It's the Math! If only that was more often declared in Washington D.C., a basic arithmetic test required of all elected representatives, we wouldn't be in the mess we're in today.
The White House has released their deficit reduction plan. First off, it seems the White House's PDFs have gotten larger, which in terms of actual specifics is a better sign. Of course it's interwoven with grand sounding phrases and other soaring political rhetoric that shines over the empty sky of generalities.
Maybe more specifics might help put the focus on what the administration's proposal is, instead of news covering pundits and sound bytes. The GOP shouts it's class warfare! Yes, it is. Corporations and most politicians have been waging war on the U.S. middle class for years. They outsource their jobs, raid their retirement, depress wages and foreclose on their homes.
By now most know the plan is $3 trillion additional deficit reduction over 10 years. Since more of the press has covered generalities and focused on the tax the rich part of the proposal, read the actual plan for yourself. It's in English, somewhat dense, but you should be able to follow along at home. The reason you want to read the plan yourself is because every news outlet, every cable show, ever blog and every tweet is someone's opinion, instead of what the plan actually says. Below are some details, pulled from the plan text, that you might actually like.
The plan caps federal contractor's executive compensation. Think about it. If a corporation wants to obtain federal contracts, they cannot pay their executives exorbitant fees. This is a clever way to cap CEO pay or make a dent, although it appears almost too low for incentives. (p. 21)
Another detail in the plan is who knew crop insurance was such a racket? It's another on the chopping block:
Crop insurance is a foundation of our farm safety net. Our Nation’s farmers and agricultural bankers understand the value of this effective risk management program, and currently 83 percent of eligible program crop acres are enrolled in the program. However, the program continues to be highly subsidized and costs the Government approximately $8 billion a year to run: $2.3 billion per year for the private insurance companies to administer and underwrite the program and $5.7 billion per year in premium subsidies to the farmers.
Another piece in the bill is to only allow patent holders of some pharmaceutical drugs 7 years instead of 12 for exclusive rights to manufacture and stops the practice of slight patent modifications in order to extend exclusivity to a drug. What happened to the concept of drug patent cross-licensing is not mentioned.
It appears President Obama is planning on lowering the corporate tax rate from the plan details and then remove a host of tax deductions, with the exception of tax deductions for U.S. investment and hiring. We'll see, this is the great political football and finding out what is actually legislation often would happens long after a bill is passed. Currently, multinational corporations, who can afford divisions of corporate tax attorneys, offshore outsourcing and tax havens pay almost no U.S. tax, while the smaller businesses, without those resources, pays more.
Here is where Obama is going after hedge fund managers and the text is a reasonable explanation of how hedge fund managers and others investing in the markets, through partnership business entities, pay 15% capital gains tax on income instead of 35%.
Tax carried (profits) interests as ordinary income. A partnership does not pay income tax; instead, the income or loss and associated character flows through to the partners who must include such items on their individual income tax returns. Certain partners receive a partnership interest, typically an interest in future profits, in exchange for services (commonly referred to as a “carried interest”). Current law taxes the recipient of a carried interest on the value at the time granted, which may be based on the value the partner would receive if the
partnership were liquidated immediately (for example, the value of an interest only in future profits would be zero). Because the partners, including partners who provide services, reflect their share of partnership items on their tax return in accordance with the character of the income at the partnership level, long-term capital gains and qualifying dividends attributable to carried interests may be taxed at a maximum 15-percent rate (the maximum tax rate on capital gains) rather than at ordinary income tax rates.
The President is proposing to designate a carried interest in an investment partnership as an “investment services partnership interest” (ISPI) and to tax a partner’s share of income from an ISPI that is not attributable to invested capital as ordinary income, regardless of the character of the income at the partnership level. In addition, the partner would be required to pay self-employment taxes on such income, and the gain recognized on the sale of an ISPI that is not attributable to invested capital would generally be taxed as ordinary income, not as capital gain. However,any allocation of income or gain attributable to invested capital on the part of the partner would be taxed as ordinary income or capital gain based on its character to the partnership and any gain realized on a sale of the interest attributable to such partner’s invested capital would be treated as capital gain or ordinary income as provided under current law.
There is a huge however in the attempts to get profits taxed as ordinary income:
any allocation of income or gain attributable to invested capital on the part of the partner would be taxed as ordinary income or capital gain based on its character to the partnership and any gain realized on a sale of the interest
attributable to such partner’s invested capital would be treated as capital gain or ordinary income as provided under current law.
Additionally this change will affect venture capitalists, not just hedge fund managers. VC firms invest in start-ups and when they hit it big, they make billions. That said, there are huge risks in funding a start-up and even the plain laid plans are subject to failure. A technology start-up usually requires millions just to get it's feet off the ground and the idea a guy in a dorm room magically creates a mufti-billion dollar enterprise is mainly a myth.
While nailing hedge fund managers and others who do not bring much value to the real or production economy is a good idea, perhaps for Venture capitalists, who do create jobs, wealth, even new industry sectors, there needs to be a large tax incentive offset.
I have one. Require VC's to hire U.S. citizens, first and foremost, and all production, business activity be located in the United States, in order to obtain a 15%, or capital gains tax treatment on all profits. You want to see, magically, all sorts of people be hired and trained, a blossoming cloud of U.S. manufacturing? That would do 'er. Wouldn't that be nice instead of venture capitalists requiring business plans have a China strategy. Many VCs today will not fund a U.S. start-up unless they plan on manufacturing in China and offshore outsourcing some tech jobs to India.
Say it ain't so, but some Buy American and Hire America tax incentives associated with investment capital would be a nice carrot to this stick.
Say what one will but at least Obama came out swinging for a change and it clearly threw the typical rhetoric on taxes off of it's A game, at least for a few minutes.