In ways large and small, Washington coddles rich
Last week, voters were so infuriated by the idea of spending $700 billion dollars to bail out rich Wall Street bankers that Congress nearly killed the plan. Given the impact on Main Street, it was a dangerous target to strike. But the anger was well placed, and Washington is a target-rich environment.
Taxpayers subsidize Wall Street and other moneyed interests in literally thousands of ways, with all sorts of outrageous consequences. We couldn't list them all if we filled this space 10 times over, so you'll find below a sampling of just four that lend a sense of just how ridiculous the situation is. We picked them based on a simple premise: Average taxpayers should not be asked to send money to people of much greater means. If Barack Obama or John McCain really wants, as promised, to transform Washington one budget line at a time, any of these four would be a good place to start. A fed up public would cheer the new president on.
1. You're subsidizing million-dollar salaries
To quiet the anger over the bailout package, Congress tried to limit compensation for executives at participating companies. Most "golden parachutes" were banned and tax deductions for compensation of more than $500,000 were removed. Good. But why on earth are taxpayers subsidizing pay over $500,000 in the first place? Not only is this unfair, it encourages the absurd benefit packages and other largesse that so infuriate people.
Last year, New York's major security firms collectively paid $33 billion in bonuses — an average of $180,000 per employee — even as they were heading into a tailspin from years of risky behavior and selfindulgence.
Some companies are still in denial that the party's over. Lehman Bros. paid $23 million in parting bonuses to three executives just days before going into bankruptcy protection. And fallen insurance giant American International Group spent $440,000 on a posh California retreat — days after it secured an $85 billion loan from taxpayers. At the top of the heap, Lehman CEO Richard Fuld has raked in as much as $480 million since 2000.
Why use the tax code to encourage such behavior? The only real answer is that companies have used creative ways to get around limitations. Although a 1993 law restricts pay deductibility to $1 million, companies have taken full advantage of a huge loophole that exempts "performance pay" from the cap. Not only have salaries soared since then, but a whole industry of executive compensation has grown up that scoffs at efforts to limit pay.
In fact, top corporate executives have demonstrated an ability to extract ever-larger pay packages at the expense of shareholders and rank-and-file employees. Compliant boards and disenfranchised shareholders have been ideal tools for insider self-enrichment.
No, the government shouldn't determine what companies pay their top talent. That should be left to shareholders, with the help of rules giving them a greater say. But taxpayers shouldn't be expected to subsidize outsized pay packages to the tune of more than $5 billion a year.
2. You're giving billionaires a tax break
In 2007, the top 50 managers of hedge funds and private equity firms earned an average of $558 million, according to Alpha magazine. (Really. That's not a typo.) Despite having incomes equal to the output of some small countries, many of them paid a lower tax rate than middle-class Americans.
How can this be? Through a complex sleight of hand known as "carried interest," they pay just 15% by masquerading their income as capital gains.
Last year, when some in Congress proposed ending this practice, they drew quick support. Then the private-equity lobby went into full mobilization. It hired multiple lobbying firms, spread around campaign contributions and created advocacy groups passed off as broadly based trade associations. The proposal went nowhere. Cost to taxpayers: $2.7 billion a year.
Whether investment income should be taxed at a much lower rate than earned income (15% vs. a top income tax rate of 35%) is a matter of considerable debate. Encouraging investment does help generate economic growth. But the argument ignores the fact that lower capital-gains rates mean higher income taxes on labor or more borrowing from future generations.
That some super wealthy money managers are laundering their income as a capital gain cries out for an immediate fix. It also suggests that the rates for investment income and earned income should be closer together to prevent people from coming up with another ruse.
In the past several decades, wealth concentration in the USA has risen to levels not seen since the 19th century. In 1982, the average CEO made 42 times the salary of the lowest paid person at his or her company. Last year, he or she made 411 times the salary of the lowest paid employee. That's an unhealthy gap even when times are good. When, as now, the economy turns sour, it's a recipe for social discontent and demagoguery.
3. You're helping to finance McMansions
The deduction for mortgage interest is one of the most popular breaks in the tax code. But allowing it on homes of up to $1 million borders on insanity.
Not only does the high cap give a break to very affluent people, it was a significant contributor to the housing bubble.
In 2005, a presidential commission proposed scaling the upper limit back to $244,000-$313,000, depending on the region, to pay for the repeal of the much-dreaded alternative minimum tax. Not surprisingly, the measure was killed by the real-estate, home-building and mortgage-lending lobbies.
The deduction is an enormous potential source of revenue to fund other tax cuts or eliminate deficits. Taxpayers deducted a staggering $443 billion in mortgage interest deductions in 2006, according to the IRS.
While curbing this deduction during a housing bust might not be a good idea in the short term, scaling it back gradually to $500,000 or less would help prevent future bubbles and return the deduction to its traditional role of encouraging middle-class families to own their homes.
4. You're paying for executives' skyboxes
One of the small but annoying tax breaks that benefit the wealthy is the full deductibility of business-related entertainment expenses. While this might seem trivial, it is catalyzing a sea change in American sports — the surging price of tickets as teams build expensive stadiums designed to maximize revenue from luxury boxes and premium seating.
Around the USA, perfectly good stadiums with reasonable pricing and great sight lines are being replaced by billion-dollar-plus palaces geared toward capturing the upscale market and taxpayer-subsidized "client entertainment."
Giants Stadium in northern New Jersey, home to the NFL's Giants and Jets, is one such place. It is slated to be replaced by a new stadium with multiple tiers of suites and premium seating. In return for being pushed out of many of the best locations, the longtime fan will be asked to pay for personal seat licenses of up to — are you ready for this? — $25,000 per seat. So what becomes of the families that have owned four seats for generations? They can save $100,000 by dropping out, but they'll still be paying for the outrage with their taxes
Nearby in the Bronx, Yankee Stadium, arguably the most storied venue in all of sports, is being supplanted by a $1.4 billion palace of the same name. And the arena where luxury suites were invented, Texas Stadium, is considered too dowdy for today's opulence and will be replaced next season.
The only consolation for the average fan could be that, if the economy continues to falter, teams might have a hard time selling premium tickets. Perhaps, one day, an irate taxpayer could even encounter a fallen Wall Street titan in what's left of the cheap seats.
Posted at 12:22 AM/ET, October 09, 2008 in Economy - Editorial, Politics, Government - Editorial, USA TODAY editorial | Permalink
Yeah, I think we should give more tax loopholes to hedge funders so they can create more jobs for the middle class..... :rolleyes:
These things are simple to fix, but the power of the lobbies once again squashes common-sense. Lobby reform should occur right along with campaign reform. As long as congress can feed at the trough of special interests, congress will remain a rubber stamp for the biggest wallets.