The stories you want. The opinions that matter.
No, thanks
CARES act, CARES check

Billionaires Got Much More Than That $1200 CARES Check

Reprinted with permission from ProPublica.

Do you want to see how legislation that was supposed to be a bailout for our economy ended up committing almost as much taxpayer money to help a relative handful of the non-needy as it spent to help tens of millions of people in need? Then let's step back and revisit parts of the Coronavirus Aid, Relief and Economic Security Act and look at some of the numbers involved.

The best-known feature of the CARES Act, as it's known, is the cash grant of up to $1,200 per adult and $500 per child for households whose income was less than $99,000 for single taxpayers and $198,000 for couples. These grants are nontaxable, which makes them even more valuable. Some 159 million stimulus payments have gone out, according to the IRS.

Read NowShow less
How Trump Squeezed Homeowners For A Trillion Dollars

How Trump Squeezed Homeowners For A Trillion Dollars

Reprinted with permission from ProPublica.

In recent weeks, President Donald Trump has been talking about plans for, as he put it, a “very substantial tax cut for middle income folks who work so hard.” But before Congress embarks on a new tax measure, people should consider one of the largely unexamined effects of the last tax bill, which Trump promised would help the middle class: Would you believe it has inflicted a trillion dollars of damage on homeowners — many of them middle class — throughout the country?

That massive number is the reduction in home values caused by the 2017 tax law that capped federal deductions for state and local real estate and income taxes at $10,000 a year and also eliminated some mortgage interest deductions. The impact varies widely across different areas. Counties with high home prices and high real estate taxes and where homeowners have big mortgages are suffering the biggest hit, as you’d expect, given the larger value of the lost tax deductions. But as we’ll see, homeowners all over the country are feeling the effects.

I’m basing my analysis on numbers from two well-respected people: Mark Zandi, the chief economist of Moody’s Analytics; and Hugh Lamle, the retired president of M.D. Sass, a Wall Street investment management company.

Zandi’s numbers are broad — macro-math, as it were. Lamle (pronounced LAM-lee) is a master of micro-math. It was Lamle who first got me thinking about home value losses by sending me an economic model that he created to show the damage inflicted on high-end, high-bracket taxpayers in high-tax areas who paid seven digits or more for their homes.

Lamle starts with the premise that homebuyers have typically figured out how much house they can afford by calculating how much they can spend on a down payment and monthly mortgage payment, adjusting the latter by the amount they’d save via the tax deduction for mortgage interest and real estate taxes. His model figures out how much prices would have to drop for the same monthly payment to cover a given house now that this notional buyer can’t take advantage of the real estate tax deduction and might not be able to take full advantage of the mortgage interest deduction.

After I showed Lamle’s model to my ProPublica research partner, Doris Burke, she steered me to Zandi’s research, which I realized could be used to calculate national value-loss numbers.

Ready? Here we go. The broad picture first, then the specific. This gets a little complicated, so please bear with me.

Zandi says that because of the 2017 tax law, U.S. house prices overall are about 4 percent lower than they’d otherwise be. The next question is how many dollars of lost home value that 4 percent translates into. That isn’t so hard to figure out if you get your hands on the right numbers.

Let me show you.

The Federal Reserve Board says that as of March 31, U.S. home values totaled about $26.1 trillion. Apply Zandi’s 4 percent number to that, and you end up with a $1.04 trillion setback for the nation’s home owners. That’s right — a trillion, with a T.

Please note that Zandi isn’t saying that house prices have fallen by an average of 4 percent. That hasn’t happened. What he’s saying is that on average, house prices are about 4 percent lower than they’d otherwise be.

Given that the Fed statistics show that homeowners’ equity was $15.76 trillion as of March 31, Zandi’s numbers imply that homeowners’ equity is down about 6.6 percent from where it would otherwise be. (That’s the $1.04 trillion value loss divided by the $15.76 trillion of equity.)

This is a very big deal to families whose biggest financial asset is the equity they have in their homes. And there are untold millions of families in that situation.

While Zandi and I were having the first of several phone conversations, he sent me a county-by-county list of the estimated home-price damage done to about 3,000 counties throughout the country. I was fascinated — and appalled — to see that the biggest estimated value loss in percentage terms, 11.3 percent, was in Essex County, New Jersey, the New York City suburb where I live.

In case you’re interested — or just snoopy — the four other counties that make up the five biggest-losers list are: Westchester County, New York, suburban New York City, 11.1 percent; Union County, New Jersey, which is adjacent to Essex County, 11.0 percent; New York County, the New York City borough of Manhattan, 10.4 percent; and Lake County, Illinois, suburban Chicago, 9.9 percent.

You can find Zandi’s county-by-county list in our Data Store. Eyeball the list, and you’ll see that counties throughout the country have home values lower than they would otherwise be.

Here’s how it works. Zandi took what financial techies call the “present value” of the property tax and mortgage interest deductions that homeowners will lose over seven years (the average duration of a mortgage) because of changes in the tax law and subtracted it from the value of the typical house. That results in a 3 percent decline in national home values below what they would otherwise be.

The remaining one percentage point of value shrinkage, Zandi says, comes from the higher interest rates that he says will result from the higher federal budget deficits caused by the tax bill. He estimates that rates on 10-year Treasury notes, a key benchmark for mortgage rates, will be 0.2 percent higher than they would otherwise be, which in turn will make mortgage rates 0.2 percent higher.

Even though interest rates on 10-year Treasury notes are at or near record lows as I write this, they would be even lower if the Treasury were borrowing less than it’s currently borrowing to cover the higher federal budget deficits caused by Trump’s tax bill.

If Zandi’s interest-rate take is correct — it’s true by definition, if you believe in the law of supply and demand — even homeowners who aren’t affected by the inability to deduct all their real estate taxes and mortgage interest costs are affected by the tax bill.

How so? Because higher interest rates for buyers translate into lower prices for sellers and therefore produce lower values for owners.

You can argue, as some people do, that real estate taxes should never have been deductible because allowing that deduction is bad economic policy that inflated home prices and favored higher-income people over lower-income people.

But even if you believe that, there’s no question that eliminating the deduction for millions of homeowners inflicted serious financial damage on homeowners who had no warning that a major tax deduction that they were used to getting would be wiped out.

As a result, homebuyers who had taken the value of the real estate tax deduction into account when buying their homes had their home values and finances whacked without warning. Interest deductions on mortgage borrowings exceeding $750,000 were cut back, compared with interest deductions on up to $1 million under the old law — but that doesn’t affect anywhere near as many people as the cap on real estate tax deductions does.

(A brief aside: Among the modest winners here are first-time buyers who purchased their homes after the tax law took effect and benefited by paying less than they would have paid under the old tax rules.)

Now, to the micro-math.

Lamle’s model isn’t applicable to most people because it works only for taxpayers with a household income of at least $200,000 a year who paid at least $1 million for their homes. But the principle underlying Lamle’s model applies to everyone who owns a home or is interested in owning one. To wit: You calculate the tax-law-caused loss of value by figuring out how much a house’s price needs to fall for buyers’ or owners’ after-tax costs to be the same now as they were before the tax law changed.

“People buying large-ticket items typically focus on after-tax costs of ownership,” Lamle told me. “The amount that many buyers can afford is affected by limits on their financial resources. Therefore, as their tax costs increase substantially because of the loss of tax deductions, they have less money available to pay for homes and to take on mortgage debt.”

At the suggestion of one of my editors, I asked Lamle to use a modified version of his economic model to estimate the tax law’s impact on the value of a theoretical house in the New York City suburb of West Orange, New Jersey, purchased for $800,000 in 2017 by a theoretical family with a $250,000 annual income. Those home value and income numbers are very high by national standards — but middle class by the standards of large parts of suburban Essex County.

Real estate tax on that theoretical house would run about $28,900 a year, according to statistics from the New Jersey state treasurer’s office. That tax used to be fully deductible for federal tax purposes. Now, it’s not deductible at all if you assume that the house’s owners are taking the standard deduction on their federal returns. Or that even if they’re itemizing deductions, they’re paying at least $10,000 of state income taxes, which means they don’t get any benefit from deducting property taxes.

According to Lamle’s calculations, this inability to deduct real estate tax has reduced the home’s value by $138,720, assuming a 5 percent mortgage rate. At a 4 percent rate, the value loss is $173,400. (For the math and assumptions underlying these numbers, see his methodology below.) So if the family put up $200,000 — 25 percent of the purchase price — to buy the house, more than half of that investment has been wiped out.

Obviously, it’s impossible to prove that Zandi and Lamle are right about the impact they say the tax law is having (and will continue to have) on home prices, because there’s no way to gauge the accuracy of their numbers. But the logic is compelling.

The loss in home values is crucial because it turns out that lots more people have bigger financial stakes in their houses than in their stock portfolios, which have thrived as the Trump tax law turbocharged corporate earnings and stock prices.

In fact, 73.5 percent of households that own homes, stocks or both had bigger stakes in the home market than in the stock market, according to David Rosnick, an economist at the Center for Economic and Policy Research, who parsed Federal Reserve data at my request.

Now, let’s put things in perspective, set aside home value losses for a minute and talk about the cash that people are getting from Trump’s 2017 tax law. It isn’t all that much for most families. Households’ average federal income tax has fallen by $1,260 a year, according to the Tax Policy Center. That average is skewed by big savings realized by people with big incomes; the median family’s tax cut is only about half as much as the average cut, by the Tax Policy Center’s math.

This means that means that — for taxpayers of higher income and more modest income — the income tax savings are likely small beer compared with the hidden loss inflicted on many of them by lower house values.

Back to the main event. And some final — but important — numbers.

According to the Tax Policy Center, the Treasury will get $620 billion of additional revenue over a 10-year period because people can’t deduct their full state and local taxes.

That, in turn, covers most of the 10-year, $680 billion cost of the income tax break that corporations are getting. So you can make a case that my friends and neighbors and co-workers in New York and New Jersey — and many of you all over the country — are paying more federal income tax in order to help corporations pay less federal income tax.

That, my friends, is the bottom line.

When Kushner’s Grandmother Bemoaned Restrictions On Immigrants

When Kushner’s Grandmother Bemoaned Restrictions On Immigrants

Reprinted with permission from ProPublica.

 

Jared Kushner’s Grandmother Bemoaned the “Closed Doors” That Faced Refugees to America

Way before Jared Kushner became internationally famous by moving into the White House to work for his father-in-law Donald Trump, those of us who live in New Jersey knew the family was an amazing story of immigrant success.

Jared Kushner’s paternal grandparents, Holocaust survivors Joseph and Rae Kushner, came to the United States in 1949 as impoverished Eastern European refugees and begat a family whose office buildings, apartment complexes and philanthropic efforts are important parts of the business and social landscapes in New Jersey and elsewhere.

Yes, there are scandals and feuds besetting parts of the family, and Jared’s father Charles racked up some prison time. But the family’s rise from refugees to titans is an example of what can happen when people are admitted into this country, work hard and prosper.

I got curious about the Kushner history after Jared invoked his immigrant forbears in his recent speech at the new U.S. Embassy in Jerusalem. “I keep a photo of them on my desk” in the White House, he said.

As a grandson of Jewish Eastern European immigrants myself — my late father and Kushner’s late grandmother even had the same birth name, Slonimsky, but spelled it differently — I was impressed that Kushner remembers his roots and discusses his origins publicly.

But I wondered how — or if — Kushner could reconcile his father-in-law’s “keep ’em out” immigration philosophy with the story of his paternal grandparents, who spent 3 1/2 years in a displaced persons camp in Italy before being admitted to the U.S. In a 1982 interview given by the late Rae Kushner to a Holocaust research center, Jared’s grandmother talks about how wrong she felt it was for the U.S. to let people like her and her husband languish in displaced persons camps for years awaiting permission to enter the country.

I was especially taken by this portion: “The day after we got married [in Budapest, Hungary], we smuggled ourselves over the border into Italy,” Rae Kushner said. “This was our honeymoon. In Italy, we sat in a displaced persons camp. It was like being in the ghetto again. … Nobody wanted to take us in. So for 3 1/2 years we waited until we finally got a visa to come to the United States.”

Later on, she says that, “For the Jews, the doors were closed. We never understood that. Even President Roosevelt kept the doors closed. Why?”

The answer, of course, can be found by looking at some less-than-inspiring U.S. history. The Immigration Act of 1924 set stringent limits on the number of people the U.S. would admit from Poland (where Joseph and Rae Kushner were from) and other Eastern European countries. Franklin Roosevelt didn’t seek to make exceptions to those rules — perhaps because, in addition to the immigration quotas, there was a nasty outfit called the America First Committee. Its prominent members included Charles Lindbergh, the famous aviator, and its supporters included Father Charles Coughlin, the anti-Semite who gained huge popularity as “the Radio Priest from Royal Oak, Michigan.” The committee tried to keep the U.S. out of World War II and blamed American Jews for supposedly pushing Roosevelt to have our country enter the hostilities. The committee folded after Japan attacked Pearl Harbor in 1941, but its influence lingered.

It all added up to huge impediments for Jewish refugees to enter the United States. I wanted to know how Kushner reconciles his family immigration history with his father-in-law’s immigration policies. I also wanted to find out if Kushner knew the history of “America First,” which my children, who are members of Kushner’s generation, said they hadn’t heard about until I mentioned it to them recently.

So I sent the White House press office an email outlining some of the major elements in this column, asking for comment or a conversation. I never heard back.

Perhaps Kushner opposes large parts of his father-in-law’s immigration program, and has been opposing it privately. But it’s also possible that Kushner has no problem reconciling his family history with Trump’s policies. Rae Kushner was an eloquent, plainspoken critic of U.S. immigration policies. Her grandson Jared’s public silence speaks volumes, too, in its own way.

Filed under:

ProPublica is a Pulitzer Prize-winning investigative newsroom. Sign up for their newsletter.

How Senior Daddies — Like Donald Trump — Are Eligible For A Social Security Bonus

How Senior Daddies — Like Donald Trump — Are Eligible For A Social Security Bonus

Reprinted with permission from ProPublica.

How Senior Daddies — Like Donald Trump — Are Eligible For a Social Security Bonus

Would you believe that President Donald Trump is eligible for an extra Social Security benefit of around $15,000 a year because of his 11-year-old son, Barron Trump? Well, you should believe it, because it’s true.

How can this be? Because under Social Security’s rules, anyone like Trump who is old enough to get retirement benefits and still has a child under 18 can get this supplement — without having paid an extra dime in Social Security taxes for it.

The White House declined to tell us whether Trump is taking Social Security benefits, which by our estimate would range from about $47,100 a year (including the Barron bucks) if he began taking them at age 66, to $58,300 if he began at 70, the age at which benefits reach their maximum.

Of course, if Trump, 71, had released his income tax returns the way his predecessors since Richard Nixon did, we would know if he’s taking Social Security and how much he’s getting. There’s no reason, however, to think that he isn’t taking the benefits to which he’s entitled.

Meanwhile, Trump’s new budget proposes to reduce items like food stamps and housing vouchers for low-income people. It doesn’t ask either the rich or the middle class to make sacrifices on the tax or spending side. And it doesn’t touch the extra Social Security benefit for which Trump and about 680,000 other people are eligible.

The average Social Security retiree receives about $16,900 in annual benefits. Does it strike you as bizarre that someone in Trump’s position gets a bonus benefit nearly equal to that?

Does it seem unfair that by contrast to Trump, most male workers — and for biological reasons, an even greater portion of female workers — can’t get child benefits because their kids are at least 18 and out of high school when the workers begin drawing Social Security retirement benefits in their 60s and 70s?

Trump is eligible for the Late-in-Life-Baby Bonus, as we’ve named it, because the people who designed Social Security decided in 1939, about five years into the program, that dependents and spouses needed extra support. They didn’t think much (if at all) about future expansion in the number of retirees, primarily male, who would have young kids.

The Late-in-Life-Baby Bonus goes to about 1.1 percent of Social Security retirees and costs about $5.5 billion a year. That’s a mere speck in Social Security’s $960 billion annual outlay.

Yet the Late-in-Life-Baby Bonus is a dramatic — and symbolic — example of hidden problems that plague Social Security, problems that few non-wonks recognize and that reform proposals have largely ignored.

Those problems are why the two of us — Allan Sloan, a journalist who has written about Social Security for years; and C. Eugene Steuerle, an economist who has written extensively about Social Security, co-founded the non-partisan Urban-Brookings Tax Policy Center and is the author of “Dead Men Ruling: How to Restore Fiscal Freedom and Rescue Our Future” — combined forces to write this article.

We want to show you how we can help Social Security start heading in the right direction before its trust fund is tapped out, at which point a crisis atmosphere will prevail and rational conversation will disappear.

Calling for Social Security fixes isn’t new, of course, but the calls usually focus primarily on fixing the increasing gap between the taxes Social Security collects and the benefits it pays.

For us, however, the Late-in-Life-Baby Bonus is an example of why reform should not only restore fiscal balance but should also make the system more equitable and efficient, more geared to modern needs and conditions, and more attuned to how providing ever-more years of benefits to future retirees puts at risk government programs that help them and their children during their working years.

If all that mattered were numbers, we could easily provide better protections against poverty with no loss in benefits for today’s retirees, while providing higher average benefits for future retirees. But that works only if the political will is there to update Social Security’s operations and benefit structure. After all, a system designed in the 1930s isn’t necessarily what we’ll need in the 2030s.

And make no mistake about how important Social Security is. Millions of retirees depend heavily on it. According to a recent Census working paper, about half of Social Security retirees receive at least half their income from Social Security — and about 18 percent get at least 90 percent of their income from it. Add in Medicare benefits, and retirees’ reliance on programs funded by the Social Security tax are even higher.

Given the virtual elimination of pension benefits for new private-sector employees and the increasing erosion in pensions for new public-sector employees, Social Security will likely be needed even more in the future than it is today.

Simply throwing more money at Social Security isn’t the way to solve its imbalances, much less deal with the Late-in-Life-Baby Bonus and some of the other bizarre things we’ll show you.

Money-tossing would just continue the pattern of recent decades that provides an ever increasing proportion of national income and government revenue to us when we’re old (largely through Social Security and Medicare), and an ever smaller proportion when we’re younger (anything from educational assistance to transportation spending). This shortchanges the workers of today and tomorrow who will be called upon to fork over taxes to cover the costs of Social Security and other government programs for their elders.

We began with the Late-in-Life-Baby Bonus because giving people like Trump — a wealthy man with a young child from a third marriage — an extra benefit unavailable to 99 percent of retirees is a dramatic example of how problems embedded in Social Security cause inequities and problems that few people other than Social Security experts know about.

Think that we’re overreacting to a minor quirk? We aren’t. Here are some additional aspects of Social Security that we think violate standards of equal justice and common sense:

There’s the Single Parent Shortchange, whereby many single parents — largely mothers with below-average earnings — pay Social Security taxes to cover spousal and survivor benefits for other people even though the solo parents can’t receive them. Sure, many people contribute toward benefits they will never see, especially if they die before retirement age. But the Single Shortchange strikes us as horribly unfair. Single parents are among the lowest income payers of Social Security taxes. Why should they subsidize other folks’ never-working spouses in a way that gives the biggest benefits to the best-off people?

Then there’s the Agatha Christie Benefit: Some divorced people get a bonus from Social Security only if their former spouse dies. And the Serial Spouse Bonus: If someone has had, say, three spouses, each might get the same full spousal and survivor benefits available to the one lifetime spouse of another worker — provided that each marriage lasted at least 10 years. If a marriage lasts nine years and 364 days, the spouse gets zippo.

The Equal Earner Penalty means that a couple with two people each earning $40,000 gets about $100,000 less in lifetime benefits than a couple with one spouse earning $80,000 and the other earning nothing. This happens even though both couples and their employers pay identical Social Security taxes.

Many if not most of these inequities would be illegal in private retirement plans.

Fixing the Late-in-Life-Baby Bonus and the other inequities we mentioned (as well as plenty that we omitted) is more about remedying injustice than cutting costs; giving some people more benefits and others less would pretty much offset each other.

The system needs to be overhauled not simply to become more fair by giving less to the Trumps of the world and more to the less fortunate among us, but because Social Security, created in the 1930s, was largely constructed around a world in which married women were expected to stay at home. People also had shorter lifespans then and retired later, so that today retirees receive benefits for 12 more years on average than retirees in the system’s earlier days.

Back in 1965, there were about four workers for every person drawing benefits. Currently the ratio is in the low threes. Now, the decline in birth rates is hitting with a bang as baby boomers retire en masse, with the ratio expected to fall to about 2.2 in 2035. Each baby boomer retirement leads to an increase in takers and a decrease in makers.

Not dealing with this decline in workers-to-beneficiaries — a good chunk of which is caused by Social Security treating people as young as 62 as “old” — has broad implications for the revenues available for all government services, not just Social Security, as well as for the growth rate of our economy.

Even as fewer workers support more retirees, the average value of Social Security retirement benefits continues to rise. Look at the increasing “present value” of Social Security benefits for a two-income 65-year-old couple earning the average wage each year and expecting to live for an average lifespan.

In 1960, such a couple needed to have on hand $269,000 (in 2015 dollars) in an interest-bearing account to cover the cost of their lifetime benefits. Today, it’s about $625,000. In 2030, it will be about $731,000. And in 2055, when a Millennial age 30 this year turns 67, the full retirement age under current law, the present value of scheduled benefits hits seven digits: $1,029,000. Include Medicare, and benefits are about $1 million for today’s couple, rising to $2 million for the millennial couple.

These benefit-value increases are caused by a combination of longer lives for retirees and Social Security formulas that increase benefits as wages rise.

These numbers matter because Social Security isn’t like an Individual Retirement Account or a pension plan that sets money aside for you today for use when you retire. It’s mainly an intergenerational transfer system: Today’s workers pay Social Security taxes to cover their parents, who previously paid to cover their parents, who paid to cover their parents. That’s the way the system has worked since its founding in 1935. Social Security taxes paid by current workers and their employers get sent to beneficiaries, not stashed somewhere awaiting current workers reaching retirement age.

The system does have a trust fund that in the early 1980s was about to run out of money. A crisis loomed. As a result, after a report by the Greenspan Commission, Congress in 1983 enacted reforms that included gradually raising the normal retirement age (but not the early retirement age) and subjecting some Social Security retirement benefits to federal income tax.

This led to temporary surpluses while baby boomers were in their peak earning years. But now that boomers are retiring rapidly, Social Security’s tax revenues are falling farther and farther behind benefits being paid out.

The trust fund is projected to run dry in about 15 years. Meanwhile, every year without reform adds to the share of the burden required of the young, who already are scheduled to have lower returns on their Social Security contributions than older workers.

Do you think that if someone offered millennials a choice, they would want to face huge student debt, declining government investment in their children and higher future taxes (which are inevitable as deficits mount) — in exchange for a more generous retirement than today’s retirees get? Or would they prefer a system that treats them and their children better when they’re younger?

We’re both way past millennial age — but we know which we would prefer.

Now, we’ll show you how we can tweak Social Security to address the problems we’ve discussed without cutting benefits for current retirees or denying future retirees average benefits higher than current retirees get.

It’s about math. Social Security pays out far more than would be required to provide well-above-poverty-level benefits to all elderly recipients. Future growth in the economy will help tax revenues and benefits rise, which would give us room to modify the payout formulas and deal with problems that this iconic program isn’t addressing.

Those problems include poverty and near-poverty for millions of retirees, particularly the very old. That problem is greater for people who retired at 62 rather than waiting for their full retirement age, a move that locks them into lower payments for the rest of their lifetimes.

How can we orient the system more progressively to the needs of modern society, provide a stronger base of protection for all workers, and slow the growth rate of benefits to bring the system into better balance? To shore up Social Security permanently, it’ll be necessary to slow down the overall growth in benefits, encourage more years of work and end the pattern of people having ever-longer retirements as lifespans increase and Social Security doesn’t adapt its rules. At some point, it will also require a revenue (i.e., tax) increase, too.

Here, in simplified form, are some suggestions for making Social Security more modern and more fair.

  • Change the benefit structure. Reduce the level of benefits that retirees get in their 60s and early 70s but give them higher-than-now benefits in their mid-to-late 70s and beyond. That would shift resources to retirees’ elder years when they have greater needs, including a higher probability of having to pay for long-term care.
  • Raise the minimum benefit. Have a strong minimum benefit for most elderly that’s indexed to wage growth, which typically exceeds inflation. This would raise benefits for one-third to one-half of the elderly in a way that will essentially remove them from poverty.
  • Trim benefit growth for those at the top. Offset at least part of the cost of higher minimum benefits by paying the highest-paid recipients less in the future than they would get under the current formula. Slow the rise in benefits for future retirees with way-above-average lifetime earnings by indexing their benefits to inflation rather than to wage growth.
  • Index the retirement age. Having people work for additional years helps pay for higher levels of both lifetime and annual benefits. So if people on average are living a year longer, they should have to work a year longer. Those additional income and Social Security taxes would help support both Social Security and national needs that are higher priority than paying additional retirement years. Gradually phase out the early-retirement age that leads many healthy couples to retire on Social Security for close to three decades for the spouse who lives longer.
  • Make spousal and survivor benefits more fair. Modify these benefits so that they provide higher benefits for those with greater needs rather than giving the richest bonuses to the richest spouses even when they contributed less in taxes than lower-income spouses. Otherwise, use rules similar to what private pensions use, so that benefits are shared fairly for the time of marriage together.

And one final thing: Bye-bye Late-in-Life-Baby Bonus. Stop paying retirees extra for children under 18. Continue the young-child bonus for widows or widowers below retirement age, and for people on disability.

Eliminating that bonanza for older parents would be a symbolic first step. And who can say? Perhaps now that lots more people (including possibly Trump himself) know that the Late-in-Life-Baby Bonus exists, our leaders might just be embarrassed enough to realize that the sooner Social Security is adapted to modern needs and circumstances, the better.

If this results in starting to fix Social Security the right way, the Late-in-Life-Baby Bonus will have delivered a big-time bonus of its own. The beneficiaries would be our future retirees, our workers and our country as a whole.

ProPublica is a Pulitzer Prize-winning investigative newsroom. Sign up for their newsletter.

GOP ‘Reform’ Of Carried-Interest Loophole Is Fakery

GOP ‘Reform’ Of Carried-Interest Loophole Is Fakery

Reprinted with permission from ProPublica.

 

This column was co-published with The Washington Post.

Donald Trump isn’t exactly shy when it comes to denouncing things he doesn’t like. And there’s one particular part of the tax code that he denounced over and over both during the campaign and after taking office.

He said that the people benefiting from this portion of the code were “getting away with murder.”

So you’d think that the tax bill being pushed through Congress with Trump’s eager backing would be closing this loophole. But you’d be wrong. As you’ll see in a bit, talking about closing the loophole isn’t the same as closing it.

The loophole is called “carried interest.” That’s tax jargon for the share of investors’ profits that goes to the managers of private equity funds, venture capital funds and hedge funds. The standard rate is 20 percent of a fund’s profits, although there’s wide variation, both up and down.

The loophole is that the managers’ piece of the action comes from owning a piece of the partnership called a “profits interest” rather than getting a fee from the partnership.

When an investment has been held for more than a year before being sold, the managers’ “profits interest” proceeds, like the gains that go to the “capital investors” who put up the money, is taxed as long-term capital gains rather than as ordinary income. Cap gains currently carry a top federal income tax rate of 23.8 percent, whereas “earned income” such as fees and salaries carries a max tax of 40.5 percent.

(The other part of the managers’ fee — typically two percent a year of the investments under management — is treated as regular income.)

People, even including many Wall Street types whom I know, have been offended by the carried interest loophole for years.

After all, if you run a mutual fund and get a bonus based on your investment performance, that bonus is treated as earned income, not capital gains. So why should things be different for managers of a private equity or venture capital or hedge fund?

(I’m putting hedge funds last because although they’re the most popular target, they typically don’t hold individual investments long enough to qualify for capital gains treatment.)

In November, after being criticized because their tax legislation didn’t deal with carried interest, House and Senate Republicans addressed the problem. Sort of, but not really.

Their “reform” doesn’t require proceeds from “profits interests” to be treated as ordinary income — which would be real reform. Rather, the legislation requires that investments be held for more than three years to get capital gains treatment, rather than the current period of more than one year.

That’s pretty much a joke, given that venture capital and buyout funds — whose managers are the biggest beneficiaries of the “carried interest” loophole — typically hold investments for well over three years before selling them. This legislation has the appearance of reform, but not the substance.

A spokesman for Kevin Brady, chairman of the tax-writing Ways and Means Committee, told The New York Times that the three-year holding period “strikes the right balance for economic growth and fairness without stifling investment in American entrepreneurship.” But this doesn’t address the substance of the loophole, which is that carried interest payments are actually fees masquerading as capital gains, which means they are taxed at a much lower rate than fees.

Let me take you through this a bit.

Treating the people who run partnerships differently from the people who are passive investors in partnerships has been around forever. But when private equity, venture capital and hedge funds began pulling in hundreds of billions of dollars of capital and paying their managers billions a year of carried interest, what had been a relatively obscure tax provision turned into a big deal.

Lots of private equity types claim that special tax treatment for carried interest is vital to them. However, when you look at history, you can see that claim is dubious at best.

Blackstone and Carlyle, two of the biggest private equity firms (which now call themselves alternative investment firms), were founded in 1985 and 1987, respectively.

From 1988 through 1990, regular income and capital gains were taxed at the same maximum rate: 28 percent. And in 1991 and 1992, the year another big firm, TPG, was formed, top rates were almost the same: 31 percent for regular income, about 29 percent for cap gains. So unless they were betting on the rates to change — which is, shall we say, highly unlikely — the preferential rate for carried interest was no big deal.

The rates didn’t really separate much until 1993. That year, the top regular income rate was more than 10 percentage points above the cap gains rate (39.6 percent to 29.2 percent), and the spread kept widening. (You can find the year by year rates here.)

Now what about Trump? Was he fouling his own nest by criticizing carried interest? I think not.

As best as I can tell from Trump’s financial filings and his leaked 2005 federal income tax return, he doesn’t play the carried interest game. So even if carried interest were to be reformed properly, it wouldn’t cost him anything.

The bottom line: If the pending tax legislation becomes law, heaven forbid, and the carried interest loophole requires a three-year rather than a one-year waiting period, you can bet that Trump and the Republicans will boast about how they taught Wall Street a lesson. And it will be a pack of lies.

Heather Long of The Washington Post and Claire Perlman of ProPublica contributed reporting to this column.

Header image: House Ways and Means Committee Chairman Kevin Brady, center, Speaker Paul Ryan, left, and other members of the GOP after unveiling the tax reform plan on Nov. 2 (Tom Williams/CQ Roll Call)

 

The GOP Tax Plan’s Mega Gift To Some of Trump’s Richest Appointees

The GOP Tax Plan’s Mega Gift To Some of Trump’s Richest Appointees

Reprinted with permission from ProPublica.

There are times that you run across something that’s so preposterous that it’s hard to believe it’s true. But in this case, it is.

I’m talking about the multiple — and permanent — set of tax breaks that some of the Trump administration’s mega-wealthy appointees and their heirs stand to get if the estate tax repeal in the House Republicans’ tax bill becomes law.

The appointees I’m talking about are those with a net worth above $11 million (which is a lot of them) who sold assets that the Office of Government Ethics said would pose conflict-of-interest problems in their new gigs.

Combine the rules that cover such sales with terms of the proposed estate tax repeal, and these people get a multilevel, multigenerational bonanza. A gift that would keep on giving (and giving and giving).

I couldn’t believe what I was reading, and figured that I might be overly eager to uncover gifts to the ultra-rich in the House tax cut bill, which is by no means tax reform because it hurts millions of taxpayers in my home state of New Jersey and other places that aren’t reliably Republican, but bestows plenty of breaks on big businesses and the rich. So I asked tax expert Bob Willens of Robert Willens LLC, whom I’ve consulted for decades, to show me where I was making a mistake.

It turned out that Willens couldn’t believe what he was reading, either, when he parsed the proposed estate tax repeal provisions. “I had to read that about eight times,” Willens told me. “It defies description. It’s unheard of. It’s unbelievable.”

Now, let me show you why. And why mega-wealthy Trump appointees and their heirs would get level after level after level of tax goodies, even more than regular rich people would get.

Under Section 1043 of the tax code, enacted in 1989, eligible federal appointees (such as an energy secretary who owns oil stocks) who sell conflict-posing assets and reinvest the proceeds in something permissible, such as an index mutual fund, don’t owe any tax until the replacement asset is sold. At that point, they pay taxes on the total gain in, to use our example, the mutual fund they bought with the proceeds of the assets they had to sell. In other words, the only benefit they get under current law is a deferral in their capital gains taxes. They don’t get to permanently escape taxes.

I have no problem with this tax deferral, by the way. I don’t think people should have to shell out serious money in order to work for the government. If they happen to benefit by being able to diversify their portfolios on a tax-deferred basis, the way former ExxonMobil chief executive Rex Tillerson could diversify out of his Exxon stock and long-time Goldman Sachs executive Gary Cohn could diversify out of his Goldman holdings, that doesn’t bother me, either.

Besides, until now people who have gotten very large Section 1043 tax deferrals have been almost certain to be wealthy enough to trigger estate tax — no, it’s not a “death tax,” it applies to only about 1 in 500 estates — when they die. Some 99.8 percent of estates don’t pay tax because about $5.5 million of assets are exempt from estate tax for a single person, and about $11 million for a married couple.

Now, watch where the outrageous part comes in. Under current law, heirs have to pay estate tax based only on the value of the inherited assets on the day the person who bequeathed them died. They don’t have to pay a penny on the assets’ gains while the dearly departed owned them. (The adjustment is known as a “basis step-up” in tax jargon.) But of course, the estate has to pay estate tax of 40 percent of the amount by which the inherited assets exceed the $5.5 million/$11 million threshold. The tax-free basis step-up allows heirs to avoid having to pay both capital gains tax and estate tax on the assets they inherit, which strikes me as a reasonable thing.

However, under the Republican plan’s estate tax repeal, not only would heirs collect everything tax-free, but they would also get a tax-free basis step-up in the assets they inherit. By contrast, when the estate tax was repealed for a year in 2010 as part of the George Bush tax cut bill, the step-up in basis was largely negated, which stopped heirs from getting a mega-windfall.

I assumed that would be the case in whatever plan the Republicans proposed this time. In fact, I predicted that in a January article that I wrote with Cezary Podkul, then a ProPublica colleague, currently a Wall Street Journal reporter.

We felt that even if the estate tax were repealed, the heirs of Donald Trump’s appointees would be subject to capital gains tax when they sold the assets their benefactors had acquired to solve conflict-of-interest problems.

Besides, even Trump, who campaigned on eliminating the estate tax, wasn’t proposing that heirs get a totally free ride. He was proposing something — details of which were never made clear — that seemed to involve estates paying capital gains tax on unrealized gains above $10 million.

That idea of taxing estates in any way seems to have disappeared entirely from Trump’s public statements these days. And I realize now that I was naïve to think that Trump might ever promote anything that might cost him or his family any money.

To return to where I started, I’m just astounded by the multiple tax breaks Trump appointees and their heirs stand to get if the House version of estate tax repeal becomes law. So is Bob Willens, the tax expert.

“You get to diversify tax-free,” he said, a tone of wonder in his voice. “Then you get to bequeath your portfolio tax-free. And the most amazing part is that your heirs get to step up their basis in the inherited assets tax-free.”

A great deal for these people. A terrible deal for the rest of us, who would have to pick up the tab for it.

ProPublica is a Pulitzer Prize-winning investigative newsroom. Sign up for their newsletter.

Did Trump Get A Big Tax Refund After 2005?

Did Trump Get A Big Tax Refund After 2005?

Reprinted with permission from ProPublica.
,
The pressure is growing to force President Trump to turn over his tax returns. The other day, for example, 200 Congressmen filed a suit in federal court, arguing that voters and lawmakers have a right to know whether Trump’s businesses are violating the Constitution’s emolument clause, which bars the president from accepting payments from foreign countries.

The lead Senate plaintiff in the suit, Sen. Richard Blumenthal (D-CT), said that the legal effort could force release of the president’s tax returns and other business documents during the discovery stage of the litigation.

“By failing to release his tax returns — reflecting payments and benefits from foreign powers — President Trump is thumbing his nose at the American people and the Constitution,” Blumenthal told my Washington Post colleague Tom Hamburger. “He is violating the Constitution by accepting foreign government payments and benefits without consent from Congress — which can’t consent to what it doesn’t know.”

But Trump hasn’t filed a tax return for 2017, which is the year he became president and the emolument clause began to apply to him. So even if we got his earlier returns, we wouldn’t know what he’s done since taking office Jan. 20.

As for the argument that seeing his returns would expose Russian connections, should they exist: I’ve written before, his old tax returns, should they ever see the light of day, are unlikely to tell us much about any possible personal foreign entanglements.

Those might show up, if they exist, in the filings of the hundreds of companies that make up the Trump empire. But Trump’s personal returns are unlikely to show them.

But seeing his old returns would tell us something especially relevant about a president who wants to radically reshape our tax code.

A lawsuit may finally bring the Trump tax returns to light, but it could be years before any of us lay eyes on them. Yahoo Finances Jen Rogers and Rick Newman discuss.

It would show us how much and in what ways Trump has personally benefited from the legal loopholes scattered throughout the current system. And what impact the changes he’s proposing would have on him personally.

Trump’s tax returns would also let us see, I suspect, that a good part of the tax payments that showed up on Trump’s leaked partial 2005 federal return was refunded to him in later years.

When the first two pages of that return became public in March, he and his backers took victory laps because the return showed him paying $36.5 million of income tax and having made about $153 million during the year.

Among the boasters was Donald Trump Jr., who tweeted about his father’s 2005 payments at least three times and at a May campaign rally in Montana told a heckler that his father’s 2005 return shows that, “You can do it all. You can be successful [and] you can pay your taxes.”

However, for reasons I’ll get to in a bit, I think there’s a very good chance that Trump got a major portion of his 2005 tax refunded to him in 2006 and later. If I’m right, it means that a good part of the 2005 payments that Trump and Trump Jr. and other Trump types boasted about amounted to temporary loans to the Treasury. Not tax payments as we normally think of them.

If so, that would be yet another example of how Trump has gotten a free ride — okay, in this case a reduced-fare ride — on his income taxes.

Getting refunds like the ones I think Trump got is perfectly legal. But for us to see the 2005 tax payments but not any subsequent refunds leaves us with a misleading picture.

Should these refunds exist — I think they do, but I can’t prove it — they would show up on post-2005 tax returns that we haven’t seen and that Trump refuses to disclose.

Seeing if he got refunds on his 2005 taxes is yet another good reason for us to want to see Trump’s returns, which presidents and presidential candidates had been providing since the days of Richard Nixon.

We’d find out about possible refunds of Trump’s 2005 taxes by looking at the “Other Credits” line on the second page of those returns and seeing if he took any credits on IRS Form 8801.

I emailed both Trump’s tax attorney and the White House several weeks ago asking them to respond to my theory about Trump having gotten refunds in subsequent years. The law firm to which Trump tax attorney Shari Dillon belongs sent a quick and courteous “no comment” response. My email to Trump spokeswoman Hope Hicks went unanswered.

So I’m relying on my own analysis, which is based on information and guidance that I got from about half a dozen tax experts, some of whom I’ve worked with for decades in the course of writing about taxes. Some of the experts I consulted for this column are tax practitioners, some are theoreticians. Their political preferences range from pro-Trump to socialist.

Okay. Now, here we go.

If you look at Trump’s partial 2005 return, which made its way to veteran tax journalist David Cay Johnson (with whom I worked at The Detroit Free Press in the 1970s), who gave it to “The Rachel Maddow Show” and put it into the public domain, you see three telling things.

First, you see the words “Client Copy” on the second page, which raises the possibility that the partial return was sent by someone in Trump’s camp with access to Trump documents. Because it puts Trump in a good light, this wouldn’t shock me.

Second, you see that most of the income tax Trump paid — $31.6 million out of $36.5 million — arose from what he owed as a result of the alternative minimum tax, a provision of the tax code intended to make sure high-income people pay at least some taxes.

Third, you see that Trump used $103.2 million of losses from previous years to reduce his taxable 2005 income. Those losses were lower than his total taxable income. This almost certainly means that he had no losses left to write off, because had more write-offs been available, Trump could have used them to lower his tax bill.

Now, let me try to make sense of all this for you.

The only other Trump tax filings that are public — partial 1995 New York, New Jersey and Connecticut state returns — show that back then, he had an astounding $915 million of losses that he could use in future years to offset income for federal, New York state and New York City income tax purposes.

The 2005 return indicates to me that Trump used up his losses in 2005 — he showed $48.6 million of taxable income after subtracting the aforementioned $103.2 million of losses. I’m assuming that from 1996 through 2004, he wiped out his taxable income for federal, New York state and New York City purposes by using the $915 million in losses, which were generated by the collapse of his real estate-casino empire in the 1980s and 1990s, and were probably supplemented with paper losses generated by a special tax code provision that benefits real-estate professionals such as Trump.

Now, I’ll give you a simplified version of why I think — but hasten to say, yet again, can’t prove — that Trump recovered a good part of the $31.6 million of alternative minimum tax that he paid for 2005.

The AMT, as it’s known, has become a plague to middle-income and upper-income types who live in states with high income and real-estate taxes. That’s despite the fact that when Congress created the AMT in 1969, its goal was to stop a handful of rich people from avoiding income taxes all together. Over the years, however, Congress failed to modify the AMT sufficiently to keep it from ensnaring millions of middle- and upper-middle taxpayers.

It turns out there are two separate types of alternative minimum tax. Most people — including me — who pay AMT on top of their regular income tax do so because state and local income taxes and the real-estate taxes on our personal residences aren’t deductible under the AMT the way they are for regular tax purposes. That leads to the AMT being higher than our regular tax, and the difference between AMT and regular tax gets added to what we owe Uncle Sam.

That kind of AMT payment — arising from what tax techies call an “exclusion preference” — isn’t refundable.

But judging from Trump’s tax return, it looks like the vast majority of the additional tax he paid as a result of the AMT arose from so-called “deferral preferences.” And that most of the $103.2 million of losses he carried over from previous years were deductible for regular income tax purposes in 2005, but not for AMT purposes.

Under the tax laws, Trump can get refunds, over multiple years, up to the refundable portion of the 2005 AMT that he paid. Which was probably the vast majority of his AMT.

For instance, let’s say that Trump had the same income in 2006 that he had in 2005, but didn’t have the $103.2 million of losses from previous years.

Because the AMT is assessed at a 28 percent rate and the top regular rate in 2006 was 35 percent, Trump’s regular income tax would probably have been $6.5 million to $7 million higher than his AMT would have been. This would have yielded him a $6.5 million to $7 million refund, with future refunds coming in future years when his regular tax was higher than his AMT.

To be sure, part of Trump’s 2005 AMT probably comes from not being able to deduct real-estate taxes on his personal residences. That “exclusion preferences” part of his AMT wouldn’t be refundable.

But the vast majority of Trump’s AMT appears to be from “deferral preferences” — especially since it’s unlikely that he paid any significant New York state or New York City income taxes from 1996 through 2004 because the losses he carried over from previous years would have been deductible for New York state and New York City purposes and would probably have wiped out all or virtually all of his New York income.

Given the size of the numbers we’re dealing with, his personal real-estate taxes and any personal income taxes he might have paid outside of New York are probably rounding errors, at most.

So unless Trump started running up big losses post-2005, when his losses dating back to the 1990s were all used up, it looks like his regular income tax (at a 35 percent top rate in 2006 and 39.6 percent in recent years) would have exceeded his 28 percent alternative minimum tax.

This means that a good part of the AMT that he paid in 2005 would likely have flowed back to him as credits in subsequent years. Hence my conclusion that although Trump paid $36.5 million of federal income tax in 2005, his ultimate income tax cost for the year was considerably lower. That’s the bottom line. Or at least, I think it is.

Of course, there’s only one way to find out for sure, and that’s to view Trump’s post-2005 tax returns. If they somehow show up at ProPublica, whose mailing address is 155 Avenue of the Americas, 13th floor, New York, NY 10013, I’ll be more than happy to look at them. Even if they prove me wrong.

I collaborated with Cezary Podkul of ProPublica on this story, and received reporting help from Alice Crites and Tom Hamburger of The Washington Post.

ProPublica is a Pulitzer Prize-winning investigative newsroom. Sign up for their newsletter.