Tax & Budget

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Exposing the Tax Scam, One Year In: Maybe Only 99.9% Bad?

In the rubbish heap of legislation officially known as the Tax Cuts and Jobs Act of 2017 hid one tiny gem: Elimination of the deduction for the pay of the five most senior executives that exceeds $1 million. CEO and senior executive pay has skyrocketed in the last three decades even as wages for average Americans have stagnated. Where CEOs in the 1970s had pay packages no more than 20 times what their average workers took home, that ratio now exceeds 300:1 at most of the Fortune 500 companies.

It’s not that today’s CEOs are brighter or better stewards than their 1970s counterparts. After all, those earlier CEOs helped pioneer development of important pharmaceuticals, computers, and efficient automobiles. And many studies demonstrate there’s no connection between pay and performance. What’s worse is that corporations can deduct the pay from their tax bills in some instances.

Why should taxpayers subsidize these exorbitant multimillion dollar pay deals? They shouldn’t. And Congress, in theory, agrees. In fact, Congress has opposed these subsidies for nearly three decades since in 1993, Congress approved a section in the tax code (Sec. 162(m)) that eliminated the deduction for pay above $1 million for the five most senior executives. At that time, very few executives beyond the most senior received more than $1 million. The rationale was straightforward– expenses that aren’t necessary for running a business– such as martinis at lunch, can’t be deducted. Firms that pay less taxes because of such deductions are simply asking other taxpayers to fill the gap in funding important government services.

However, the 1993 law included a loophole: If the pay exceeding $1 million for each employee is subject to a “performance test” approved by shareholders, then it could still be deducted. In the law passed a year ago, Congress closed this loophole– but only as it applies to the five most senior executives. Just that tiny improvement to the tax will generate $10 billion in new tax revenue during the next ten years, according to congressional estimates. That could buy about 5,000 miles of new roads, or free tuition for 200,000 college students, or 30 new hospitals for veterans.

True elimination of the bonus loophole would mean the prohibition on deduction of multimillion dollar bonuses would apply to all, not just the top five, employees at a firm—which would be achieved by legislation supported most notably by Sen. Jack Reed (D-R.I), Sen. Richard Blumenthal (D-Ct.) and Rep. Lloyd Doggett (D-Texas).

Since President Trump signed the law on December 22, 2017, it’s too early to determine whether this small pay reform hidden in what is otherwise a wreck of a law will bridle rising CEO pay; corporations would not have reflected the impact in pay for that year. However, a Fortune analysis showed that the CEOs of the largest 350 companies received an average of 18 percent more in 2017 than in 2016, or about $18 million.

But politically, this small change buried in the 2017 law puts Republicans on the record in support of ending deductions for multimillion dollar performance-based pay. That better positions the ability to pass legislation to fully close the loophole and eliminate the deduction for high pay for all employees paid more than $1 million. While only a few employees outside the C-suite took home such packages in the 1990s, thousands of people at a single companies do today. In 2007, in New York City alone, 4,793 bankers made more than $1 million in bonus payments. This information was only available because of one of the reports looking into the financial crash of 2008, and the pool of uber-million packages undoubtedly has grown the last decade. Congress estimates closing the entire loophole would generate $50 billion over ten years. That’s 50,000 miles of roads, tuition for a million students, or 150 new veterans’ hospitals.

We look forward to a genuine discussion about needed changes to the tax code. This should include fully eliminating the bonus loophole, and other tax-related pay reforms. As Americans rightly reflect on the injustices of Trump’s corporate tax cut bill one year after enactment, we can find at least some comfort that lawmakers of all political stripes agree that escalating senior management pay deserves reform.

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Exposing the Tax Scam, One Year In: Johnson Amendment repeal, the bullet we have to keep dodging

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It’s been one year since the passage of the Tax Cuts and Jobs Act, legislation that was in essence a scam—it served as a massive transfer of wealth from working people to the already-rich and corporations while being sold as paying for itself.  Public Citizen is exposing the truth behind the bill by publishing a series of blogs this week examining the serious consequences of the law. But, as we examine last year’s tax cut bill, it’s also worth remembering what, thanks to hard work from organizations and people across the country, including Public Citizen’s members, didn’t make it into the bill that would have made it even worse.

The initial draft of the tax giveaway package contained a very pernicious proposal that would have gutted the Johnson Amendment, the law that keeps 501(c)(3)s from doing partisan political activity like endorsing candidates for office. Without that prohibition, wealthy donors would be able to go to their local church pastor and say “You want my donation to help with a new parish hall? Then I want to hear you give an endorsement of my choice for mayor from the pulpit on Sunday.” Even under the Johnson Amendment repeal language that was in the initial drafts of the tax package, which was billed as being “limited” in scope, the head of a large university would be able to tweet endorsements to thousands of followers who trust the university’s opinion.

As bad as that partisan manipulation would be, the impacts of repealing the Johnson Amendment could even be worse than that– many new nonprofit groups would immediately form specifically to take advantage of the new rules in order to do electioneering work. And to top it all off, the wealthy donor would end up getting a tax break for boosting the candidate of their choice, and their name would not be disclosed to voters. Our Lady of the Perpetual Tax Break could become the next big dark money engine.

Those consequences and many others are why nonprofit and religious groups a year ago were so united in opposition to weakening or repealing the Johnson Amendment as part of the tax package. Through the activism of these groups and their members, and assisted by an arcane procedural rule, the Johnson Amendment repeal language thankfully didn’t make it into the final Tax Cuts and Jobs Act bill.

But that doesn’t mean Republicans have stopped trying to repeal the block on political endorsements by (c)(3) nonprofits. In fact, only last week the Chairman of the House Ways and Means committee, Representative Kevin Brady, put out a last-gasp tax bill he hopes to pass in the lame duck session that contained this same Johnson Amendment-destroying language that we successfully kept out of the Tax Cuts and Jobs Act bill one year ago. The House could vote on the bill this week. 109 groups, including Public Citizen, just signed a letter making it clear that these kinds of changes are unacceptable.

Though we fought to keep it out of the law that was passed one year ago, we must remain vigilant. The introduction of Johnson Amendment repeal in Brady’s bill is another indication of how much influence a very few people seeking more power have and how much they want this change. However, with YOUR help, we can block changes to the Johnson Amendment’s vital protections! Call (202) 224-3121 to be connected to your U.S. Representative and tell her or him to oppose any bill that contains harmful changes to the Johnson Amendment.

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Exposing the Tax Scam, One Year In: Hearing From the Public

One thing made clear by the outcome of the November election is that the massive tax giveaway bill, the Tax Cuts and Jobs Act passed in December 2017, was hugely unpopular, especially with voters in states where it mattered most. Instead of going to the table in a bipartisan manner to hammer out how to really fix the tax code to best invest taxpayer dollars, the GOP rushed through a $2 trillion dollar package of tax cuts greatly tilted toward benefitting the super rich and corporations. Workers were promised bonuses and wage hikes as the tax cuts were supposed to “trickle-down.” Unsurprisingly, President Trump’s magical $4,000 check for everyone has yet to manifest, and it never will. In a word, the tax bill was a scam.

Another predictable, but still sad, outcome of the tax giveaway scam is that we’re seeing job cuts at American factories with well-known names like GM and Harley-Davidson. And because of backward incentives baked into the tax bill that let companies pay half or less the rate of tax on profits made by foreign subsidiaries it will attract even more multinational corporations to outsource jobs and investments.

And, instead of building up operations, corporations are buying back their own stock at record volumes, which increases the value of existing shares and lines the pockets of CEOs getting fat bonuses. At current count, companies have spent 121 times as much on buybacks as on giving bonuses or increased wages for workers.

It doesn’t stop there. Millionaires will reap the majority of the “small business” breaks, while true small business owners were left with a tax code more complicated and difficult to navigate than before. Gender and racial inequities were further entrenched. These are just a small sampling of the many ways the tax law changes have proven to be a failure one year after the tax giveaways were gifted to the corporations and mega wealthy.

Certainly, we already know that the new House majority has prioritized release of presidential tax returns as part of their ethics platform scheduled first up on the docket and incoming Ways & Means Chairman Richard Neal has the power to obtain President Trump’s tax return. Not only are the returns critical to understanding the extent to which he personally benefitted from the Tax Cuts and Jobs Act, but the potential ramifications for the Mueller investigation are also huge. The New York Times has already documented alleged past tax fraud and New York State is currently suing the Trump family for their tax dealings through the Trump Foundation.

As important as that is for oversight and protecting our democracy, American families and communities across the country are suffering from a lack of available government funding. Teachers are going on strike because of the appalling conditions at their schools, our streets and bridges are crumbling, and health care is accessible for far too few. These problems are only going to get worse unless we act to repeal the tax handouts to the rich and corporations, close the loopholes that are bleeding our country of tax dollars, and implement new sources of revenue generation like taxing Wall Street trades.

As we mark one year since the passage of this terrible tax bill, Congress needs to hear from the public that they must do more than just focus on Trump’s tax returns, they need to repeal cuts, close loopholes, and get new revenue to invest in a better America.

Public Citizen and our partners are hosting a chat on Twitter on December 17 at 2:00 pm Eastern. You can add your voice to the conversation and join the chat by following #TaxScamTurns1. And, while you’re at it, why not tag your Tweets with the handle of your U.S. Representative (or U.S. Representative-elect) and tell her or him that in addition to seeing Trump’s tax returns, America needs to unrig the tax code and implement a tax fairness vision that creates significant revenues to invest in our communities.

Finally, follow this blog for a series of posts this week as we expose the tax scam one year in.

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Congress Continues to Handicap Bright Line Rules

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Last week, the U.S. Department of the Treasury Inspector General for Tax Administration (TIGTA) published a report that once again criticized the Internal Revenue Service for failing to adequately enforce the rules on nonprofit political activity. The report comes as no surprise; Public Citizen’s Bright Lines Project has been calling out the problems with the IRS’s subjective standards in this area for years.

As the TIGTA report says, “There should be limits on the use of discretion in this area given the potential that bias could enter into decisions of whether or not to refer these types of cases for examination.” We could not agree more!

These sorts of objective standards would allow the agency to judge what is and isn’t political activity would make compliance and enforcement easier and help the IRS avoid repeatedly being called out by its own Inspector General watchdog. Without objective standards, nonprofits willing to flout the rules essentially get a free pass to engage in electioneering, while the vast majority of nonprofits that want to follow the law are left in the dark as to what is and isn’t permissible under their tax status.

The scandal here, unfortunately is not the inaction by the IRS, it’s the degree to which Congress has taken an active role to attempt to block the type of objective standards we need from ever being put into place—rules that are essential to objectively determine when a nonprofit is engaging in political activity. In the nonprofit space, this recent TIGTA report provides evidence of the degree to which Congress and the administration have been handicapping the IRS’s ability to enforce political activity tax laws. The report states that of more than 6,500 reports of impermissible electioneering activity between 2015 and 2016, not a single nonprofit received a negative consequence (some cases are still pending).

To make it worse, this report comes in the face of blatant signals from the Trump administration that it plans to make even further reductions in enforcement of the limits on partisan activity for nonprofits. In June, Vice President Mike Pence promised to repeal the Johnson Amendment – the law that keeps 501(c)(3)s from partisan election spending. And in July, the Treasury Department stopped requiring 501(c)(4)s to disclose major donors to the IRS, removing one of the only ways the IRS can see whether groups are illegally spending foreign money in our elections.

Several years ago, the IRS tried to put objective standards in place to solve these problems, but Congress stopped these efforts. A poison pill rider inserted into the 2015 government funding package – that has been carried through to today on subsequent appropriations bills – blocked IRS and Treasury Department rulemakings that might have put in place objective standards. As Congress negotiates the Treasury Department’s funding (ahead of the Dec. 7 deadline), lawmakers need to remove this old rider and reject any new riders that would limit enforcement of the Johnson Amendment.

Even in the broader sense, Congress’s refusal to fully fund the IRS has hamstrung its enforcement divisions, costing taxpayers billions by letting the wealthiest and sneakiest among us get away with stealing money from the government. According to a ProPublica article published earlier this month, prosecution of tax fraud as a primary crime has declined dramatically since 2010– a decline that tracks nearly exactly with Congress’s decisions to defund the agency. Due to this lack of enforcement, business owners have been able to swindle $125 billion per year from taxpayers, during a period when Americans were struggling to regain their financial footing after the 2008 stock market crash.

One of the most important things to remember about the tax code, whether talking about nonprofits or individuals: the vast majority of us want to pay our taxes correctly and follow the law. The US has an extremely high tax compliance rate compared to the rest of the world, and that’s something we should be very proud of as individuals and as a nation.

However this recent report from the IRS’s Inspector General should make Congress ashamed. A lack of enforcement by government agencies enables a rigged system. Reports that rich people or nonprofits willing to flout the rules and are treated differently than the rest of us threaten  a critical part of our democracy and weaken the fabric of our American values.

This issue doesn’t have nearly enough traction on the Hill. You can help by raising the issue with your Senators and Member of Congress.  Tell them to remove the poison pill rider blocking the IRS from doing its job, and to put bright line rules in place to make the tax rules for nonprofits fair.

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Tax Cuts 2.0: the Sequel Is As Bad As the First

This post was co-authored by Emily Peterson-Cassin.

It’s been less than a year since President Trump’s tax giveaway package handed a massive bag of money to the wealthy and corporations at the expense of the rest of us. As if that wasn’t bad enough, almost as soon as the cuts were passed, the President and his friends began talking about how their giveaway didn’t go far enough.

Fast forward to now– and conservatives in the U.S. House of Representatives are poised to do it again.  They plan to move ahead with a second round of tax handouts even though the first GOP tax giveaway was a decided flop – where corporate shareholders and the mega wealthy received a windfall and working families got fleeced.

The first round of tax cuts legislation enacted in December 2017, the Tax Cuts and Jobs Act, will add nearly $2 trillion to our nation’s deficit that will be end up being paid for by cuts to critical services like Medicare, Medicaid, education, nutrition assistance and other programs Americans depend on. The legislation sharply reduced the tax rate paid by corporations and paved the way for increased outsourcing of jobs and investment by multinational companies using accounting gimmicks to escape contributing their fair share of taxes.

As expected, the GOP’s “trickle down” promises for working Americans did not pan out—with more than 101 times as much money going toward enriching shareholders as compared to increasing employees’ wages or bonuses. The public rightfully saw through the sham, and last year’s tax changes remain unpopular with voters across the country. Nonetheless, that hasn’t stopped the GOP from trying to double down on the tax giveaways to the wealthy.

The proposed sequel to the Tax Cuts and Jobs Act has been dubbed “Tax Cuts 2.0.” Because the first round of tax cuts prioritized slashing the taxes corporations pay, it made those cuts permanent. However, the giveaways aimed at very wealthy taxpayers were set to expire after 10 years. The main component of the tax cuts round 2.0 package is a bill to make permanent the individual changes that help the richest among us.

Make no mistake, though it included some minor provisions aimed at working families, the temporary cuts for individual tax filers included in last year’s tax legislation were intended to benefit the very wealthy. For example, the top tax rate that the highest earners pay was reduced from 39.6 percent down to 37 percent. And, the law shielded estates valued up to $11 million dollars (or twice that for couples) from having to pay estate tax when previously the exemption levels were half as expansive. (It should be noted that even the former limits were far too weak to prevent gross accumulations of wealth by a small number of families.) Moreover, the original tax cut law’s “Trump Loophole” deduction for LLCs and partnerships–the way that the president has organized his hundreds of companies–has been shown to mainly provide benefits to millionaires.

As is typically the case with Hollywood blockbusters, this sequel to first tax giveaway performance is irredeemably terrible. Tax cuts 2.0 has a jaw-dropping price tag of $2.8 trillion, nearly 50 percent more than the original tax cuts legislation. This bleeding of government revenues through massive tax cuts for the wealthy and corporations will further exacerbate the upcoming cuts to public services like health care and education, while locking in  inequities that  further rig our economic system to benefit CEOs and other wealthy individuals.

Unfortunately, tax cuts 2.0 was passed last week by the U.S. House Ways & Means Committee, and Speaker of the House Paul Ryan has vowed to bring a vote on the proposal before the end of September. (As a last minute incentive to wealthy mid-term campaign donors.) However, even if that happens, the proposal is likely dead on arrival  in the Senate, as Senators fear another vote against the interests of their non-billionaire constituents.

Spoiler alert: If eventually passed, the tax cut sequel will widen gulf between the rich and the poor, and lead to unconscionable cuts to Medicare, Medicaid, public education and more. So, now is the perfect time to call your U.S. Representative to tell her or him to oppose tax cuts  2.0. And, if you are on social media, you can follow the hashtag #TaxScam2 to join a Twitter storm on Friday, September 21 at noon ET and add your voice to the collective call to oppose more tax cuts for the rich.

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