Death of the Honeybee
If the bee disappeared off the surface of the globe then man would only have four years of life left. No more bees, no more pollination, no more plants, no more animals, no more man.
A quote often ascribed to Albert Einstein
It is not known whether the above quote was really made by Albert Einstein but we do know that some mysterious disease has wiped out about a third of the commercial colonies of honeybees since 2006. This phenomenon is known as colony collapse disorder or CCD.
Honeybees are a critical component of the production of crops that make up about ¼ of our diet and, according to the Agriculture Department, pollination by honeybees adds about $15 billion in the value of crops each year. An international study of 115 food crops grown in over 200 countries showed that 75% of the crops were pollinated by animals, especially by bees.
Many possible causes have been studied and most researchers suspect that a host of viruses, parasites and possibly other factors like pesticides are working together to kill the bees.
A recent study suggests that the mass die-offs of honeybees may be linked to a rapidly mutating virus that jumped from tobacco plants to soy plants to bees. The researchers found that the increase in honeybee deaths generally starts in autumn and peaks in winter and may be correlated with increasing infections by a variant of the tobacco ringspot virus.
Bees are a keystone species and vital to the systems that support food production for human beings. Their rapid destruction is a poignant example of the inter-relationship and importance of the many species in our eco-systems.
For more information, we suggest:
Bee Colony Collapses Are More Complex Than We Thought, US News & World Report
The GMO controversy currently in public discussion may be more about trust than health. Some GMOs are good GMOs and have greatly improved the health of many people around the globe. Iodized salt is an example; it greatly reduced the goiter epidemic in the US during the 1920s and still provides significant health benefits in third world countries. Scientists are currently working on modifying rice to include Vitamin A, a vitamin deficiency common in many poor countries that causes many debilitating diseases.
Critics of GMOs claim that GMOs can cause potentially toxic or allergenic reactions, alter the nutritional value of food, taint the genetics of natural varieties of the same crop, impose toxic impact on other living things, concentrate food power in the hands of few large companies and marginalize small farmers. The Bt toxin used in GMO corn is an example of a GMO run amok.
The poster child for the anti-GMO movement is Monsanto. Monsanto’s patented genes are estimated to be in roughly 95% of all soybeans and 80% of all corn grown in the U.S. Monsanto has not helped its public image by financially destroying small farmers by suing those who try to avoid payment of huge license fees to Monsanto for seed. And Monsanto and other BigCo’s are now trying to get a law passed in Brazil that would allow them to sell “suicide seeds” to farmers – genetically modified seeds that farmers could only once and have to buy them over and over again.
Because of these concerns, at least 26 countries (including Switzerland, Australia, Austria, China, India, France, Germany, Greece, Italy, Mexico and Russia) all include total or partial bans on GMOs and less severe restrictions exist in about 60 other countries. Can all of these countries be wrong and Monsanto be right?
As American consumers learned longed ago from Big Tobacco, BigCo is quite capable of lying to consumers and secretly modifying its product to make it even more addictive, no matter the cost in human life and wellness. While our government eventually made the public aware of the danger of smoking and made tobacco companies include warning labels on its products, it took decades to do so. How many people died or suffered serious illness during this period? Today, the Great Recession is “Exhibit A” of the government’s inability to stand up to BigCo and protect American consumers.
Given our lack of trust in BigCo and lack of confidence in government oversight, GMO labeling is the minimum we should require. If consumers know what products are genetically modified and how, we can each make our own decision on whether to consume the product or not. Of course, labeling is not the end-all to protection since labels can easily omit accurate information or present it in a misleading way. Even with labeling we will need strong consumer organizations to monitor label accuracy.
Terrorists Profit from Poaching Wildlife
There are many reasons to fight against unlawful poaching of animal species on this planet, not least of which is preservation of critical ecosystems and moral recognition that we humans do not own Mother Earth. However, a new dynamic has developed that should persuade even big game hunters.
Since 2011, Kenya has seen elephant poaching rise to unsustainable levels, fueled by the unprecedented increase in the market value of ivory by 1500% in four years to about $1,000 per pound. About 30,000 elephants were killed illegally in 2012, the highest number in 20 years. Known as “white gold,” countries in the Far East (and in particular, China and Vietnam), refuse to ban the sale of ivory and, as the price escalates, the magnitude of poaching escalates. While many of us in the US wish we could take the high road on this issue, the New York Times reports that the US is the second-largest consumer (after China) of illegal animal products like elephant ivory, rhinoceros horn and tiger bone.
Elephants are not the only species suffering from increased poaching. The black market price for horns from rhinoceros is about $30,000 per pound or, as described by Grant Harris (senior director for Africa for the National Security Council) “literally worth greater than their weight in gold.” In 2013, South Africa lost more than 450 rhinos, which could be a record loss.
In a report filed by Ian J. Saunders with the International Conservation Caucus Foundation (ICCF) in April 2013, Mr. Saunders reported that terrorism is playing a substantial role in the increase in poaching elephants in Africa:
“The rapid escalation of the threat to elephants is due to heightened levels of participation from the heavily armed poaching gangs, often hailing from Somalia, operating either for organized crime syndicates or from fundamentalist organizations. Ivory has the potential to provide an easily accessible and untraceable source of revenue to terrorist and extremist organizations in both Kenya and Somalia, providing a direct threat to the U.S. and its African allies.”
Experts believe that the recent terrorist attack on the Westgate Mall in Nairobi, Kenya, which left more than 68 dead and more than 150 injured, was fueled in part by illegal profits obtained from illegal poaching. The attack was conducted by the terrorist group Al-Shabaab, an al-Qaeda-backed terrorist group from Somalia. Al-Shabaab reportedly was forced out of several areas in which it had produced significant funds from illegal trafficking in coal. To replace those funds, al-Shabaab began trafficking in illegal ivory obtained from poaching elephants. Studies by the Elephant Action League conclude that al-Shabaab’s illegal trafficking in ivory could be supplying up to 40% of its funds.
In response, President Obama formed a cabinet-level Task Force on Wildlife Trafficking in July 2013 to devise a national strategy for reducing poaching. In addition, the US destroyed six tons of illegal African elephant ivory in order to send a message of zero tolerance, reduce the appeal of ivory, rhinoceros horns and other illicit animal products, and send a clear signal that these products should not be perceived as valuable. Other countries have followed suit.
According to the Washington Post, the hunting of elephants, rhinos, sharks and other species in developing nations for sale in wealthier countries as valued at $7 billion to $10 billion per year, placing it among drugs and human trafficking as one of the world’s top illegal markets. The interconnection between wildlife and humans is succinctly defined by Monica Median, former assistant to several Secretaries of Defense:
“Elephant poaching is the latest example of how our
‘natural security’ impacts our national security.”
For more information, we recommend the following:
How Elephant Poaching Helped Fund Kenyan Terrorist Attack, Treehugger.com
Obama Announces Initiative To Combat Wildlife Trafficking, Washington Post
In a Message to Poachers, U.S. to Destroy Its Ivory, New York Times
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Last week this blog talked about several corporate tax loopholes – corporate jets and the carried
interest issue. This week we cover the ethanol tax credit, oil industry tax breaks and the ever
fascinating LIFO inventory method of accounting.
How do these work?
Ethanol Tax Credit. This is considered by many to be one of the worst tax boondoggles. Tax
credits for ethanol have been around since 1978 due to substantial and very skilled lobbying
efforts by its beneficiaries. In its current form, gasoline refiners (not farmers) get a tax credit
of $.45 for every gallon of pure ethanol that they blend with gasoline. According to the
Government Accountability Office, this will cost taxpayers $5.7 billion in tax expenditures
in 2011. In addition to being a tax expenditure, this credit is also criticized for encouraging
production of an inefficient fuel (ethanol burns less efficiently than gasoline) that increases
demand for fuel and artificially increases the cost of farm commodities and retail prices of food.
I recently attended a seminar by a food industry expert who identified the ethanol tax credit
as one of two major challenges facing the food industry today because of the increased prices
and scarcity of corn it causes (the other major challenge being the cost of energy). President
Obama proposes to eliminate this credit and replace it with a lower cost credit that would apply
to cellulosic ethanol made from non-food crops and agricultural waste.
Oil Industry Tax Breaks: The oil industry benefits from a number of tax breaks and has
for decades. The tax breaks permit oil companies to immediately deduct their expenses for
preparing domestic oil and gas wells for drilling and for exploring for and researching new
sites for oil wells. Companies in most other industries have to amortize these types of costs
over many years. Investors in some oil companies get to write off their investments over time
based on a percentage of the income they get from the investment each year. Investors in most
other industries are not able to do so. Oil companies also get a 15% tax credit for using tertiary
methods to extract oil. These methods are considered more efficient ways to extract oil but
critics of the tax credit point out that most businesses work to increase efficiency because it’s
good business and are not also rewarded with tax expenditures to do so. President Obama’s
budget proposes to repeal many of the major tax breaks for the oil industry. The estimated
increase in tax revenues is estimated to be about $40 billion over 10 years.
LIFO Method of Inventory: One of the most boring of tax provisions but also one of the most
costly “tax expenditures” is the LIFO method of inventory accounting. “LIFO” stands for “last
in, first out.” Under tax law principles, income earned from selling products is supposed to be
matched with the related cost of producing the product, i.e., you deduct the cost of producing
a product in the same year you collect the sales proceeds from selling the product. When the
product is unique and substantial, the costs and sales proceeds can pretty easily be matched.
When the product is inexpensive and there are lots of them (think of a manufacturer of socks),
it is impossible to directly match the cost of making a specific sock with the revenues from
selling that specific sock. So the law allows manufacturers to use accounting methods to
account for inventory that estimate the cost of the socks sold that year. One of these methods
is LIFO. Under this method, the manufacturer can pretend that the last bolts of cotton fabric
that the manufacturer purchased was used to make the socks regardless of which bolts of cotton
fabric were actually used. Since the cost of cotton fabric has risen significantly during the
course of the last year, the cost of the cotton most recently purchased is much higher that the
inventory of cotton fabric the manufacturer may have available from earlier purchases. By letting
the manufacturer offset its revenues from selling socks by the most costly cotton fabric just
purchased, the net profit from selling the socks will be much lower and the manufacturer will
pay less in taxes. President Obama proposes to eliminate LIFO inventory. Estimated revenues
from repealing this boring tax benefit – a stunning $70 billion over 10 years.This is the largest
single revenue raiser in Obama’s proposed 2012 budget.
It is reported that 70% of Americans believe that corporations don’t pay their fair share of taxes. And it is not surprising. In 2009, Exxon Mobile made $19 billion in profits but not only did not pay any income taxes at all, it received a $156 million rebate from the IRS. Bank of America got a $1.9 billion tax refund from the IRS in 2010, although it made $4.4 billion in profits and received a bailout from the Treasury Department and Federal Reserve of almost $1 trillion. And the list goes on. The Institute for Policy Studies reports that 25 of the top-paid CEOs in the US were paid more in salary and other compensation than their corporations paid in federal income taxes. No wonder most Americans feel that the system is rigged.
However, getting rid of corporate tax loopholes will not by itself solve the deficit crisis. When
it comes to tax expenditures, corporate tax breaks are not where the money is. The top 10
corporate tax breaks will cost $350 billion in tax expenditures over 2010 and 2014, but the top 10
individual tax breaks will cost $3 trillion over that same period. The most costly individual tax
1. Exclusion of employer provided health insurance: cost -$659 billion
2. Home Mortgage interest deduction: cost- $484 billion
3. Capital gains and dividends (taxed at 15% maximum rate): cost -$403 billion
4. Pensions: cost – $303 billion
5. Earned Income Tax Credit (for low-income taxpayers): cost – $269 billion
6. Charitable donations: cost – $241 billion
7. Deduction for state taxes: cost – $237 billion
8. 401(k) Plans: cost – $212 billion
9. Basis step up on death: cost – $194 billion
10. Exclusion of social security benefits: cost – $173 (Medicare would be #4 on this list if
Parts A, B and D were combined.)
If Washington DC actually gets serious about fixing the deficit, it is likely that some
individual tax expenditures will become part of the dialogue and proposals have already been
introduced to limit the amount of employer-paid health care premiums that employees can
exclude from taxes, to limit the amount of deductible home-mortgage interest, to increase capital
gain rates, and to take other steps to reduce the individual “tax expenditures”. This does not
diminish the need to deal with corporate tax loopholes, particularly those that are the result of
effective lobbying rather than good policy. Fairness in the tax system is one of the ingredients
essential to a cohesive and productive democracy.
There is lots of talk these days in Washington DC about “tax expenditures” and “corporate tax loopholes.” This blog will try to deconstruct these concepts and describe some of the most commonly discussed loopholes.
A “tax expenditure” is a tax deduction or tax credit that is specially designed to benefit a particular industry or class of taxpayers. The same way an individual can deduct their mortgage interest from their gross income, a business can deduct costs associated with its business from its gross earnings to reduce its tax liability. Businesses use these deductions in place of and in conjunction with government subsidies to reduce their adjusted gross income. A government subsidy is financial assistance given to a business or industry for many different reasons (to encourage growth, promote research or to avoid collapse of the world economic system). However, because government subsidies have a bad connotation, businesses often lobby for beneficial tax deductions to increase their profits and reduce the amount they contribute our state and national coffers. Instead of asking the government for outright financial assistance, they ask for concessions in their tax bills. Washington uses the phrase “tax expenditure” to show that a tax deduction given to one industry is – to other taxpayers – the economic equivalent of a direct subsidy to that industry.
Corporate Tax Loopholes
A “corporate tax loophole” is a special tax deduction given to a specific industry or class of taxpayers that other taxpayers view as boondoggles. The Internal Revenue Code is loaded with special tax deductions because: it can be more cost efficient to implement and encourage desired behavior since fewer government bureaucracies are involved; tax deductions are politically easier to award to industries as they are not as obvious to the taxpaying public as are direct subsidies and are not as scrutinized; and the general public likes beating the tax man but does not like government handouts. Ending Tax Loopholes essentially means removing special tax deductions that are viewed as unfair boondoggles. Although ending loopholes won’t fix all of our financial problems, their removal will help restore a sense of fairness in the tax system.
The corporate tax loopholes President Obama most often refers to are deductions for corporate jets, the carried interest rule, oil company special deductions, the ethanol credit and the LIFO method of accounting for inventory. Each one will be explained over the course of the next few blog postings. Today’s blog will tackle corporate jets and the carried interest rule.
Corporate Jets: Under current tax laws, the cost of corporate jets can be depreciated over 5 years even though they last many more years. Under basic tax principles the cost of a piece of equipment that lasts more than one year is supposed to be depreciated over its useful life. Our tax laws got away from using actual useful lives a long, long time ago and now equipment is depreciable over the number of years specified in the tax code (which varies depending on the type of equipment) which are usually a lot less than the equipment’s actual useful life. This rapid depreciation is thought to incentivize business to buy more equipment, hire more people, increase its business and otherwise live the American dream. President Obama thinks 5 years is to rapid and wants to increase the depreciable life of a corporate jet to 7 years, a number that is still much lower than a jet’s actual useful life. This change is estimated to produce tax revenues of only $3 billion over 10 years.
Carried Interest Rule: This is one of my biggest pet tax peeves. Hedge fund managers typically get paid a management fee and a percentage of the profits earned from the investments they manage for investors and they report their share of profits as long-term capital gains taxed at 15%. In contrast, people who get paid for services in other industries pay income taxes as high as 35% and are also subject to payroll taxes.
Under general tax law principles, there is a distinction between income from providing labor (i.e., the wages and salaries earned by most of us ordinary working stiffs) and income earned from investments of capital. Service income is taxed at the higher ordinary income tax rates and subject to payroll taxes but gains from capital investments are taxed at the much reduced capital gain tax rate and not subject to payroll taxes. The lower rates are provided to capital based on the belief that encouraging wealthy people to invest their capital increases business, which in turn increases jobs and salaries and everybody benefits.
Even though hedge fund managers get their share of profits from providing management services, hedge fund managers rely on an arcane partnership tax provision in the Internal Revenue Code to treat their share of profits as capital gains and pay the much lower capital gain tax and not pay payroll taxes. (Some hedge fund managers do invest their own money but no one is disputing their right to treat profits from their actual investments as capital gains). President Obama thinks that hedge fund managers should be taxed the same as the ordinary working person. Various legislation proposals have been bandied about for years to fix this disparity but Wall Street lobbyists have so far beaten them down with the standard mantra that, if hedge fund managers have to pay ordinary income taxes, this will hurt business and reduce jobs. (Would they really give up the ability to make millions of dollars because they have to pay more tax???) Some of these legislative proposals target only hedge fund managers; others include managers in other industries that do the same thing; for example, managers of real estate funds report their profit participations as capital gains even though received for their services and not for capital investment and they too would be covered by some legislative proposals. President Obama’s 2012 Budget includes the broader version. Budget impact – estimated to be $21 billion over 10 years.
Next week, we will talk about the ethanol tax credit, oil industry tax loopholes, and the ever fascinating LIFO method of accounting for inventory.
As the debt ceiling crisis continues, some politicians and scholars are encouraging President Obama to exercise his purported rights under the 14th Amendment to the Constitution to lift the debt ceiling if Congress continues to fail to get its own act together. President Clinton, Senator John Kerry and Senator Tom Harkin are among those encouraging President Obama do to so. President Clinton has publicly stated that he would invoke the 14th Amendment and raise the debt ceiling “without hesitation.”
So what are the legalities involved in President Obama invoking the 14th Amendment?
Section 4 of the 14th Amendment provides that “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.”
Section 8 of Article 1 of the Constitution provides that “The Congress shall have Power … To borrow money on the credit of the United States…”
Former Dean of the Chicago Law School Geoffrey R. Stone believes that the 14th Amendment gives President Obama the power to lift the debt ceiling without Congressional approval. He argues that the Constitution, via the 14th Amendment, says the public debt of the US previously approved by the Congress cannot be repudiated and not raising the debt arguably is a repudiation and unconstitutional.” Senator Harkin compares the idea to President Lincoln making the Emancipation Proclamation and President Franklin Roosevelt starting the Lend-Lease program, which enabled the US to support Allied nations before declaring war in 1941.
However, Erwin Chemerinsky, constitutional scholar and Dean of the UC Irvine Law School, and Lawrence Tribe, professor of Constitutional Law at Harvard Law School, disagree. They say that the 14th Amendment only means that debt already authorized by Congress cannot later be declared invalid by the US. Due to Article 1, Section 8 of the Constitution, only Congress can approve an increase in the debt ceiling. Dean Chermerinsky points out that any bonds issued after an unilateral increase in the debt ceiling could be challenged on grounds that this borrowing violated Article 1, Section 8, the buyers of the bonds would be buying a lawsuit and the bonds would likely be rated as lower grade bonds than bonds issued prior to a unilateral presidential increase in the debt ceiling. Professor Tribe asks whether, if the President can unilaterally increase the debt ceiling, where does his power stop? Could he also unilaterally impose taxes, coin money or sell federal property to pay US debts? For Dean Chermerinsky’s op-ed piece, click here ; for Professor Tribe’s op-ed piece, click here.
Another unknown is whether a unilateral presidential increase in the debt ceiling would prevent US bonds from being downgraded. There is the threat of lawsuits, although it is not clear who would have standing to bring the lawsuit. And there are threats of impeachment proceedings against President Obama if he took this action, most vocally by Tea Party Representatives Tim Scott and Michele Bachmann. The rating agencies might well conclude that the uncertainty surrounding the constitutionality of the issuance of bonds on President Obama’s act alone along with the obvious inability of Congress to get its act together requires that US bonds be downgraded anyway.
Efforts by Wall Street has reportedly stepped up in recent days to encourage Congress to resolve this issue. A letter dated July 28 from the Financial Services Forum and signed by the CEOs of the major banks is attached here. While Main Streeters generally decry the clout of Wall Street lobbyists, this may be one case where we hope it is a legendary as we typically fear it is.
In the next several years, a case challenging the constitutionality of the Patient Protection and Affordable Care Act (a/k/a “Obamacare”) will likely reach the US Supreme Court. Some predict this could happen as early as 2012. More than 30 cases challenging the constitutionality of Obamacare has been filed in courts across the country, including one case in which Attorney Generals of more than ½ of the fifty states challenge the constitutionality of Obamacare. At this time, three District Court judges – all appointed by Democratic presidents – have ruled that Obamacare is constitutional and two District Court judges – both appointed by Republican presidents- have ruled that it is not. One of the judges ruling that Obama care is not constitutional struck down only the mandate; the other struck down the entire legislation.
The cases highlight the inter-dependence of many of the more popular provisions in Obamacare (for example, elimination of pre-existing condition exclusions, prohibition of higher rates where the insured has a pre-existing condition and elimination of lifetime caps) and the individual mandate. Since elimination of pre-existing condition exclusions and lifetime caps will increase the insurance companies’ costs to cover health care expenses and, without a mandate, many people would wait until they were ill to buy insurance, supporters of Obamacare believe it is essential to expand the pool of insured people. Otherwise, insurance premiums will skyrocket beyond affordability for too many Americans.
So what are the arguments at issue in evaluating the constitutionality of Obamacare? I recently found an interesting article “Does Obamacare Violate the Constitution” in the Washington Lawyer that discusses this issue.
According to the Washington Lawyer article, the primary argument against the constitutionality of Obamacare is that health care regulation is a state’s right issue and the federal government is not empowered under the Commerce Clause, the Necessary and Proper Clause or any other provision of the US Constitution to enact Obamacare.
The Commerce Clause grants the federal government the power to regulate commerce “among the several states.” The Necessary and Proper Clause gives the federal government the power “to make all laws which shall be necessary and proper to for carrying into Execution the foregoing Powers….”
The first question is whether Obamacare is the regulation of interstate commerce. If it is, Obamacare is constitutional. Prior decisions of the US Supreme Court generally have taken the position that the Commerce Clause covers only “economic” activity and that “non-economic” activity cannot be regulated by the federal government and must be left to the individual states.
Opponents of Obamacare argue that failure to buy medical insurance is a non-economic activity or an inactivity not covered by the Commerce Clause. If the federal government can regulate Americans who are engaging in the non-economic activity or the inactivity of not buying insurance, they argue that there is then nothing that the federal government cannot command Americans to do–for example, it could make you have an abortion, require you to buy a GM car or require you to work in the defense industry.
Proponents of Obamacare argue that health care is a huge part of the nation’s commerce. In order to provide the popular benefits like elimination of pre-existing conditions limitations and lifetime caps, Congress has to bring in the uninsured. Otherwise, people would wait until they were sick to buy insurance, this would drive up premiums which would make insurance unaffordable for many and, ultimately, the reforms would not work. They highlight the long history of Americans participating in social insurance, like the progressive income tax, pension plans for veterans and Social Security. Moreover, people who do not carry health insurance may still receive medical help paid for by all taxpayers through emergency rooms and government-sponsored programs.
The US Supreme Court has issued prior decisions on what amounts to economic activity covered by the Commerce Clause and non-economic activity which is not, which are not particularly enlightening on how the current Supreme Court may view whether the act of not buying insurance amounts to an economic activity.
>In a case where federal agents charged a high school student with violating the Gun-Free Schools Zones Act of 1990, legislation enacted pursuant to the Commerce Clause, when he possessed a .38 caliber handgun on a school campus, the Supreme Court invalidated the Act because it did not regulate a commercial activity or contain a requirement that the possession of a gun be connected in any way to interstate commerce even though the government argued that gun violence did have economic consequences because it affects the travel and insurance industries and because guns on school campuses have a detrimental effect on education which ultimately affects economic productivity.
> A college student claimed that two fellow students had raped her and she sued under the federal Violence Against Women Act of 1994, passed by Congress in part in reliance on its authority under the Commerce Clause. The US Supreme Court invalidated the applicable section on the ground that “gender-motivated crimes are not in any sense of the phrase economic activity”.
>The US Drug Enforcement Administration seized homegrown medical marijuana used by two women in California under its authority under the federal Controlled Substances Act. The US Supreme Court held that the homegrown medical marijuana had a substantial affect on interstate commerce and upheld the seizure under the Commerce Clause.
> A farmer argued that the federal government did not have the right to penalize him when he grew 12 acres of wheat beyond his allotment because he did not sell the wheat; he used it on his own farm. The US Supreme Court ruled that the federal government had the power to impose a penalty under the Commerce Clause since the farmer’s use of the additional wheat for his own purposes amounted to economic activity in that it supplied “the needs of the grower which would otherwise be satisfied by his purchases on the open market.”
Opponents of Obamacare alternatively argue that the legislation is not “proper” under the Necessary and Proper Clause. Opponents argue that the Constitution only allows mandates related to American’s duties to their country – for example, serving on juries, registering for the draft, and filing income tax returns.
Proponents of Obamacare assert that Americans have been historically been forced into transactions by the federal government. For example, in 1792 the Militia Act required citizens to provide their own ammunition and muskets to defend the country. And federal law permits the federal government to take private property for public purposes (a/k/a condemnation). Proponents also argue that a mandate for each American to buy Obamacare is a social program related to citizenship duties: it makes it possible for all Americans to have medical insurance. Moreover, health care and health insurance is a unique situation and a mandate in this case would not lead to mandates requiring all Americans to buy toasters.
Proponents of Obamacare also argue that the mandate is constitutional as a “tax.” Under Obamacare, a person who fails to purchase insurance will not be accused of a criminal act but will be assessed a penalty under the Internal Revenue Code. The test of whether a tax is constitutional is whether it raises revenues and whether or not Congress can conclude that it promotes the general welfare of the people. In addition, does it qualify as an excise tax or a tax derived from income under the 16th Amendment since the penalty will be imposed only on those who do not buy insurance. The federal government has estimated that the penalty for failure to buy insurance will raise about $4 billion in revenues and proponents assert that the penalty promotes the general welfare since the mandate makes insurance more affordable; hence, it is a tax which the federal government can constitutionally impose under its taxing powers under the Constitution. However, in response to the “no-tax increase” phobia in American politics, Obamacare does not identify the penalty as a “tax,” the revenues to be obtained from the penalty are not scored as a revenue raiser, Obamacare prohibits the IRS from enforcing the penalty through liens and levies (apparently included to dilute the argument by opponents that Obamacare “criminalizes” the failure to buy health insurance), and President Obama has publicly declared that it is not a tax. Proponents of Obamacare believe that the failure by Congress and President Obama to describe the penalty as a “tax” has no bearing upon whether it is in fact a tax and the mandate constitutional; opponents believe the failure to identity the penalty as a “tax” is fatal to the argument that it is one.
I have found it perplexing that opponents of Obamacare rage against its constitutionality while at the same time embracing Social Security, Medicare and Medicaid. What distinguishes Obamacare from Social Security, Medicare and Medicaid in a constitutional analysis? According to the National Center for Policy Analysis, Social, Security, Medicare and Medicaid are government run programs that promote the social welfare of Americans. Social Security and Medicare benefits received by an individual are not directly related to the amount of taxes paid by the individual. In contrast, the individual mandate in Obamacare will compel people to buy private insurance or be assessed a penalty. In other words, opponents of Obamacare believe it is appropriate for the government to assess taxes against Americans to pay health care for other Americans but it is not permissible to require an American to pay for his or her own health care. This dichotomy suggests the ultimate irony: If Obamacare is ultimately found to be unconstitutional by the US Supreme Court, its opponents may find that, when rising health care costs get so high that our entire economy is on the brink of collapse, the only solution available may be government sponsored health care – the single payor plan so adamantly disparaged by opponents of Obamacare.
When accepting the Oscar for best documentary, Inside Job (which by the way I have seen and is a masterful recount of the underlying causes of the financial crisis), the director, Charles Ferguson, pointed out that “three years after a horrific financial crisis caused by massive fraud, not a single financial executive has gone to jail, and that’s wrong.” Warren Buffett recently said that CEOs of companies that needed rescuing by the government and their spouses should end up “dead broke” and the board should suffer too.
So how are we doing with holding corporate America accountable?
According to the AFL-CIO, in 2010 CEOs at 299 U.S. companies had combined compensation of $3.4 billion or enough to pay more than 102,000 workers. Put another way, the average pay for the CEOs of companies in Standard & Poor’s 500 Index is enough to cover the salaries of 28 US presidents or more than 700 minimum wage workers. (For more information, access the AFL-CIOs website “Executive Paywatch.”)
In a report entitled “Negotiating Out of the Crisis: Executive Compensation and the Economic Crisis,” the US propensity to overpay CEO’s of its financial institutions is highlighted. In 2003, the average CEO pay in the US was $2,249,080. The second highest was in Switzerland where average CEO pay was $1,190,567 or only about 50% of that paid to US CEOs. UK CEOs averaged, $830,223, French CEOs averaged $700,290, and Japanese CEOs averaged $456,957. The study concluded that part of the disparity for the much higher US CEO salaries was the “phenomenon of multi-year guaranteed annual bonuses, where executives were guaranteed bonuses irrespective of performance,…” And the difference was not due to overseeing the biggest financial institutions. In China, two banks, ICBD and CCB had the two highest rates of market capitalization (value of the company’s stock); yet in 2008 the levels of executive compensation was 50 times lower than that of executives in Western banks with considerably lower market capitalization. For example, the CEO of Chinese bank ICBC which in 2008 had a market capitalization of $250.20 Billion was paid $235,700 in compensation (in US $$) and the CEO of HSBC in the UK was paid $2,800,000 when HSBC had a market capitalization of $188.10 Billion. In contrast, Jamie Dimon of JP Morgan was paid $19,651,560, even though JP Morgan had a market capitalization of $158.60 billion or only 63% the size of ICBC and only 84% the size of HSBC.
In addition, median CEO pay jumped 27% in 2010 according to a study undertaken by USA Today. The large percentage increase is due in part to reduced compensation paid to CEOs in 2008 and 2009 and was still slightly below 2007 levels of CEO compensation. USA Today reports that profits in the S&P 500 companies rose 47% in 2010 but the increase in profits was due to cost-cutting and layoffs rather than growth and increasing business. In other words, the CEOs were paid well to lay off the rank and file.
Many experts also think CEOs are set up to significantly increase their pay in future years because of the high number of stock options granted to them in 2008 and 2009 when stock prices were very low. As the stock prices increase dramatically, the CEOs’ potential gain also increases dramatically. The increase in stock options is in part due to the push by regulators to get Wall Street to restructure its compensation packages. The idea was that, by holding more stock options, the CEOs’ interest would be more aligned with that of their shareholders and aggressive risking taking would be discouraged. However, in the same way the regulators failed to mandate the way in which companies could use their taxpayer bailouts, they also failed to protect against CEOs again gaming the system and The New York Times recently reported that many executives who received stock options in 2008 and 2009 in lieu of their typical cash bonuses used derivatives to protect them against losses in stock value. One Goldman Sachs executive reportedly avoided more than $7 million in losses by use of derivatives. In other words, the executives are using their knowledge and expertise in the derivative market to protect themselves against losses if their companies again crash and, like Goldman Sachs in the mortgage back securities debacle, might even make money from their stock options if their companies do crash. Alignment with their shareholders?
A few measures have been taken in the US to help rein in executive pay. The SEC enacted the “say on pay” rule which permits shareholders of publicly traded companies to vote on whether they approve the compensation packages being awarded to the top executives by the Board of Directors. These votes are not binding on the Board and it remains to be seen how much credibility the Board will give to shareholder votes. And since mutual funds control about 25% of publicly traded shares and are generally managed by Wall Street CEO cronies, it remains to be seen the shareholder votes will play out. To date, shareholders of only four companies have voted against proposed executive compensation.
There are a few promising actions underway that may help promote executive accountability.
One is an independent High Pay Commission recently formed in the UK which some believe will approach their review of executive pay with more credibility, creativity and integrity than typically found in “blue ribbon commissions”.
A promising course of action comes from the Obama administration. The Wall Street Journal and Bloomberg.com report that the administration is flexing its regulatory muscle and threatening to ban drug company Forest Laboratories, Inc. from doing business with the federal government, including Medicare and Medicaid, unless they dump their current CEO. The government is allowed to do this under a little-known policy in the Social Security Act and the Obama administration is reportedly invoking it because they believe that fines and penalties no longer have much deterrent effect. (A view I am sure is shared by many who have felt for years that the so-called penalties had morphed into being simply a “cost of doing business” to corporate America.) The Wall Street Journal describes this demand as “part of a larger Obama administration effort to pursue individual executives blamed for wrongdoing rather than simply punishing companies.” The pharmaceutical industry is predictably claiming that the use of this new tool will end Western civilization as we know it.
Ironically, the new model for corporate accountability may be Nigeria (yes, that Nigeria – the home of the infamous email scams). The Nigerian central bank governor identified nine banks that were in trouble and, concluding that their management acted in ways detrimental to the interest of the banks’ depositors and creditors, he fired the chief officers of eight of them. He has also implemented bailouts with stiff rules on capital and proprietary trading. A speech he gave in 2009 shortly after he was appointed to this post has become a “must-read” for financial policy wonks around the world. You can watch it here or read it here.