The Complicated Perquisites of the 1%

It’s amazing what you can learn from research. Recently, the Brookings Institution took note of the oft-made assertion that the corporate tax rate in the U.S. (at 35%) is too high. The usual response is to point out that 35% may be the statutory rate, but many of our largest and most profitable corporations take advantage of tax breaks that substantially reduce–or even eliminate–federal taxes.

This report, however, looked at a different issue.

Corporations used to be the dominant form in which business was done. Partnerships and other “pass through” entities–so named because the income “passes through” and is taxed as the partners’– were far fewer.  In 1980, only 20.7% of all business income was earned by pass-through entities; in 2011, the share had grown to 54.2%.

So a band of number-crunching economists at the U.S. Treasury and some academic partners, with access to far more data than outside researchers can see, set out to answer two simple questions: Who is getting all this partnership income? And what tax rate do they pay? They offered their answer Thursday in a paper presented at a National Bureau of Economic Research conference in Washington.

The findings are significant. And troubling.

*Pass-through business income is even more concentrated among the richest Americans than traditional corporate profits. “Overall, 69% of pass-through income earned by individuals accrues to the top-1%. Corporate income is similarly concentrated, but other business income (typically considered very concentrated) is substantially less concentrated.

* The average federal income tax rate paid by individuals who report pass-through business income was 19% in 2011. In part, that’s because so much of that income is considered capital gains or dividends, which are taxed at preferential rates.

* Across all business entities except for sole proprietorships, the average tax rate of U.S. business income in 2011 was 24.3%, they estimate. That’s lower than is often assumed in debates over corporate tax reform.

* “The migration of business activity out of the C-corporate sector and into the pass-through sector has likely substantially reduced U.S. tax revenue,” the economists conclude. If pass-through activity had remained at the (low) level of the 1980s, then the average tax rate on total U.S. business income in 2011 would have been approximately 28% rather than 24%, and tax revenue would have been at least $100 billion higher.

Who was it who used to say “A billion here, a billion there–pretty soon, you’re talking real money”?

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Go Back to Wherever You Came From is Not a Policy and Not in America’s Interests

Pew recently issued the results of its in-depth research on immigration.

First, a few “factoids.”

When we include the children and grandchildren of those who have immigrated to the U.S. since 1965, immigrants have accounted for 55% of America’s subsequent population growth. (They’re projected to account for 88% of the population increase over the next 50 years.)

Nearly 14% of the population is foreign born.

Compared with U.S.-born adults, recent arrivals are less likely to have finished high school, but they are more likely to have completed college or to hold an advanced degree.

As with so many other issues, American attitudes are polarized: Some 45% of adults say immigrants in the U.S. are making American society better in the long run, while 37% say they are making it worse.

A recent op-ed in the New York Times offered some useful perspective on the issue:

History provides some clarity about the relative costs and benefits of immigration over time. Fifty years ago this month, Lyndon B. Johnson signed the Immigration and Nationality Act of 1965 at the foot of the Statue of Liberty. By any standard, it made the United States a stronger nation. The act was endorsed by Republicans and Democrats in an era when cooperation was still possible. Indeed, the most serious opposition came from Southern Democrats and an ambivalent secretary of state, Dean Rusk. But it passed the Senate easily (76-18), with skillful leadership from its floor manager, Senator Edward M. Kennedy, and Johnson himself….

The flood of new immigrants also promoted prosperity in ways that few could have imagined in 1965. Between 1990 and 2005, as the digital age took off, 25 percent of the fastest-growing American companies were founded by people born in foreign countries.

Much of the growth of the last two decades has stemmed from the vast capacity that was delivered by the Internet and the personal computer, each of which was accelerated by immigrant ingenuity. Silicon Valley, especially, was transformed. In a state where Asian immigrants had once faced great hardship, they helped to transform the global economy. The 2010 census stated that more than 50 percent of technical workers in Silicon Valley are Asian-American.

Not to mention that our food choices have improved immeasurably….In short, any rational analysis demonstrates that immigration has been (and continues to be) incredibly beneficial to the country.

I suspect that it is another “factoid” from the Pew survey that really explains “the Donald”– and for that matter, most opposition to immigration: By 2055, the U.S. as a whole is projected to have no racial or ethnic majority.

Let’s be honest: much of the animus expressed toward immigrants (and protestations to the contrary, that animus is not limited to those labeled “illegals”) is based upon the “otherness” of some of them. To be blunt, much of it is racist.

As I’ve noted previously, my son-in-law is a (legal) immigrant, and in his thirty-plus years in America, has never experienced that animus. I’m sure it’s just coincidental that he’s a very pale Brit….

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What Makes a Community?

Last night was the second in our three-part series “Electing Our Future.” The panelists were great, and I will post a link when WFYI uploads the video. In the meantime, here are my opening remarks introducing the panel:

What is the difference between cities that are collections of homes and businesses and cities that are genuine communities?

The last forum in this series described the systems we’ve developed—sometimes intentionally, sometimes not—to govern Indianapolis. That forum tried to answer the question: what does Indianapolis look like today? What’s its structure? How do we elect the people who manage the services we expect government to provide? How do we decide what those services are, and—not so incidentally—how do we pay for them?

Whatever we think about our city—what works well, what doesn’t, what isn’t getting done, what is getting done that perhaps shouldn’t be—one fact is inescapable: there aren’t enough resources to do everything that everyone would like to see our City do. Indeed, increasingly we find ourselves trying to stretch limited dollars just to do the very basic sorts of things that all citizens expect.

All cities have to set priorities, and we in Indianapolis are no different. Those priorities need to be informed by those of us who live here. And I want to suggest that those priorities tell the people who live here and the people who might want to start businesses here or live here or even visit, a great deal about us.

If we want Indianapolis to be a genuine, healthy community, rather than a collection of unrelated inhabitants—if we want to marshal the talents and goodwill of our neighbors in ways that will build on our strengths and compensate for our weaknesses—we need to consider what it takes to create that community, and we need to ask ourselves which of those tasks are properly the job of our municipal government.

Setting priorities requires us to agree on the elements that make for a good quality of urban life. In an era of scarce resources, that process also requires us to decide which services are essential, and which fall under the category of  “would be nice if we could  afford it.”

The process of setting priorities requires us to decide what trade-offs are worthwhile, and which ones shortchange us as a community.

Most of us want to feel safe in our homes and on our streets—but we don’t want that security to come at the cost of people’s civil liberties. 

We want to send our City’s children to schools that will prepare them for life in the 21st Century, that will give them critical thinking skills, because we know that great cities don’t exist without great schools and educated populations.

We all want a government that represents us, that is trustworthy and transparent and responsive to its constituents.

Most of us want to live in a city that is inclusive and welcoming, with a citizenry that sees diversity as an opportunity and difference as enriching, rather than a city that is a collection of separate communities walled off from and suspicious of each other.

And most of us want the amenities that make cities such wonderful places to live and work: parks and trails, libraries, museums, great public transportation, clean air and water, well-tended streets, roads and bridges—the social and public infrastructure that facilitates urban well-being.

The question is: how do we pay for all that? And if we can’t pay for it all, which of those public goods must take priority?

Our panelists have been selected because they are in positions that make them ideally suited to address those questions.

Julia Vaughn has been working with Common Cause to fight for good government for many years. She has been a voice for ethical governance and sanity at the Indiana Statehouse and in City Halls around the state.

Kelly Bentley, who is serving her 4th term as a member of the Board of Commissioners of IPS, has been a longtime ardent supporter of public education and educational reforms that serve our city’s children.

Judge David Shaheed recently retired from the bench; he has long been one of the most thoughtful observers of issues in the community involving re-entry,  disadvantaged populations, and diversity in general.

Troy Riggs recently left his position as Indianapolis’ Director of Public Safety, and has a uniquely informed perspective on the issue of crime in our city.

Through her work with Health by Design, Kim Irwin has come to understand that civic health involves far more than the physical health of its inhabitants, important as that is; healthy cities are cities with a great quality of life.

And finally, John Ketzenberger of Indiana’s Fiscal Policy Institute knows better than most of us the challenges we face in paying for our priorities and funding that good quality of life.

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Trash Talking

Back when Indianapolis built its waste incinerator to generate energy, the move was applauded as state of the art, and it was. The “deal” made at that time required the City to provide enough trash to allow the vendor, Covanta, to produce steam used to heat downtown buildings.

But time marches on. As cities across the country have encouraged recycling, Indianapolis has persistently lagged the nation in the percentage of people doing so. (We are one of the few places that charges folks for the “privilege” of recycling, which might have something to do with our lackluster performance.)

Ostensibly to address that low level of participation, the Ballard Administration entered into an agreement with Covanta to build a new recycling facility. But as Carrie Hamilton of the Indiana Recycling Coalition has written:

This facility would move the city’s residential collection to a one-bin system that would mix waste and recyclables in the same bin. Covanta, which already has a contract to burn the city’s waste for energy production, has been contracted to separate recyclables from waste at the proposed MWP facility. In exchange, it gets a minimum $100 million contract putting it in charge of both waste and recycling for all of Indianapolis until 2028…..

There are a number of concerns about this plan, but at the top of the list is this: Covanta secured this contract – and the rights to the city’s recycling future – without having to go through a competitive bidding process.

The contract calls for use of a process known as “Dirty Recycling” –it allows residents to throw all their trash into one receptacle; actual separation is to occur at the Covanta facility. This is a process that is simply not suitable for use in many industries that purchase recyclable materials.

Among the many concerns raised by this contract are its length–it locks Covanta in until 2028– several “put or pay” provisions that actually penalize the city if residents recycle more than the contract anticipates, and the contamination of otherwise recyclable materials in a highly questionable methodology. But the major issue is, once again, the utter disregard of the process by which such agreements should be executed.

There are all sorts of arguments–legitimate and less so– to be made about the impact of recycling (see John Tierney’s Op Ed in last Sunday’s New York Times), but there is no legitimate argument for ignoring the legal processes intended to protect taxpayers against crony capitalism and/or intemperate decision-making.

If the contract with Covanta is good for the City, it would have survived the vetting that the law requires.

If the Ballard Administration were truly interested in protecting the interests of citizens and taxpayers, and genuinely interested in an environmentally-appropriate recycling program, there would be no need to bypass the public bid processes mandated by law.

Garbage isn’t the only thing that smells here.

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Speaking of Education…

David Schultz–with whom I collaborated on a textbook a couple of years ago–has written a thought-provoking article on the coming decline of the “corporate” university.

The corporate university is being undone by the very forces that created it. The defining characteristic of higher education in the last forty years has been its corporatization, which has transformed the university from an educational community with shared governance into a top-down bureaucracy that is increasingly managed and operated like a traditional profit-seeking corporation.

David points out that–at least since World War II– there have been two very distinct “business models” that have characterized American higher education. The first model was based on public investment in education, and it lasted until the 1970s. “The second, a corporate model, flourished until the economic crash in 2008.”

Public institutions were central to the first model.

The business model was simple: tax dollars, federal aid, and an expanding population of often first-generation students attending state institutions at low tuition. Let us call this the Dewey model,after John Dewey, whose theories emphasized the democratic functions of education.

Beginning with the 1980s, support for all public institutions and programs–including but not limited to universities– began to diminish, and a near-religious belief in the power of markets to cure everything that ails us replaced it.

The corporate university took control of the curriculum in order to generate revenue. The new business model found its most powerful income stream in professional education, including programs in public or business administration and law school, which became the cash cow of colleges and universities. This was especially true with MBA programs, which rapidly multiplied. These programs were sold to applicants with the claim that the high tuition would be more than offset by future earnings.

This business model in part used tuition from professional programs to finance the rest of the university. Students in these programs were able to secure loans to finance their training. The model relied heavily on attracting foreign students, returning baby boomers in need of additional credentials, and recent “baby boomlet” graduates seeking professional degrees as a shortcut to professional advancement.

The consequences of this shift are all around us: ballooning student debt loads, the emphasis on narrow job/professional training and the corresponding neglect of the liberal arts curricula that taught students how to think, the ever-growing dependence on poorly-paid (okay, exploited) adjunct faculty, and the rise of for-profit institutions that promise quick credentialing without the inconvenience of an actual education, among others.

David pulls no punches: as he says, the corporate business model is an education Ponzi scheme, and like all Ponzi schemes, it is falling apart.

Those of us who care about education, who fear the consequences for self-governance of a credentialed but uneducated population, need to figure out how to go about restoring the university’s civic and intellectual mission.

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