceiling sooner than we thought. This is largely due to a weaker stock market and lower economic growth than the country had in 2021.

But it’s also true that America has an enormously complicated tax code, built by decades of lobbyists working with the Congress to carve loopholes into the Code to provide legal tax avoidance strategies to their corporate clients.

Imagine a world where corporations and individuals didn’t try to weasel out on their tax obligations to the government…Impossible, you say?

Well, consider Ukraine. We’ve been told that Ukraine is rank with corruption and a large informal economy. Both may be true but read what The Economist has to say about tax receipts during their war with Russia: (emphasis by Wrongo)

“After Russia invaded in February last year, Ukraine’s finance minister, Serhiy Marchenko, braced…for government revenues to “plummet”. He says he expected them to fall by roughly as much as economic activity. That did not happen. Although Ukraine’s GDP plunged by 29% in 2022, the state pulled in just 14% less than the year before.”

Of course the war led to drops in tax revenues from imports and tourism. Blackouts caused by Russian attacks on power plants and the grid disrupted automated reporting of taxable transactions. More from The Economist:

“What, then, is behind the state’s “unique results”, as an official puts it, in wartime revenue collection? One explanation is that firms and taxpayers, eager to support their country’s defense, are paying more tax than required.”

Still more: (brackets by Wrongo)

“According to Ukraine’s finance ministry, in March last year such donations came to 26b[illio]n hryvnias ($880m), rising to 28b[illio]n in May.”

Why are Ukrainian businesses and individuals motivated not to avoid taxes like in the US, but to make donations and pay taxes in advance? The Economist quotes a tax partner with Price Waterhouse Coopers, with responsibility for Ukraine:

“…if Ukraine wins, you’ve got your country; if Russia wins, thuggish authorities will take your money anyway, so why not help out now?”

A lawyer at a Ukraine law firm says that many of his corporate clients have asked for guidance on how to prepay taxes. And now a year later, the lawyer says that nearly all the 100-odd clients he serves have begun to prepay. According to the lawyer, efforts to seek loopholes to lower tax bills have decreased.

Finally, The Economist reports that Ukraine’s State Tax Service continues to receive payments, through its online portal, from the territories occupied by Russia (except for Crimea). Despite the pressure to pay Russian taxes, apparently, last year 2.3 million individuals and organizations in occupied areas paid $9.5 billion in taxes to Ukraine.

They are doing this despite the risk of retribution from their Russian overlords. Can you imagine anything like this happening in the shell of a country we call the United States?

There are other factors at work. Taxes on gas production were raised last year. The Economist quotes Danil Getmantsev, chair of the Ukrainian parliament’s Committee on Finance, Taxation and Customs Policy, who says that a crackdown on corruption also may have had something to do with it.

No one should think that Wrongo is saying that Ukraine is a better place to live and work than is the US. The key point is they are demonstrating that in a country that was thought to be barely unified before the war, it now acts as one. Try to imagine how, under similar circumstances what it would take for companies and citizens in the US to freely prepay their taxes. (Wrongo knows about the need in the US for some Americans to file quarterly returns, which is a form of prepayment).

Or imagine people willingly donating to the government in an effort to keep us free.

Nope. We’re addicted to fiscal gimmickry. Anything to pay less to the government. After all, Trump said not paying taxes showed that he was a smart guy.

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What To Do About Social Security and Medicare

The Daily Escape:

Lupine and poppies, near Glendale, AZ – March 2023 photo by Marion Cart

From Joe Perticone:

“Social Security and Medicare are headed for insolvency—that’s just a mathematical, demographic fact. But when it comes to addressing the problem, there’s virtually nothing the two parties actually agree on. For years, Republicans have waffled between proposing cuts and kicking the can down the road.”

Republicans are correct that Social Security (SS) and Medicare (M) are marching toward insolvency. But they trip over their own feet with their proposals to save them. Republicans are wrong to think they can solve the solvency questions without raising taxes. Once the Republicans take taxes off the table, they’re left without any real solutions to propose.

The Biden administration has done a good job in pre-emptively going after Republican’s ideas about cuts in Social Security and Medicare benefits. The result is that the GOP is squabbling between themselves and scrambling to come up with a plan they could take to the public.

It’s not just the federal debt that should be discussed. Dr. Donald Berwick head of Medicare and Medicaid during the Obama administration wrote in JAMA: (emphasis by Wrongo):

“A total of 41% of US adults, 100 million people, bear medical debts. One of every 8 individuals owes more than $10,000. In Massachusetts, 46% of adults say they skip needed care because of costs. As of 2021, 58% of all debt collections in the US are for medical bills.”

The WaPo explains why people who live in the American South have bad credit scores. It turns out that neither race nor poverty were the deciding factors. It was medical debt:

“Of the 100 counties with the highest share of adults struggling to pay their medical debt, 92 are in the South, and the other eight are in neighboring Oklahoma and Missouri…”

But why the South? Yes, as a region, it’s unhealthy. But there are several Northeastern states where residents struggle with chronic health conditions but have good credit. One thing that stands out is the lack of Medicaid:

“…a recent analysis in the Journal of the American Medical Association…found that medical debt became more concentrated in lower-income communities in states that did not expand Medicaid after key provisions of the Affordable Care Act took effect in 2014.”

So bad health and bad credit are because of Republican governors’ refusal to expand Medicaid to cover more poor people. Leave it to the south to show a MAGA future for all of us: undereducated, unhealthy, and neck-deep in debt.

More from WaPo:

“In states that immediately expanded Medicaid, medical debt was slashed nearly in half between 2013 and 2020. In states that didn’t expand Medicaid, medical debt fell just 10%, the JAMA team found. And in low-income communities in those states, debt levels actually rose.”

It’s probably not a surprise that deep medical indebtedness isn’t a threat in any other developed nation on earth. It isn’t a surprise that health care in the US costs nearly twice as much as care in any other developed nation, while US health status and longevity lag far behind.

Legislating in the US is always a process. That means Congress labors to find incremental gains they dress up as reforms. The 1983 deal struck by Reagan and Democratic Speaker Tip O’Neill is considered to be one of the great bipartisan compromises. It combined benefit cuts with revenue increases to put Social Security back on a sound financial footing that has lasted for decades.

This time, getting rid of the income cap on the SS tax would help to keep it funded for an additional 35 years. At that point the Baby Boom demographic bulge will be over, and a different set of reforms can be proposed.

Medicare is the second largest program in the federal budget, equaling 10% of the total. Medicare spending is also a major driver of long-term federal spending and is projected to rise from 4% of GDP in FY 2021 to about 6% in FY 2052 due to the retirement of the Baby Boom generation and the continuing rapid growth of per capita healthcare costs:

Medicaid accounts for another 9%. But it’s also the largest source of federal revenues for state budgets. As a result of the federal dollar matching structure, Medicaid has a unique role in state budgets as both an expenditure item and a source of revenue.

Over the next few years, we’re going to need to come up with solutions to the problem of what to do about growing health care costs that are (along with lower tax revenues from recent Republican tax cuts) driving our ever larger US budget deficits.

Both sides are going to have to compromise. There’s no way we’re going to balance the budget in 10 years (or ever) unless we talk about increasing revenues while slowing the growth in the costs of health care that our entitlement programs cover.

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It’s Impossible To Buy A $200k Home Anymore

The Daily Escape:

Mt. Hood sunrise – February 2023 photo by Mitch Schreiber Photography

Happy Valentine’s Day for those who celebrate! If you don’t celebrate, find someone or something to give a little bit of love to.

In all of the hype about the Super Bowl and Rihanna’s halftime show, you may have missed that homes selling for less than $200k have basically disappeared in America.

John Burns, a real estate consultant, reports that they are now 0% of the new home market. They were 40% of the market 10 years ago. Burns also says that $500k+ new homes have grown from 17% of the market to 38% of the market during Covid. He provides this handy chart showing how average home prices have changed since 2010:

At the same time, sales of homes going for $500k or more (red line) have shot up from less than 10% to nearly 40% of the new homes market and represent the largest share of new home sales.

This isn’t great for Millennials looking to buy their first homes, or for retirees who have to downsize. It also explains why many first-time homebuyers are angry.

It’s not only the $200k and under segment that has fallen off a cliff. New homes going for between $200k – $300k now make up just 11% of the total, down from 80% of all new home sales in the year 2000.

Ben Carlson shows Federal Reserve new home price data going back to 2000 that breaks down new homes price points more clearly. He says that those being sold for $750k and up have gone from less than 1% to more than 10% of the market.

A few reasons for the shifts: First, we’re not building enough new houses anymore. Second, we’ve seen changing tastes drive demand toward larger homes, helping move the market to a new floor in home prices. Inflation didn’t help either.

We overbuilt in the 2000s housing bubble, and that led to more than a decade of underbuilding ever since. There was a brief spike during the pandemic housing craze but that has abated with mortgage rates rising so rapidly in the past year.

In 2002-2006, we were building around 120,000 new homes per year. In 2022, it was more like 65,000 units per year. Tastes have changed as well. Houses today are substantially larger than they were in the 1950s, 1960s, and 1970s.

In his book The Fifties, David Halberstam talks about how the housing market played a huge role in the rise of the suburbs following World War II. Then houses were about 1,300 square feet. In the 1970s, the median size of a new home in the US was 1,525 square feet. Today it’s around 2,500 square feet.

Tastes have changed. People want bigger houses. They want open floor plans for entertaining, bigger bedrooms with more bathrooms, and more storage space for all of their stuff.

It’s also true that homebuilders aren’t incentivized to build starter homes anymore. In the 1950s the government helped out the troops and their families. With the GI Bill, the federal government took some of the risk that homebuilders wouldn’t be able to find mortgages for all the new houses they were building.

Local zoning regulations have made it difficult to get approvals to build new homes. So builders have moved upmarket in home size to justify those upfront expenses. Starter homes aren’t as profitable as they once were.

There’s a big change in the buyer’s market as well. The WSJ quotes John Burns: (emphasis by Wrongo)

“You now have permanent capital competing with a young couple trying to buy a house.” Burns estimates that in many of the nation’s top markets, roughly one in every five houses sold is bought by someone who never moves in.”

The Atlanta Journal-Constitution in an article last week entitled: “American Dream For Rent: Investors elbow out individual home buyers. Metro Atlanta is ground zero for corporate purchases, locking families into renting’. The Journal says a generational housing shortage, inflated construction costs and a surge in consumer demand all contributed to the historic rise in prices.

But there’s little doubt that a flood of cash from institutional investors has exacerbated it. They quote Maura Neill, a realtor in Alpharetta:

“They go after every listing under $500,000
it’s like clockwork…The property gets listed and, sight unseen, they make offers within an hour.”

This is late-stage capitalism at work. Young working couples are increasingly shut out of buying homes. America is failing them. It would be helpful for families to build equity by purchasing homes instead of renting.

Pricing families out of home ownership carries risks to a cohesive society.

We should have a federal tax policy that disincentivizes ownership of multiple single-family homes, by investment funds. The way to remedy this is to steer investors to other assets that don’t directly impact individual welfare to the same degree as single family housing.

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