Who Will Save The Hedge Funds?

It's great to offer two sides to a story, broadly speaking. But some stories just aren't true. For some odd reason, the Journal Sentinel thinks these stories still need to be told. Myth making at its worst; great job Journal!

I'm referring here to a recent opinion piece in the Journal from Brett Healy, president of the MacIver Institute, and Patrick Gleason, director of state affairs of Americans for Tax Reform - Bipartisan push for higher taxes trouble for Wisconsin companies. 

They are particularly upset over the possibility of "raising taxes on capital gains, particularly capital gains earned by private equity fund managers, commonly referred to as carried interest."

Who will save the hedge funds?!

They make unsubstantiated and dubious claims about the economic impact of private equity firms, followed by the well-worn double-taxation whine.

Capital gains taxes are a type of double taxation, and investment income taxes are among the most economically damaging forms of taxation.

Yes, taxing people for making money off of other money is so mean.

Also, the attempt to raise taxes on carried interest is the first step toward the long-held progressive goal of taxing investment income at the higher rates at which wages are taxed.

So, inherited wealth, which is often simply reinvested to achieve capital gains, should be taxed at a lower rate than income earned by people whom are actually working, building and doing something?

Proponents of raising taxes on carried interest often talk about tax parity and fairness, but note they never want to reduce wage income tax rates to the lower capital gains rate in order to achieve this. That's because the goal for most of those targeting private equity is to raise taxes on net in order to grow the size of government.

No. You can't reduce income taxes to lower the capital gains rate because we wouldn't be able to fund government. It's not about growing the size of government. It's about living in a civilized society with a working and equitable infrastructure. We need Social Security, Medicare, roads, bridges, trains, airports, fire fighters, police, parks, museums, universities, a military, and on and on. It's about paying the bills to assure our quality of life.

President Obama has reduced deficits and decreased the number of federal employees. That's leaner and meaner, not growing.

Yet, for this conservative, pro-business cabal, taxes can never be low enough on the wealthy, and the working masses should just get used to going without.

The belief that keeping the tax burden as low as possible promotes economic growth is supported by a large body of research.

Again. NO! Research, and the U.S.'s experience since the 80s, indicates the exact opposite of what the authors claim. Low rates have lead to slower growth, increasing income inequality and rising deficits.

As Dean Baker discusses:

...the desire to lower the tax rate on capital income as stemming from a desire to reduce "double taxation." The logic of this argument is that profits are taxed at the corporate level, so when they are taxed again at the individual level when they are paid out as dividends or lead to capital gains, this amounts to "double taxation." 

The problem with this logic is that the government gives individuals something of enormous value when it allows them to create a corporation as a legal entity. A corporation enjoys a wide range of privileges that these people would not have as individuals, most importantly that it allows them limited liability. This means that the individuals who own shares in the corporation are not liable for any harm the corporation may do beyond the value of their shares. 

We know that limited liability and other benefits of corporate status have great value because people choose to incorporate. They would not do so, and save themselves from having to pay the corporate income tax, if they didn't think the value of corporate status exceeded the burden of the tax. In this sense, the corporate income tax is a 100 percent voluntary tax, people opt to pay it in order to get the benefits of limited liability.

There is one other point that would have been useful to include in this discussion. Taxes affect the before-tax distribution of income insofar as they allow for a lucrative tax avoidance industry. To a large extent the private equity industry, which has created rich people like Mitt Romney and Peter Peterson, is about devising ways to raise corporate profits through tax avoidance. This is an important cost associated with having an excessively complex tax code. That is an important point that is always necessary to keep in mind in any discussion of the tax code.

The economic havoc that has been the Scott Walker administration is in part due to the fact that they have followed the playbook of the Healys and Gleasons of the world. Political apparatchiks whose proclamations have been debunked long ago. They can keep repeating their dead ideas (which has been going on for decades now), but we don't have to keep listening to it.

A bit of an aside: in the article, Healy and Gleason use $68 billion for the amount invested in Wisconsin by private equity since 2003, they claim this is an economic windfall for the state. Yet, later in the article, "Obama's budget indicates that this damaging tax increase would raise just over $2 billion per year in additional tax revenue, which is basically a rounding error in a more than $3 trillion federal budget." So, Obama's increase would raise $2 billion, which is just a rounding error. But private equity's roughly $5 billion per year investment in Wisconsin is an economic game-changer.

For Further Reading:

Fox Still Wrong About Income From Capital Gains: It's Still Income

Warren Buffett Is Right, the Wall Street Journal Is Wrong
Raise Capital Gains To Lower Income Inequality

From Investopedia:

Capital gain is an increase in the value of a capital asset (investment or real estate) that gives it a higher worth than the purchase price. The gain is not realized until the asset is sold. A capital gain may be short term (one year or less) or long term (more than one year) and must be claimed on income taxes. A capital loss is incurred when there is a decrease in the capital asset value compared to an asset's purchase price. 2. Profit that results when the price of a security held by a mutual fund rises above its purchase price and the security is sold (realized gain). If the security continues to be held, the gain is unrealized. A capital loss would occur when the opposite takes place.

An Inherently Capitalistic Approach May Not Be A Good Thing

Recent history (the last 40 years, and more specifically, the last decade or so) should have given "free markets", "capitalism" and "running it like a business" a cumulative black eye. From increased market volatility, to insecure retirement, to rising health care costs, and stagnating wages, running everything like a business and allowing blind faith in the "free" market has been a spectacular failure for 99.9% of the population.

But, leave it to Republicans to beat and ride that dead horse into the ground.

Just recently in the Journal Sentinel, Dan Steininger (of BizStarts Milwaukee, Wisconsin Early-Stage Fund and Successful Entrepreneurs LLC), in an effort to laud the supposedly impressive economic power of research parks, claimed that, at the end of the day, we should all push for more public dollars being used for more private speculation because it is an "inherently capitalistic approach."

Research parks are claimed to "kick-start" economies and create jobs "that attract new companies to the region."

Steininger exclaims, "The University of Wisconsin-Milwaukee's Innovation Park is now under construction in Wauwatosa. Its goal is to become the largest driver of economic development for southeastern Wisconsin in the 21st-century, knowledge-based economy."

Investment in research and development (R&D) is great. Increased educational spending, also, great stuff, in the general sense of things.

Although ... The "largest driver of economic development"?

I'm just saying there should be some perspective to counter the overblown rhetoric. There are many worthwhile endeavors and programs, which are important to a majority of citizens.

Government spending is wasteful when it goes to the poor, to teachers, or to public transportation. But there's never enough money for stadiums, research parks, and other private-interest pet projects. The projects that generally benefit a select few at the expense of many.

Small cabals of "entrepreneurs" are the ones who told us to run things like a business, cut taxes, and pump more money into private investment schemes. Yet, nothing has trickled down. Wages are down, health care costs are up, and retirement is increasingly unstable and/or out of reach. I don't know about you, but to me, that's not economic growth nor job creation.

For Further Reading:
The False Promise Of The Entrepreneurial University
Research Parks
Research, Science & Technology Parks: Global Best Practices
Technology In The Garden: Research Parks & Regional Economic Development
University Related Science Parks
UWM As Economic Engine? Dream On

Cronies of Rich Guys (CRG)

Mike Johnson wrote an article on August 7, 2009 in the Milwaukee Journal Senintel, Property Tax Levies up 5.1% in region. In all of the talk about property values and taxation, one of the persons quoted in the article caught my attention.

Chris Kliesmet is the executive administrator of CRG Network. He found the Public Policy Forum report (the data discussed in the article) showed "another sign of how onerous property taxes in Wisconsin have become." He feels, "local officials should be holding the line on spending and cutting taxes."

Does any of this sound familiar? Is this unbiased analysis? Or just conjecture? Is this opinion even necessary for the article? Does this simply interject conservative talking points for no apparent reason?

I guess the irony of a "watchdog" group complaining about taxes even though [because of the status of his group, "CRG Network Foundation, Inc. was formed as a 501(c)(3), non-profit, tax-exempt corporation"] their organization doesn't pay any taxes went over their heads.

Here are some excerpts taken directly from their website regarding their mission:

1. It's mission is to help citizens elect fiscally conservative candidates, assert property rights, and remove corrupt and/or fiscally irresponsible politicians from office
2. To lobby and advocate for fiscally conservative and property rights legislation on a local and statewide basis
3. Motivate fiscal conservatives to vote in increasingly larger numbers
4. Organize fiscal conservatives into the most influential political force in Wisconsin
5. Encourage fiscal conservatives to contribute the human and financial resources needed to grow and be successful

And here's some rhetorical flourishes from their site which give a bit more insight into their perspective:

• ...unions and other special interest groups
• ...tax-spending special interests and regulatory bureaucrats

The Journal Sentinel article simply labels the group as a "taxpayer watchdog group". As if they were unbiased and non-partisan. If it were a labor or union group - or a group with a mission of socially liberal policies, encouraging liberals to vote, etc. - they would have been labeled so, or at the very least called liberal or left-leaning. But then again, to be called "liberal" is supposedly bad. Even though "liberal" policies have been empirically shown to lead to a greater standard of living for a larger proportion of citizens over our history. Somehow, though, the label of "conservative" doesn't garner any disdain.

CRG was one of the initial agitators calling for the recall of Tom Ament. Scott Walker has only worsened the County budget. How about recalling him? Come on, CRG, where's your consistency? Walker has only dug a deeper budget hole. According to your logic, he must go. I'll gladly sign that recall petition.

CRG is nothing more than one of "starve the beast" organizations of the right. It's not about what's best for citizens. It's about their ideology being in control of government to steer largesse to their cronies rather than to workers and infrastructure. Seems more like a "watchdog" group for the rich.

In a recent post, I had shown government wasn't all that bad. And, as Paul Krugman wrote in a recent column, if it wasn't for government intervention in the economic catastrophe we're in, we'd be in a Depression. (And if conservative ideology hadn't invaded government policy and torn down the regulatory structures enacted after the Great Depression, we wouldn't be facing such an excruciating financial collapse, either.)

But, alas, the liberal and government bashing will continue. Why? Because it's easy, and because the right-wing conservatives have nothing concrete, substantive, or worthwhile to offer. Although, they'll form a PAC, call themselves "watchdogs", and get quoted in the local paper as credible public policy analysts.

Thirsty Suburbs

A May 13 Journal-Sentinel editorial, Unwarranted, chastised Clean Wisconsin for intervening, on behalf of the environment, in Waukesha's attempt to obtain diverted water from Lake Michigan. The paper concedes Clean Wisconsin meant well, but their input was unnecessary. We don't need debate, "pressure politics," or public education when we're dealing with such a non-issue like water?

But [thinking about the bigger picture] why not - regarding these water-starved areas - make them institute growth boundaries, population or usage limits, as a prerequisite of any water diversion? Obviously mother nature never intended such intensive uses and such concentrations of people in these areas. Also, the price should be much, much higher. Water is a vital resource becoming more and more scarce for certain communities. Those located in unsustainable areas should pay the real cost of obtaining diverted water. Meaning, a huge amount, an amount that encourages conservation and development in more sustainable areas.

Political Hack Boosterism

Is the Milwaukee-Journal Sentinel implicitly supporting Paul Ryan and Scott Walker in their attempts at advancement within the Republican party and on the national stage? It doesn't seem a day, or at least week, goes by without some glowing article about one of these characters in the paper.

In the article, Walker Gets Strong Support At GOP Convention, they report on Scott Walker's popularity at the state Republican convention, but no mention is made of his disastrous policies and performance for Milwaukee County.

Ryan Draws Inspiration From Family, Mentors is a big warm literary hug from the Journal to Paul Ryan. It's tells of his family, previous jobs, and his economic views. They mention his work at Empower America, a right-wing lobbying group, and for Sam Brownback, an ultra conservative Kansan. Of course none of this is put in context or given any weight, in that these experiences may give insight into how Ryan wants to or would govern. He has a degree from the University of Miami Ohio in economics, so this makes him a serious economist alongside Paul Krugman, John Keynes, and Joe Stiglitz. Or at least that's how the Republican party and the Journal-Sentinel have been selling the story whenever Ryan spouts something regarding taxes or deficits.

Ryan Shines As GOP Seeks Vision is the extended version of the Journal slobbering all over Paul. At one moment the article states, "Ryan has clearly made the bet that he can offer detailed, controversial, conservative ideas (personal accounts for Social Security; vouchers for Medicare; lower tax rates for the wealthy; freezing most domestic spending) and still prosper politically, as long as voters see him as substantive, civil, inclusive and attentive." But then the story primarily goes back to patting Ryan on the back, and doesn't really delve into the fact that this is the same old party line coming from a younger face.

A whole compendium of Walker falacies, errors, and other stories can be found at The Political Environment. They also have plenty on Paul Ryan. I, too, have a previous post on Walker's ineptitude, and two previous posts on Ryan (here and here).

To me, this supposed reporting is more correctly described as boosterism. Blatant boosterism from a media organization for political figures. It's as if they are reporting GOP talking points. I hope the Journal follows suit with glowing and loving pieces about Jim Doyle and whomever may be running against Paul Ryan next.