Tax policy change is not possible

Reform Party of California Commentary

On occasion, especially during elections, some politicians and candidates for congress or president promise tax policy reforms which typically refer to tax code changes. That has been the case for years, maybe a few decades. Analysis of tax data suggests that the U.S. treasury loses over $400 billion per year to tax evasion, which is illegal non-payment of taxes owed. A reasonable estimate is that unknown hundreds of billions per year is lost to tax avoidance measures that congress never intended, but which are nonetheless legal. Tax policy changes could significantly alter the situation, but the chances of that happening appear to be very low at best.

To the Reform Party of California (RPCA), indefensible, incoherent tax policy is one of the most persuasive factors, maybe the single most persuasive, that the two-party system, congress and the White House is not really serious about improving America's fiscal situation. The sheer magnitude of the money that could be collected from tax evasion alone, probably  $320 to $350 billion/year,  is strong evidence that there is insufficient political will for either tax code reform or collection of most of what is due. Collecting tax revenue that is owed to the U.S. treasury is not a matter of raising any new tax and thus it should not offend conservative political anti-tax ideology. As for liberal political ideology, there is nothing obvious that would render either reasonably effective collection of taxes owed or tax code reform necessarily objectionable.

The circumstances here include a federal debt well over $17 trillion[1], federal spending heavily subsidized by new debt and hundreds of billions of dollars/year in "free" money that is allowed to simply vanish. Collecting at least some of the owed money does not require tax code reform, but it is nonetheless not done. Given that, it is fair to conclude that the two-party political system uses the tax code for payback for campaign contributions. If collecting what is owed is an unattainable political goal, then asking for real tax code reform is even less attainable because bipartisan cooperation would be needed in addition to the political will to overcome resistance from lobbyists who fight to maintain the status quo on behalf of their clients.

The RPCA is not alone in seeing tax policy as difficult or impossible to touch in any meaningful way. On Dec. 12, 2013, C-Span broadcast a Q&A interview with Marty Sullivan, the chief economist for Tax Analysts, which is a non-partisan, non-profit provider of tax news and analysis with about 200 employees.[2] Dr. Sullivan, a well-known analyst and former republican, is no longer affiliated with the democratic or republican parties. His focus is on communicating intelligent tax analysis to his customers and the public without partisan political baggage. The 59 minute interview focuses on tax avoidance tactics, which Sullivan has studied in detail (key comments on tax avoidance tactics are are at 2:15 to 6:20), but other topics including tax policy issues are also discussed.


A couple of critical points regarding tax policy jump out from the comments that Sullivan makes in his C-Span discussion. At 14:35 to 16:13 of the C-Span broadcast, Sullivan points out that congress is simply incapable of making reasonable, sensible changes to the tax code in the face of lobbyists who overpower congress as an institution. As Sullivan puts it, congress is "swarmed" by tax lobbyists who argue that proposed, common-sense tax code changes will "be the end of the world." Congress just caves in and nothing changes.

At 16:15 to 20:00, Sullivan argues that campaign contributions to key people in congress are not nearly as powerful as is the capacity of lobbyists who are technical tax experts to influence the writing of the tax code. That process is not normally subject to press scrutiny. Even if the press did decide to try to understand what was going on during legislation, the details likely would not be fully understood. In essence, it appears to be the case that the process of writing tax law is done behind closed doors between congressional staffers and special interest lobbyists who know far more about tax code matters than congressional staffers. It is no surprise whatever that the tax code is littered with tens or hundreds of billions of dollars in tax breaks that congress neither intended or even understood in the first place.

Despite claims by key politicians that tax policy reform is likely in a given legislative session, Sullivan argues in comments at at 25:35 to 27:18 that such sentiment grossly overstates the odds of change by about 10-fold, i.e., if the congressional committee chairpersons say there is a 50% chance of reform, the reality is that there is about a 5% chance. The reason Sullivan gives is that when congressional chairpersons propose meaningful tax policy reform, that necessarily includes the bad news, i.e., who is going to pay for closed loopholes. When those details become known to the business community, they do not like what they see. That presumably triggers the swarms of stinging lobbyists who argue the world is coming to an end. In fact, all that ends is the political will and congressional capacity to pass any meaningful tax policy reform.[3]

Finally, at 30:30 to 31:28, Sullivan argues that democratic and republican politicians "both do a lousy job" regarding tax policy, despite the fact that republicans at least talk about the topic more than democrats and they try to elevate the importance of reform. In Sullivan's opinion, unless there is a self-interested motive, most democratic politicians just do not care enough to try anything. Sullivan's point that tax policy reform is not sufficiently important for meaningful tax reform to happen is a point the RPCA has argued repeatedly.

Obviously defenders of the two-party status quo will reject Dr. Sullivan's version of reality as nonsense, misguided, self-serving and/or otherwise simply wrong. So, who are you going to believe? You decide. While you are deciding, consider these two arguments. First, every year that passes under the status quo, the U.S. treasury loses another, say, $500-$600 billion in revenue to criminal tax evasion and unintended tax avoidance, with some, about one-third at present, of that amount financed by increasing federal debt. Second, that accumulating debt and lost treasury revenue decreases America's GDP growth by, say, 0.7% to 1.0% annually. If those arguments are wrong, it would be nice to see the unspun data and unbiased analysis that refutes those two assertions. Such data and analysis probably does not exist.

Footnotes:
1. On the books federal debt is over $17 trillion and off the books debt amounts to about $85-90 trillion that will come due in the next 30-40 years or so.
2. The information that Tax Analysts generates is among the best sources, maybe the best, for understanding tax law and policy. U.S. tax policy and its tax code is blindingly complex. Attaining a reasonable grasp of the issues for a lay audience requires resort to politically unbiased expert analysis and opinion.
3. This is not meant to be a criticism of special interests or their swarms of technical expert lobbyists. They are doing exactly what they are supposed to do. It is the job of special interests to defend their special interests. It is the job of congress, not the for-profit business community, to protect the public interest. When it comes to tax policy, which is urgently needed and has been for years, congress is AWOL.

trust in govt & illegal govt activities

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Reform Party of California Commentary

Poll data regarding Americans' trust in the two dominant parties and all three branches of the federal government is evidence of widespread public mistrust and unhappiness. Some poll data suggests that many Americans are now receptive to the idea that a third political party is needed to offset some of the perceived two-party ineptitude and/or corruption. Opinion here fully accords with those beliefs.

There are good reasons for Americans to be unhappy. Average people are economically stressed by long-term low wage growth and there is a common perception that the two parties are more focused on serving themselves and their concerns than they are on serving the public interest.

Reasons to be unhappy with government include periodic revelations that some federal agency or another is doing things that are either illegal, almost illegal or unnecessarily damaging to personal liberties. Information on domestic spying by the National Security Agency (NSA) that Edward Snowden released is a recent example. Not surprisingly, the political system defends itself and its actions, or failures to act, while only dimly recognizing that, yet again, they have fallen short on being sufficiently honest with the public. One key NSA insider, Chris Inglis, considers what Snowden has done to the NSA to be equivalent to burning down a house so that, now that it is completely burnt, it can be rebuilt the right way.
 
That arrogant, dismissive attitude is just more evidence that the American people come in second to other concerns that really do not need to trump the public interest such as the public's need to know. Mr. Inglis, as intelligent as he might be, just doesn't get it. The NSA's house would have been properly built in the first place if our two-party political system was focused on service to the public interest before service to narrower perceived needs for keeping the public uninformed. Snodwen's leaked documents have prompted calls from both democrats and republicans in congress to a review and reassessment of exactly what the NSA is doing. Why are these calls for a review and reassessment of the NSA coming now? A review occurs now because Snowden forced it, not because there was any congressional intent to ever do anything. President Obama, congress and the entire two-party system was focused on themselves. They were not doing a proper job of oversight in service to the public interest.[1]

Some things don't change

A past federal "indiscretion" is worth mention.  On March 8, 1971, a group of 8 political activists broke into an FBI office in Media, PA and stole nearly every document in the office. The burglars then began leaking the documents to the press. The activists knew what they were looking for and they just got lucky that proof of their suspicions were in that office. The leaked documents proved that the FBI was heavily engaged in domestic spying, dirty tricks and other forms of politically-inspired sleaze (New York Times, Jan. 7, 2014; online here). Not surprisingly, the federal government tried to prevent the press from reporting on the, no doubt in the name of national security. The FBI was engaged in trying to suppress political and antiwar activists and dissent. The FBI even tried to blackmail Martin Luther King, Jr. into committing suicide by threat of exposing King's extramarital affairs if he didn't.

Some of the burglars in the 1971 burglary and theft have recently outed themselves and explained their motives. The statute of limitations for burglary charges expired March 11, 1976, so none of them can be prosecuted. They all maintained their anonymity until now because they were not interested in personal publicity. They just wanted the public to know what the FBI was doing. Without the Media burglary and theft of documents, there is no way to know when and what changes, if any, would have come to the FBI. Congress was then, just as it is now, asleep at the switch and focused on interests other than serving the public interest. It took whistle blowers to force change.

To trust or not to trust, that is the question, or at least its one question of several

There are very good reasons that millions of Americans do not have much trust in the federal government, the two parties or their politicians. That two-party system has earned distrust. It deserves to be distrusted. That raises the question about what can or does one do if the situation is deemed to be unacceptable? There does not appear to be much of anything that the public can do other than to simply walk away from the two parties and the system of politics they build and forcefully defend every single day. Events like these do not happen by accident. They reflect the reality that the two-party system does not put the public interest first. Unfortunately, that is an assertion that both parties, the federal government and special interests who benefit from two-party politics will vehemently dispute. Change is not going to come from within because from the status quo point of view, nothing is broken and therefore nothing needs to be fixed. Do you believe that or not?

Footnote:
1. Absent Snowden's revelations, there is no reason to believe that there would be any reassessment or change at the NSA now or ever. After Snowden, one suggested change that the NSA apparently enthusiastically accepts now would be to have an advocate arguing for the public's interest in the secret Foreign Intelligence Surveillance (FISA) court. That should have been done from the start or at least sometime before Snowden blew the whistle. The House of Representatives had plenty of time to cast 40 or more votes to overturn or defund some or all of Obamacare, but it did not have time to cast an even cursory glance at what the NSA was doing. Whose interests did that serve? A separate issue is whether the presence of a public advocate in the FISA court would make a difference. Years ago, congress created the office of National Taxpayer Advocate to protect the public's interest regarding tax policy. That advocate argues intelligently and forcefully every year for common-sense tax policy changes and every year congress simply ignores everything the public's advocate argues for. If that isn't evidence that the public interest is a second- or third-order priority for the two-party system, then what is?

Political intelligence industry

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Reform Party of California Commentary

Summary and conclusions

In April of 2012, President Obama signed the Stop Trading on Congressional Knowledge ("STOCK") Act into law (http://en.wikipedia.org/wiki/STOCK_Act). The law prohibited insider trading by members of Congress and other government employees, which had been legal since the time when inside trading on securities was even possible in the U.S. The STOCK Act exempted lobbyists and non-federal people dealing with congress from the ban on insider trading, so there some people could still trade on inside information that arose from congressional activities that could affect stock and securities prices. Some member of congress had been trying for years to pass a law to make such inside trading illegal. However, some powerful members of congress liked being able to exploit their inside information to make money on the stock market, so the reformer's efforts were simply ignored for years.[1]

On April 11, 2013 President Obama signed an new bipartisan bill into law, a rare event. The White House announced the law in an obscure 1-sentence press release. One commentator described the new law like this: "The STOCK Act passage was on the front page. When it got de-fanged, the announcement was so buried that only the most hardcore of wonks could find the news." (http://finance.yahoo.com/blogs/breakout/stock-act-gets-gutted-why-care-173159298.html)


According to the Congressional Research Service (CRS) (https://www.govtrack.us/congress/bills/113/s716), the new law eliminated the requirement for "mandatory public, on-line financial disclosure reporting by congressional staff (except Members of Congress and congressional candidates) and executive branch officers and employees (except the President, the Vice President, and officers at levels I and II of the Executive Schedule who require nomination by the President and confirmation by the Senate)." The CRS also stated that the law applies "the financial disclosure reporting requirements and restrictions of the STOCK Act only to Members of Congress, congressional candidates, the President, the Vice President, and executive branch officers at levels I and II of the Executive Schedule who require nomination by the President and confirmation by the Senate." In other words congressional and executive branch staffers, lobbyists, aides and almost anyone who works for or is close to a serving politician can trade on inside information once they become aware of it.


Because laws that congress plans to pass or not pass can profoundly affect the price of individual stocks or securities or prices of stocks in an industry or an entire market, fortunes can be made trading based on the information that only insiders have. Average Americans are simply out in the cold and kept ignorant, except maybe to occasionally trade against the elites who have the inside information. It is fair to say that it looks and smells bad, to say the least. Given the great value of some inside information, it is no surprise that enterprising entrepreneurs, all stalwart pillars of the community no doubt, have established an industry called the political intelligence industry (PII). The PII collects and sells inside information obtained from congressional activities to select, wealthy, elite clients.

According to one source, the PII collected $402 million in 2009 from clients, who in turn made unknown millions or billions by trading on the precious information (http://www.motherjones.com/politics/2013/11/political-intelligence-industry-jellyfish?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:%20TimMurphy%20%28Tim%20Murphy%29). Because clients pay millions of dollars to obtain it, there is real value in the information the PII collects for its them (http://online.wsj.com/news/articles/SB10001424127887324660404578202072713156116; https://blogs.law.harvard.edu/corpgov/2013/07/20/the-stock-act-and-the-political-intelligence-industry/). Also no surprise, clients who buy information from PII sources fight proposed rules to disclose their identities and republicans in the House protect that desire for anonymity PII clients (http://www.reuters.com/article/2013/05/08/us-usa-congress-politicalintelligence-idUSBRE94718C20130508). That has been going on since 2012 (http://online.wsj.com/news/articles/SB10001424052970204059804577225572815851652?mod=googlenews_wsj).

It is fair to characterize the situation or facts like this. Congress had no qualms about engaging in inside trading until it was embarrassed into passing the STOCK Act, in part because its public approval rating had dropped to abysmally low levels. The STOCK Act left the PII intact and it never was a blanket prohibition against insider trading based on information arising from congressional activities. A year later, congress and the President repeal some of the disclosure requirements to for some federal staffers and aides. The House continues to protect the identity of PII clients from disclosure.

It is fair to draw the following conclusions from the situation. There is no compelling rationale for allowing congressional staffers, lobbyists or anyone else in possession of inside information arising from congressional activities to be allowed to make inside trades. Because is there no other obvious logic behind Republicans in the House protecting the identities of clients who profit from trading on PII information, it is fair to conclude that members of the PII industry and/or their clients maintain their privileges in return for campaign contributions. If there was another rationale, congress would have articulated it loud and clear. Finally, it is reasonable to conclude that congress and President Obama are incapable of resisting irrational and self-serving demands by federal employees and political donors.

This in just one small issue in a greater scheme of things, but it exemplifies what can pass for acceptable business as usual in the two-party system. There are good reasons that millions of Americans have lost faith in the two parties and in the federal government as they now operate it. Despite continuing low public approval, congress and the President obviously believe that they can simply continue this kind of business as usual without even deigning to offer an explanation to the public. Obviously they think the public does not deserve an explanation.

Footnotes:1. Apparently, what caused congress to finally pass the STOCK Act was a combination of (i) dismal new lows in congressional approval ratings in 2012 and (ii) President's Obama's mysterious decision to actually lead on something for a change and make this into an issue. In passing the law, congress congratulated itself on its high ethical standards and all the usual self-serving propaganda. The fact that congress was, in essence, embarrassed into acting on this was ignored. It was just two-party politics as usual.

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Pros & cons of inside trading: http://www.econlib.org/library/Enc/InsiderTrading.html
Obama guts the stock act: http://finance.yahoo.com/blogs/breakout/stock-act-gets-gutted-why-care-173159298.html
White house's 1-sentence announcement of the new law: http://www.whitehouse.gov/the-press-office/2013/04/15/statement-press-secretary-s-716
librabry of congress summary details of the new law: https://www.govtrack.us/congress/bills/113/s716

Footnotes:
1.  
x

Harvard summary of the STOCK Act: https://blogs.law.harvard.edu/corpgov/2013/07/20/the-stock-act-and-the-political-intelligence-industry/
Reuters article: http://www.reuters.com/article/2013/05/08/us-usa-congress-politicalintelligence-idUSBRE94718C20130508
Mother Jones article: http://www.motherjones.com/politics/2013/11/political-intelligence-industry-jellyfish?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:%20TimMurphy%20%28Tim%20Murphy%29
WSJ research: http://online.wsj.com/news/articles/SB10001424127887324660404578202072713156116

Hot Air's conservative pol int industry viewpoint: http://hotair.com/archives/2013/01/18/wsj-the-burgeoning-political-intelligence-industry/

original post
Sometimes politics is just so much better than fiction. On Thurs., Feb. 16, 2012 (pages C1, C2; online article) the Wall Street Journal ran an article with the title "New Bill Clouds Legality of Tips." As it turns out, Congress is drafting a new law that would ban insider trading by the president, members of congress, congressional staffers and maybe some others. The article had nothing to do with tipping the waiter or bartender.

 Stardust launch 1999

The WSJ article was about information gatherers who work with people in congress and/or their staff and in the course of their work get inside information about impending laws, i.e., "tips". The WSJ noted the existence of a "political intelligence" industry dedicated to making money from this unique source of information. The people involved sell their inside information or "tips" to whoever has the cash and money to capitalize on the information. Those folks then make stock trades and money. According to an attorney familiar with this industry, the "legal risks may well outweigh the financial benefits" if the proposed bill becomes law.

This whole thing started up two or three months ago when the WSJ ran an article and 60 Minutes news show aired a piece at about the same time about people in congress, their staffers and lobbyists doing inside trades based on what congress was or was not going to do. Insider trading by congress, their staffers and lobbyists who do business with them is legal and thus a good way to make money.

People in congress and their friends have been doing inside trades for a long time. Occasional stories about this have come up over the years, but the topic apparently didn't penetrate public consciousness until (i) the two high profile WSJ and 60 Minutes stories and (ii) the public approval rating of congress dropped to below about 17% last year, an all time low until more recently when it it hit 10%. Profound public disapproval coupled with growing awareness that people in congress and their cronies were inside traders may have finally prompted a reluctant congress to fix the "problem".

If those things are not the reason for congress' attention to this topic, then who knows what is. Regardless, there is a reason. Congress partly feeds its massive ego on being above the law. They won't mess with that exhaulted status unless something very serious forces a change.

The congressional effort to deal with this public relations issue may cause the political intelligence industry massive potential collateral damage (or maybe not, if Republicans get their way). That was the focus of the WSJ article. The trouble with the pending legislation is that it may require people who gather tradable information to file disclosure reports. The horror of that is that the firms who work in this industry and the people who buy that inside information would likely lose their anonymity and the fees paid for such information might be made public. That awful scenario would ruin the whole political intelligence industry and cause massive job losses among the very wealthy and well-connected. Economic chaos would ensue. Or would it?

A plethora of questions from the bemused/irate

taxpayer outside the beltway

Why would the political intelligence industry be damaged at all if they had to disclose the people, fees and profits involved? After all, what they do is perfectly legal. Perfectly legal. What's wrong with making money? What's wrong with screwing the party (admittedly, usually anonymous) without inside information on the opposite side of an insider's trade? Its legal in this context. This is just a matter of winners and losers in a deadly serious capitalist game of making money. Some economists defend insider trading and some Republicans (Eric Cantor) are trying to defend the fine, job-creating, mom & apple pie, all-American political intelligence industry, so there must be merit to it, right?

Or, is it just that the people involved in this profitable industry don't want the rest of us idiots to know just how much money they make and how they make it, i.e., by cheating? But why? Are they embarrassed? Come to think if it, just what do inside trades do for the U.S. economy as a whole? It punishes fools without inside information and dumb enough to think they trade in a clean and fair marketplace. So, is inside trading good for the economy in some other way? Does it create confidence in our economy among those with inside access, wealth and power and that more than trumps any downside among the idiot masses or in the overall economy?

Allowing legal inside trading arguably undermines public trust in the federal government and financial markets by showing the reality of just how corrupt our government and "respectable" business people can be. It undermines public trust in congress. It is hypocritical, e.g., a few in congress complain about people in congress doing it but say nothing about people outside congress. If its bad for people in congress to do insider trades why isn't bad for those on the outside? Does the inside trade industry create jobs in the wider economy? If so, how many jobs and what are they - a few butlers and yacht and private jet salesmen?

The WSJ article quoted a political intelligence industry insider who said the new law will mean that some information providers "will simply quit doing it as the compliance creates burdens and costs." Huh? They will quit because they don't want to be outed and their information will likely become worthless or people will risk Martha Stewart's mildly adverse fate. That's probably not that big a risk, given the SEC's usual inability to police the markets, hedge funds and Bernie Madoff, but that's a different topic. Nonetheless getting caught by the SEC is a probably enough of a deterrent to cause the inside information to lose significant value to political intelligence operatives and their stalwart customers.

Fair and balanced

All that one can reasonably and fairly say about the people in congress, their staff and the fine "entrepreneurs" involved in the political intelligence industry is that they are sleazy cheats. Like Honey Badger, they just don't care. They are not criminals because what they do is legal. What Martha Stewart did and went to jail for, they do with impunity. This sleaze or variations of it has been going on in federal, state and local governments for decades, if not centuries.

Even Newt's failed fantasy called the 1994 Contract With America had a provision that laws applicable to us would also apply to people in congress. We all know how far that got. If insider trading like this was even marginally good for the country, then why doesn't congress just tell the public that and do nothing? On the other hand, if it was bad all along, then why didn't congress fix this in 1994 or decades or centuries ago? Either way, congress is far beyond being just ethically challenged. The institution is inherently corrupt. The people outside government who make money from this cheating scheme could not care less about the sleaze or the people they rip off so long as they (i) remain anonymous (look good via plausible deniability), (ii) make money and (iii) pay taxes, if any, at the 15% capital gains rate. Is that a sweet deal or what?

Now, how can a political story get any better than that? It is easy to see why congress' approval rating is 10%. They earned it.