Tuesday, November 25, 2008

Shelter us from the mess we made

The research and advocacy group Citizens for Tax Justice in the United States have sent a letter to offices in the US Senate and House of Representatives urging them to reverse legislation slipped into the US bailout package which, it has been estimated, will result in tax tax cuts for large banks eventually costing a total of $140 billion. The short letter is well worth reading in its entirety, as an illustration of the tax shenanigans that nobody seemed to be paying attention to during the good times.

CTJ's letter, following earlier work of theirs on the bailout (which we blogged here), refers to an arcane provision, known as Section 382, effectively saying that banks can ignore a provision in the tax code preventing abusive tax shelters. As CTJ explains:

"Section 382 was enacted by Congress in 1986 to stop companies from sheltering their income by purchasing shell companies with losses on their books. Before that time, many mergers took place not because they made economic sense but merely because they offered a tax shelter. Ever since Section 382 was enacted to end these abuses, corporate lobbyists have been promoting its repeal.

This is a classic example of what TJN has pointed to for a long time: again and again offshore abuses do absolutely nothing at all to promote better price or quality for the goods or services being offered. They are simply distortions in the economic system which, every time, tilt the economic playing field in favour of the wealthier sections of society, and undermine respect for the rule of law. They use these systems to preserve towering wealth inequalities during the best of times, and now they want to squirm out of the payback. In its press release CTJ commented on the sheer unfairness of this, achieved through thoroughly anti-democratic means:

The change they sought, which costs more than the measures mentioned above, has been accomplished through a two-page notice that directly contravenes the explicit intent of a statute enacted by Congress. . . . . Now it seems those lobbyists have achieved their goal without using the same long and difficult legislative process that lawmakers and advocates face when they want to enact, say, a $3 billion increase in the child tax credit for low-income families. Instead, bank lobbyists achieved their $140 billion goal through an agency action that contradicts the explicit intent of a statute enacted by Congress."

Of course, many people agree that strong stimulus measures have had to be taken to stop this economic mess from spiralling even further out of control. But this seems an unusually egregious, sly, soak-the-poor way of going about it. The Washington Post recently wrote on its dubious legality:

"The sweeping change to two decades of tax policy escaped the notice of lawmakers for several days, as they remained consumed with the controversial bailout bill. When they found out, some legislators were furious. Some congressional staff members have privately concluded that the notice was illegal."

And there are signs that the backlash against this measure, which is now widely noticed, may be strong enough to get it reversed. The New York Times has more.

And one final point from the CTJ letter, which is fundamental to everything we do. It underlines a principle that we wrote about at length in our long essay on corruption in The American Interest.

"These public services are threatened when people stop believing that the tax system that pays for them is fair. It is hard to imagine anything that could cause Americans to question the fairness of their tax system more than an agency telling the world’s largest banks that they can ignore an explicit provision of the Internal Revenue Code to reap a $140 billion benefit. Creating a vast new tax loophole to encourage bank mergers against the explicit intent of Congress should not be one of them."


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