The very rich don’t pay taxes any more, and as Matt Damon says, they don’t use those unpaid taxes to create jobs either. Instead, they buy and sell existing financial instruments, or some new delights from the innovators on Wall Street, or bet against sovereign nations or buy US treasury securities, pushing the yield on short-term treasuries below zero. Corporations are sitting on trillions of dollars invested in financial instruments instead of productive businesses. Those returns are lousy, but better than what they could expect from investments in new businesses or new jobs. It’s gotten to the point that banks are charging customers fees for large deposits, as the banks have no use for the money and have to pay to insure them with the Fed. What can a poor corporatist president and congressional tools do to increase those returns?
One idea is to set up an infrastructure bank, and talk rich people into buying bonds issued by the bank. The reason to do this is that we don’t have the money to do infrastructure. That would require taxes, and taxing Americans, especially rich Americans, is UnAmerican. Under this proposal, rich people can buy bonds with the money they should have paid in taxes, and we have to pay them interest that will be tax-exempt.
The nation desperately needs to repair and renew its infrastructure, as Felix Rohatyn explained in this 2008 article in the New York Review of Books. Things have gotten worse since then, what with floods, tornados and the ravages of time.
So, the idea is to take most of the money we usually spend on infrastructure and give it to this infrastructure bank every year. We set up an unaccountable board of directors, if we can, since under Rohatyn’s plan, the CEO of the bank would have to be confirmed by the broken Senate. They would then apply a sort of industrial policy to decide if projects have merit under some set of rules.
Interest on the bonds would come from bank profits, which in turn would come from interest paid by states and cities on loans made by the bank or from tolls or other user fees, or some combination. Rohatyn sees this as a way to insure that the decisions made by the unaccountable board are subject to examination by Mr. Market, which won’t invest if it doesn’t think the projects will pay off. In other words, the bank is not accountable to citizens, but to Mr. Market, and its earthly representatives at Goldman Sachs (Chicago street parking, anyone?) and other non-human overlords.
We currently use private money for public purposes through our both taxable and tax-exempt state and local bonds. But governments can’t sell bonds if they are struggling just to pay the few remaining teachers and public safety employees they will have when the anti-tax Tea-Zombies are finished. So this can be seen as a way of replacing the existing system of bond issuance by states with a whole new way for rich people to avoid taxes. They not only don’t pay taxes, they get to force the rest of us to pay interest on the money they should have paid in taxes.
But wait, there’s more! Giant corporations are sitting on trillions of dollars of profits they allegedly earned overseas. That money isn’t subject to US taxation until it is repatriated. In 2004 Congress passed a bill with the lying name, the American Jobs Creation Act of 2004, which allowed corporations to repatriate this money at the low tax price of 5% instead of the 35% paid by small US businesses. It led to the loss of jobs, but shareholders got great dividends. That didn’t stop disgraced Senator John Ensign from trying to put it into the stimulus bill as a jobs creator, and now it’s back with the support of companies like Apple ($76 billion cash on hand, no one knows how much parked overseas).
It’s no surprise that Senator Charles Schumer (D-Wall Street) is thinking about supporting the idea with a cool twist: the pitiful tax payments would go to the infrastructure bank! Reuters’ MuniLand blog does the numbers:
Using these figures we can deduce that corporations would be taxed at a 2.5% rate vs. the normal rate of 35%. As for the number of job creation, it would go from approximately 34,000 this year before peaking in 2012 at 125,000 and then declining to 96,000 in 2013.
So Congress would allow corporations to pay $25 billion in taxes on $1 trillion of profits while creating 250,000 jobs over three years.
That was too creepy. Here’s another version :
In return for obtaining the cash infusion of overseas profits into the infrastructure bank, the Treasury would forgo taxation on a schedule set by auction. By a bidding mechanism, the Treasury would obtain the best deal offered for funding an amount, say $100 billion, in the infrastructure bank. We believe that firms would agree to invest in the bank for five or even 10 years in return for avoiding taxation. Why doesn’t Congress let firms bring back their overseas profits without taxation — if, and only if, they put the money into an infrastructure bank for a certain period? This bank would then issue low-interest, long-term loans for projects that in flusher times would be funded by municipalities or utilities.
In return for obtaining the cash infusion of overseas profits into the infrastructure bank, the Treasury would forgo taxation on a schedule set by auction. By a bidding mechanism, the Treasury would obtain the best deal offered for funding an amount, say $100 billion, in the infrastructure bank. We believe that firms would agree to invest in the bank for five or even 10 years in return for avoiding taxation.
Apple will have no trouble with this choice: a) pay taxes or b) avoid taxes and earn tax-exempt interest.