January 24, 2020 "Information
Clearing House" -
As part of the bill, Republicans approved
tax breaks in 2017 for seven classes of
assets many of the wealthier members of
Congress held at the time, including
partnerships, small corporations, real
estate, and several esoteric investment
vehicles. While they sold the bill as a
package of business and middle-class tax
cuts that would not help the wealthy,
the cuts likely saved members of
Congress hundreds of thousands of dollars in
taxes collectively, while the corporate tax
cut hiked the value of their holdings.
“It feels to me like a kleptocracy,”
said Jeff Hauser, director of the Revolving Door
Project at the Center for Economic and Policy
Research, a left-leaning think tank in Washington,
DC.
Such congressional self-enrichment
has been thrust into the 2020 presidential campaign.
Democratic candidate Sen. Elizabeth Warren has said
her first priority as president would be to pass an
anti-corruption package that, among other things,
would forbid
members of Congress from owning individual
stocks, bonds, and other securities so they could
not benefit from tax or financial laws they passed.
“Under current law, members of
Congress can trade stocks and then use their
powerful positions to increase the value of those
stocks and pad their own pockets,” Warren wrote in a
September
Medium post.
Republicans own lots
of stock
Two years after the passage of the
Trump tax act, its effects — some obvious, some
hidden — are coming into focus. One is its cost:
Contrary to Republican claims, the law is not paying
for itself and is likely to burden the nation with
an additional
$1.9 trillion in debt over 11 years beginning in
2018, according to the Congressional Budget Office.
And while the law cut tax rates for
people of all income brackets, some of its tax
benefits overtly favored the wealthy, such as the
2.6 percentage point tax rate cut in the highest
bracket and the doubling of the estate tax exemption
to $11.2 million. Other provisions were subtler yet
favored the wealthy even more: tax breaks for their
investments, for instance, or changes that boosted
the value of their stocks. Among the rich
beneficiaries are members of Congress, more than
half of whom were found to be millionaires in 2014.
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The tax law’s centerpiece is its
record cut in the corporate tax rate, from 35
percent to 21 percent. At the time of its passage,
most of the bill’s Republican supporters said the
cut would result in higher wages, factory
expansions, and more jobs. Instead, it was mainly
exploited by corporations, which bought back stock
and raised dividends. In 2018, stock buybacks
exceeded
$1 trillion for the first time ever, according
to TrimTabs, an investment research firm. Net
corporate dividends reached a new high in 2018 of
more than
$1.3 trillion, nearly 6 percent more than the
previous year. The result, analysts say: The
buybacks boosted stock prices, and bigger dividends
put even more money in the pockets of stockholders.
Promises that the tax act would boost
investment have not panned out. Corporate investment
is now at lower levels than before the act passed,
according to the Commerce Department. Though
employment and wages have increased, it is hard to
separate the effect of the tax act from general
economic improvements since the 2008 recession.
The boost in stock prices, however,
was predictable. As the bill was reaching its final
stages in 2017, Bryan Rich, the CEO of Logic Fund
Management, a wealth advisory company,
wrote that the proposed corporate rate cut “will
go right to the bottom line of companies — popping
EPS [earnings per share] and driving stocks even
higher.”
Those benefits mainly went to the
rich, as the wealthiest 10 percent of Americans own
84 percent of all stocks. The 10 richest Republicans
in Congress in 2017 who voted for the tax bill held
more than $731 million in assets, almost two-thirds
of which were in stocks, bonds, mutual funds, and
other instruments, according to Roll Call’s
semiannual assessment of
Congress’s wealth.
The precise amount of
Republicans’ windfall can’t be determined
without a review of the members’ tax
returns, which they are not required to
disclose.
All but one of the 47 Republicans who
sat on the three key committees overseeing the
drafting of the tax bill own stocks and stock mutual
funds, according to Public Integrity’s analysis.
Rep. Mike Kelly (R-PA) was among them. A member of
the Ways and Means Committee, which oversaw the
writing of the tax bill in the House, Kelly reported
in 2018 that his spouse owned 101
individual stocks, Apple included, with a minimum
total value of $439,000.
When he voted for the 2017 tax cuts,
which will be funded by nearly $2 trillion in added
debt, Kelly called it “the most important vote I’ve
ever cast.” Yet 19 months later, he voted against a
two-year budget agreement that
added to the national debt by hiking government
spending for defense and nondefense programs by $320
billion. Kelly warned that “America is driving
toward a fiscal cliff.”
Orrin Hatch (R-UT) was chair of the
Senate Finance Committee in 2017, when he and his
wife owned mutual funds and a limited liability
corporation valued between $562,000 and $1.430
million, paying them between $12,700 and $38,500 in
dividends and capital gains, according to Hatch’s
financial disclosure forms. They also owned a blind
trust worth between $1 million and $5 million.
(Congressional financial disclosure forms do not
require members to report the precise value of
assets and income but rather in 11 different ranges,
each with a minimum and a maximum value.)
For decades, Hatch, who retired in
2018, had been one of the loudest deficit hawks in
Congress. Just 10 months before he would shepherd
the tax bill through his committee, Hatch said, “The
national debt crisis poses a significant and growing
threat to the economic and national security of this
country.”
His concern over national security
lasted two months. In April, Hatch signaled he was
open to a Republican tax bill that would likely add
to the national debt. When Republicans passed the
tax bill in December 2017, he beamed. “This is a
historic night,” he said at a press conference.
(The Center for Public Integrity
sought comment from 13 current or former members of
Congress mentioned in this article; only two
responded.)
A big bump from
overseas onshoring
Republican lawmakers also boosted the
value of their stock holdings when they encouraged
American corporations to repatriate money they were
holding overseas. The tax law decreed that future
foreign profits would not be taxed at high rates,
and that previously earned profits stashed abroad —
an estimated $2.7 trillion — would be taxed one
time at no more than 15.5 percent.
In 2017, Apple was sitting on $250
billion in overseas profits. In January 2018, the
month after President Donald Trump signed the tax
bill into law, the tech behemoth and third-largest
American company
said it would pay the new, lower tax and start
bringing the cash home. Just four months later,
Apple
said it would buy back $100 billion of its stock
and hike its dividend by 16 percent. Apple shares
increased almost 9 percent by the week’s end. In
April 2019, Apple
announced $75 billion more in buybacks, a move
analysts said would likely drive its stock price
higher. A day after the announcement, shares
increased in value nearly 5 percent. The stock
continued to hit record highs late last year.
That increase and higher dividends
augmented the holdings of 43 Republicans who voted
for the tax bill, including seven senators and their
spouses who owned Apple stock in 2018: John Hoeven
of North Dakota; David Perdue of Georgia; Arizona’s
Jeff Flake, now retired; Jim Inhofe of Oklahoma; and
the spouses of Pat Roberts of Kansas, Maine’s Susan
Collins, and Shelley Capito of West Virginia. A
spokesperson for Hoeven said that he “follows Senate
regulations and reporting requirements.” Sen.
Collins’s husband’s portfolio decisions are all made
by a financial adviser, a Collins spokesperson said,
and he has not bought or sold Apple stock since
2015.
Perdue is one of the wealthiest
senators, with a net worth of $15.8 million, $14
million of which is in stocks,
according to Roll Call. In 2018, with his wife,
Perdue owned $100,000 to $250,000 in Apple stock, he
reported. The couple sold some of it and received
annual dividends and capital gains that year between
$15,000 and $50,000.
The optics that the tax cuts would
boost the prices of stock he owned apparently didn’t
concern Perdue. Weeks before Republicans passed the
tax bill, Fox News host
Maria Bartiromo asked Perdue if he was worried
that the corporate cuts would result in buybacks and
increased dividends instead of new jobs. “Well,
Maria,” he answered, “I come from the school that,
you know, all of the above is acceptable. This is
capitalism.” He later added that it was all about
“capital flow,” whether for jobs, economic growth,
or dividends.
An affinity for
“small business” — and pass-throughs
Passing a law that helped fuel
increases in stock prices wasn’t the only way
Republicans enriched themselves. The new law also
contained a 20 percent deduction for income from
so-called “pass-through” businesses, a provision
called the “crown
jewel” of the act by the National Federation of
Independent Businesses, a lobbying group.
Pass-throughs are single-owner
businesses, partnerships, limited liability
companies, (known as LLCs) and special corporations
called S-corps. Most real estate companies are
organized as LLCs. Trump owns hundreds of them, and
the Center for Public Integrity’s analysis found
that 22 of the 47 members of the House and Senate
tax-writing committees in 2017 were invested in
them.
Pass-throughs can be found in any
industry. They pay no corporate taxes and steer
their profits as income to business owners or
investors, who are taxed only once at their
individual rates. Despite their favored treatment as
a business vehicle, the 2017 tax act did them
another favor: It allowed 20 percent to be deducted
off the top of the pass-through income for tax
purposes.
In the Senate, the champion for the
pass-through break was Ron Johnson, a Wisconsin
Republican who was a Budget Committee member when
the tax bill was being written. He argued that
because the bill was slated to give
big corporations a 14 percent cut in their tax rate,
smaller businesses should get a break, too. “I just
have in my heart a real affinity for these
owner-operated pass-throughs,” he
told the New York Times when the Senate was
considering the tax bill in November 2017.
No doubt Johnson, with his wife, held
interests that year in four real estate or
manufacturing LLCs worth between $6.2 million and
$30.5 million, from which they received income that
year between $250,000 and $2.1 million, according to
his financial disclosure form.
How much money lawmakers will pocket
from the 20 percent pass-through deduction can’t be
determined without an examination of their tax
returns. There are limits on how much of the
deduction can be taken based on total income and
business category. But in some cases, the tax
savings could run into the tens of thousands of
dollars. Johnson declined to comment for this
article.
And while the provision did help
small businesses in certain favored categories, the
benefits of the pass-through deduction are heavily
tilted toward the wealthy. Sixty-one percent of the
benefits of this provision will go to the top 1
percent of taxpayers in 2024, according to the Joint
Committee on Taxation, the congressional agency that
analyzes tax bills.
GOP real estate
owners make out big
Besides the law’s benefits to real
estate pass-throughs, real estate in general was
hugely favored by the tax law, allowing property
exchanges to avoid taxation, the deduction of new
capital expenses in just one year versus longer
depreciation schedules, and an exemption from limits
on interest deductions.
“If you are a real estate developer,
you never pay tax,” said Ed Kleinbard, a former head
of Congress’s Joint Committee on Taxation.
Members of Congress own a lot of real
estate. Public Integrity’s review of financial
disclosures found that 29 of the 47 GOP members of
the committees responsible for the tax bill hold
interests in real estate, including small rental
businesses, LLCs, and massive real estate investment
trusts (REITs), which pay dividends to investors.
The tax bill allows REIT investors to deduct 20
percent from their dividends for tax purposes.
Real estate pass-throughs got an
especially sweet gift in the form of a provision
inserted into the tax bill behind the closed doors
of the House-Senate conference committee. The Senate
bill under consideration based a company’s
pass-through deductions on the total amount of wages
paid to employees. Because real-estate pass-through
companies typically have few employees, however,
this meant they could offer only tiny deductions to
investors.
A stroke of the pen fixed that:
Someone changed the law to allow
real estate companies to use the value of their
assets — in addition to the size of their payrolls —
to calculate pass-through benefits. Because such
companies can hold sizable assets, suddenly they,
too, could offer the full 20 percent deduction to
investors.
“In my judgment, it was a big
giveaway to the real estate community, and they are
very good lobbyists,” said Steve Rosenthal, a senior
fellow at the nonpartisan Urban-Brookings Tax Policy
Center in Washington, DC. That giveaway contributed
to last year’s record $1.02 trillion federal revenue
shortfall.
One Republican senator who benefited
from the last-minute provision was Tennessee’s Bob
Corker, who at the time owned or was a partner in 18
real estate businesses, LLCs, and partnerships,
records show. His reported income from them was
between $2.1 million and $11.1 million in 2017.
Corker, who retired in 2018, told Public Integrity
he had nothing to do with the provision or the 20
percent pass-through deduction. It was all Ron
Johnson’s idea, Corker said.
“The budget deficit is going up so
that people like Ron Johnson and Bob Corker can pay
less in taxes,” said Hauser, of the Revolving Door
Project.
Forbidding
self-dealing would help close the loopholes
Republicans wouldn’t have had many of
these apparent conflicts if Elizabeth Warren’s
anti-corruption plan had been in effect.
Much of the plan was pulled from her
Anti-Corruption and Public Integrity Act, which
she introduced in the Senate in 2018. Among its
provisions, the bill would forbid lawmakers to own
or trade individual stocks, bonds, commodities,
hedge funds, derivatives, or “complex investment
vehicles.” Members would be required to put their
assets in “widely held investment vehicles” such as
mutual funds. Warren and her husband were invested
in 20 mutual funds in 2017, but no individual
stocks.
Members could no longer own
commercial real estate, though they could keep
businesses with revenue under $5 million — which
could include a lot of pass-throughs. Warren’s bill
hasn’t moved out of the Senate Finance Committee; an
identical bill in the House also remains idle.
Warren’s plan faces an uphill climb,
even among Democrats. “It’s very difficult to get
congresspeople to pass rules that make life
exceedingly difficult for themselves,” said Beth
Rotman, the money in politics and ethics director at
Common Cause, a government watchdog in Washington,
DC.
But it’s happened in the past. In
1978, Congress passed the
Ethics in Government Act in the wake of the
Watergate scandal. It requires certain government
officials, including members of Congress, to file
annual financial forms — records the Center for
Public Integrity used for this analysis. And in
2012, Congress passed a
bill that made it unlawful to use insider
information to trade stocks, required members to
report stock trades within 45 days of the
transaction, and required lawmakers to file
disclosure forms online in a searchable, sortable,
and downloadable database —
so conflicts of interest would be easy to
detect. (Within a year, Congress had removed the
“searchable and sortable” language from the law. The
financial disclosures are now available online, but
they are not easily searched or sorted.)
Apparently just because of
disclosure, stock trading by senators dropped by
about two-thirds in the three years following the
law’s enactment,
according to a study by Craig Holman at the
government watchdog group Public Citizen. But Holman
said he found that some senators continued to trade
in stocks in the very businesses they oversaw in
their committees — a practice Public Citizen wants
banned.
Ironically, it was Congress that
passed laws that restrict other federal government
officials from owning stocks or assets that would
benefit from the officials’ decisions — or require
them to recuse themselves from such decisions. Yet
Congress has not passed legislation that bans itself
from the same practice. “Congress should have the
same rules put on them that the executive branch
has,” said Rotman of Common Cause. “The executive
branch conflict of interest rules are stronger.”
For the 2017 tax act, Holman of
Public Citizen notes that about six years ago,
researchers found that more than half of the members
of Congress were millionaires. “They are passing tax
laws and legislation that disproportionately favors
the wealthy class,” Holman said. “And that means
they personally benefit from this type of
legislation.
“And, from what we’ve seen,
especially from the tax cuts and jobs act of 2017,”
he added, “that tax bill clearly favored the very
wealthy over the rest of Americans. And that means
it favored Congress over the rest of America.”
Peter Cary is a consulting
reporter for the Center for Public Integrity, a
nonprofit investigative news organization in
Washington, DC.
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