• Advertisement

Looking Over the Fiscal Cliff

Congress returns to Washington DC today – but “fiscal cliff” negotiations aren’t expected to resume until next week.

The delay may allow Congressional GOP leaders to bring a different position to the bargaining table.

Immediately following Election Day, GOP leadership seemed stuck in their “no new taxes” campaign rhetoric.

Since then, several prominent Republicans have questioned the wisdom of sticking with Grover Norquist’s infamous “pledge”.

Over the decades, Norquist’s “pledge” has not been a fiscally-conservative position.  It works like a ratchet wrench: things can only go in one direction; taxes can only go down.  And taxes have gone down – considerably – since Norquist started agitating.

Right now, the federal tax burden – tax revenues as a percentage of the economy – is at one of the lowest points in modern history.

Much of the decline was caused by cuts to corporate taxes.

Next week’s “fiscal cliff” negotiations need to be framed by this reality.  Particularly in a down economy, Congress can’t just cut its way to a balanced federal budget.  (They have tried that in Europe; it’s not solving anything.)

America’s working families know that you can’t balance the budget if revenues keep declining.  We’ve tried to keep our own books balanced despite declining wages.  Too many families have ended up doing just what the federal government has done: borrow money to make ends meet.  And that doesn’t work out very well, over the long term.

As the “fiscal cliff” negotiations continue, keep an eye on your Social Security and Medicare benefits.  It’s just like what happened with the NH Retirement System: the politicians want to cut our benefits, after we spent decades paying into the system.

Right now, even the politicians who are forswearing Norquist’s “pledge” are insisting on “entitlement reforms” in exchange for “new revenue”.  But that’s a false choice.  They are simply trading one way of ratcheting-down taxes for another.

Returning tax revenues to their previous (pre-Norquist) levels would go a long, long way toward solving our country’s debt crisis.

 

[Tax revenues shown above do not include Social Security, Medicare or other retirement program revenues.  Data is from Table 2.3 of http://www.whitehouse.gov/sites/default/files/omb/budget/fy2013/assets/hist.pdf.]

What Mitt Romney Taught Us about America’s Economy

Mitt Romney ran on his record as a businessman.  But over the summer, when bloggers and journalists started taking a closer look at that record, they shined some light into the shadows of the private equity industry.

The companies’ names change, but the sequence of events is basically the same:

  1. Rolling Stone writer Matt Taibbi:  “Bain put up a mere $18 million to acquire KB Toys … Less than a year and a half after the purchase, Bain decided to give itself a gift known as a ‘dividend recapitalization.’ The firm induced KB Toys to redeem $121 million in stock and take out more than $66 million in bank loans – $83 million of which went directly into the pockets of Bain’s owners and investors, including Romney. ‘The dividend recap is like borrowing someone else’s credit card to take out a cash advance, and then leaving them to pay it off.’ “
  2. Pensions and Investments writer Aaron Elstein: Hospital operator HCA borrowed $2.5 billion in October to help finance a $1.2 billion dividend payout, 40% of which went into the pockets of private equity owners Bain Capital and KKR & Co.
  3. Bloomberg News blogger William Cohan: “Welcome to Mitt Romney’s America. This is the true story of how in October 1993 buyout firm Bain Capital LLC, which Romney founded and ran from 1984 to (roughly) 1999, and its partners bought a steel mill in Kansas City, Missouri, from Armco Steel Corp. for $75 million, merged it with other steel companies, loaded it with too much debt, paid themselves big dividends and ran the company into the ground.”
  4. San Diego Free Press writer John Lawrence:  “In 1994, Bain bought medical equipment manufacturer Baxter International. After a merger with another company, it became known as Dade Behring.  Bain froze the workers’ pension benefits … it used the projected savings as the basis to borrow $421 million…  Dade paid Bain and its partner, Goldman Sachs, the entire amount as a dividend. … Bain and Goldman had only put down $81 million to buy the company in the first place. Yet, in June 1999 they received $365 million from the dividend—a gain of 4.3 times their initial investment.”
  5. Forbes Blogger Peter Cohan: “Consider Bain Capital’s Thomas Lee Partners’ $26 billion acquisition of Clear Channel Communications — home of Rush Limbaugh … This takeover has turned a company that formerly earned net income of nearly $1 billion into a money-loser (almost $4.7 billion in cumulative losses), resulted in thousands of layoffs, extracted millions in fixed management fees, and recently resulted in a multi-billion special dividend for the two PE owners paid for by highly risky borrowing.”
  6. David Stockman, Former Budget Director for President Ronald Reagan:    American Pad and Paper was a 20-bagger—that is, $5 million was invested in 1992 for a $100 million profit, a miraculous outcome for Bain, but hardly so for the Ampad workers and shareholders left holding the bag when the company went bankrupt in 1999 with massive debt.  … Ampad generated barely enough operating income during the first six months of 1996 to cover its swollen interest payments… Yet since Bain Capital had now harvested a dividend that was 12X its original investment, it was basically home free.
  7. Bloomberg News writer Anthony Luzzatto Gardner:  What’s clear from a review of the public record during his management of the private-equity firm Bain Capital from 1985 to 1999 is that Romney was fabulously successful in generating high returns for its investors. He did so, in large part, through heavy use of tax-deductible debt, usually to finance outsized dividends for the firm’s partners and investors.

Time and time again, companies controlled by Bain Capital borrowed money to pay a dividend to Bain Capital.  [Bain Capital then passed the dividends through to its partners and investors, including Mitt Romney.  Want to see all the different ways that dividends were passed through to Romney?  Read his Personal Financial Report here.]

Dividends are supposed to be a method of profit-sharing.  Companies figure out what their income and expenses have been, and how much they will need to invest in growing the business.  Then the rest of the profit is divided among the stockholders (that’s why the payments are called “dividends”).

Dividends used to be taxed as “ordinary income” – and for a lot of years, high-income taxpayers paid a 90% tax rate on dividend income.  That tax mechanism tended to encourage corporate decision-makers to reinvest profits in growing their business, rather than paying profits out as dividends.

But the Bush tax cuts changed the law so that dividends are treated as “capital gains” – which are currently taxed at a 15% rate.  That tax mechanism tends to encourage corporate decision-makers to pay out as much money as possible in dividends.

Bain, and some other private equity companies, took things one step further: they had companies paying dividends using borrowed money, not profits.

Does anyone think Bain Capital would be operating that way if dividends were still taxed at 90%?

For the past decade, our country’s tax policies have provided the wrong incentives to corporate decision-makers.  The low tax rate on dividends has encouraged executives to wring as much money as possible out of companies (however they can!).

That’s not good tax policy.

Good tax policy wouldn’t provide a financial incentive for executives to mortgage their companies, inflate the books and pay bootleg dividends.

Good tax policy would encourage executives to invest in growing their businesses; to structure their companies to succeed over the long haul; and to borrow only for legitimate business needs.

As our nation teeters on the fiscal cliff, there is also an opportunity: Congress can get rid of this obscene tax incentive that we learned about from Mitt Romney.

 

Using Retirement Funds to Balance the Budget


Up here in New Hampshire, we have some experience with politicians trying to use public workers’ retirement funds to balance the budget.

Back when Craig Benson was Governor, he wanted to use money from the public employee retirement system to balance the state budget.

But up here in New Hampshire, the public didn’t let him get away with that.  In 1984, Granite State voters amended our state Constitution to protect our employees’ retirement benefits.  New Hampshire Constitution Article 36-a [Use of Retirement Funds] provides:

“The employer contributions certified as payable to the New Hampshire retirement system … shall be appropriated each fiscal year … All of the assets and proceeds, and income there from, of the New Hampshire retirement system … shall be held, invested or disbursed as in trust for the exclusive purpose of providing for such benefits and shall not be encumbered for, or diverted to, any other purposes.”

Down in Washington DC, the federal government hasn’t been quite so careful.  Down in DC, public employee retirement funds are regularly used to balance the budget.

In fact, when the federal government hit the debt ceiling in May 2011, public employee retirement contributions were used to keep the federal government going for more than two months (until Congressional Republicans finally agreed to increase the debt limit).

At last report,

  • more than $800 billion of the federal debt was owed to the federal employees’ retirement system;
  • more than $600 billion of the federal debt was owed to military employees’ retirement programs;
  • more than $45 billion of the federal debt was owed to the Postal Service Retiree Health Benefits Fund.

State and local employees also own a significant chunk of the federal debt.  At last report, pension systems for state and local government employees held almost $190 billion in Treasury securities.

Adding it all up, the nation owes about $1.6 trillion to the various public employees’ retirement systems.  (That’s direct debt – not including unfunded liabilities.)

That’s only slightly more than what tax cuts for the wealthiest 5% have cost the Treasury since 2001.

Should we really be surprised that right-wing Republicans are trying so hard to “reform” public pensions?

The business lobbying group ALEC (“American Legislative Exchange Council”) has led the crusade.  “Taxpayers are no longer willing to bear the increasing cost of these plans… They are demanding reforms that will bring these plans into line with pension and OPEB benefits offered in the private sector.”  (What an interesting comparison!  Federal law generally prohibits private sector pension plans from loaning money to the company that sponsors the plan.)

As Chairman of the House Budget Committee, Rep. Paul Ryan followed ALEC’s lead – almost word-for-word.

Up here in the Granite State, we believe that government should fulfill the promises it has made to its employees.  We even amended our state constitution to ensure that public employees’ retirement funds would be used only to pay retirement benefits.

It’s time for the country to stop using public employee retirement funds to pay the cost of extending tax cuts for the wealthy.

It’s time for Congressional Republicans to stop trying to weasel out of their obligations to federal employees.

It’s time to keep the country’s promises.  (Now that’s a conservative value.)

——————————————————————–

Wait!  That $45 billion borrowed from the Postal Service Retiree Health Benefits Fund deserves a closer look.

The Post Office is losing money.  Most of that deficit is being caused by Congressionally-mandated payments to the Postal Service Retiree Health Benefits Fund.   That mandate dates back to the Postal Accountability and Enhancement Act of 2006.

Guess what else happened in 2006?  Just months before Congress decided to have the Postal Service pre-fund retiree benefits (and loan that money to the US Treasury), the country had hit the debt ceiling, and had borrowed from the federal employees’ retirement system to pay the bills.

(No, by the time 2006 rolled around, the Bush tax cuts hadn’t “jump started” the economy or started to erase the federal debt.  So Congress used federal employees’ retirement contributions as a Rainy Day Fund.)

Kind of convenient, isn’t it?  The country needs to borrow money, and suddenly there’s a new Fund to borrow from.

Only now, that Fund is drowning the Postal Service in debt.

Promises, promises…

A lot of promises were made, back when the Bush tax cuts were first enacted.

Back in 2001, the Heritage Foundation projected that:

  • “Under President Bush’s plan, an average family of four’s inflation-adjusted disposable income would increase by $4,544 in fiscal year (FY) 2011, and the national debt would effectively be paid off by FY 2010.”
  • “The plan would save the entire Social Security surplus and increase personal savings while the federal government accumulated $1.8 trillion in uncommitted funds from FY 2008 to FY 2011.” (“Uncommitted funds” is a fancy way of saying “surplus”.)

Did your family’s disposable income increase by $4,544 last year? (Wondering how the top 1% are doing? Browse through “How to Spend It” here.)

Has the national debt been paid off?
Is the Social Security surplus “safe”?
Has your family been able to increase your savings?

What happened to the $1.8 trillion federal surplus that was supposed to appear, after the tax cuts stimulated the economy and the “job creators” created jobs?

Lots of promises were made, back when Republican Leadership was forcing the Bush tax cuts through Congress. [Historical footnote: both the 2001 tax cuts and the 2003 tax cuts were passed in a way that made them exempt from Senate filibuster. In 2003, the Senate vote was 50-50 after Republican Senators John McCain, Lincoln Chafee and Olympia Snowe voted “nay”; and Vice President Dick Cheney cast the deciding vote to enact the bill.]

Those promises never panned out. But now, Republican leaders in Congress are acting as if high-income taxpayers are somehow entitled to the low tax rates they have been enjoying for the last decade

What’s up with this idea of “entitlement”?

Millions of American workers have paid into the Social Security system for decades, based on the promise that we would get Social Security benefits when we retired. Isn’t it reasonable for all of us workers to think we’re entitled to the benefits we contributed to? But now, Congressional Republicans are insisting on “adjustments to eligibility and benefits in the Social Security and Medicare programs.”

One man – Dick Cheney – cast the deciding vote to give the wealthy their tax cuts; but now Congressional Republicans think those tax cuts are somehow sacred. Just two days ago, Senate Minority Leader Mitch McConnell told a hometown newspaper that any “fiscal cliff” deal “must not raise taxes on wealthy.”

Sense of “entitlement”?

“Gifts” from the government?

The Bush tax cuts were supposed to “jump-start” our economy. They were supposed to “trickle down” and enrich working families. They were supposed to eliminate the country’s debt. They didn’t do any of that – but now Congressional Republicans want us to pay the price, through cuts to our Social Security and Medicare benefits.

Didn’t they get the memo? Romney-Ryan lost.

  • Subscribe to the NH Labor News via Email

    Enter your email address to subscribe to this blog and receive notifications of new posts by email.

    Join 12,539 other subscribers

  • Advertisement

  • Advertisement