June 25, 2011
Dispatches (XIV): "Walker cancels budget bill-signing at firm run by felon"
Gov. Scott Walker has called off plans to sign the 2011-'13 budget bill at a private Green Bay-area company run by an executive with eight felony convictions, a spokesman announced today.
The announcement came less than an hour after the Journal Sentinel contacted the governor's office to ask about the executive's criminal history.
Walker aide Cullen Werwie said this afternoon that the event will now be held at 2 p.m. Sunday at Fox Valley Metal-Tech Inc. in Green Bay.
Werwie acknowledged that Walker's advance team had erred by not conducting a thorough background check on Gregory A. DeCaster, chief executive officer of Badger Sheet Metal Works in Ashwaubenon, the original location for the ceremony.
DeCaster was convicted of eight felony counts of income tax evasion in the mid-1990s and was sentenced to three months behind bars. He was also fined $10,000, ordered to pay another $3,700 to cover prosecutors' expenses and given two years of supervised release.
"It was something we wish we would have known on the front end," Werwie said.
Progressives have found precious little to like in the 2011-2013 budget Gov. Scott Walker will sign into law Sunday at a ceremony in Green Bay.
But perhaps the most regressive item is a new tax loophole — disguised as an economic development tool — that is projected to cost the state hundreds of millions in lost revenue over the next decade.
Walker’s budget creates two new provisions to provide income tax shelter for capital gains — or profits made from an investment like stocks, bonds, real estate or precious metals.
Right now, Wisconsin exempts 30 percent of capital gains on assets held at least one year and allows 100 percent exclusion for gains on the sale of business assets to a family member or sale of small business stock.
But the new budget makes all capital gains free from state income tax as long as the money is reinvested in a qualified Wisconsin business for at least five years. A separate provision allows taxpayers to defer any tax on capital gains if they reinvest the profits within 180 days to a Wisconsin business. Tax on the deferred gain would be paid when the new investment is sold.
At first blush, it sounds like a good way to encourage investment in state-based companies. Grow your own, so to speak.
In reality, however, it's a tax accountant's dream and a nice loophole for upper income residents, says Andrew Reschovsky, professor of public affairs and applied economics at UW-Madison.
“The benefits of this provision will almost certainly be concentrated among the wealthy,” he says.
That’s because the wealthy also book the big capital gains. According to this Legislative Fiscal Bureau report, taxpayers with incomes over $150,000 represented only 10 percent of 2009 state tax filers but claimed 52 percent of the capital gains exclusions.
For the vast majority of taxpayers, the only real capital gain in their lifetime comes from the sale of a house — and that gain is already exempt from state and federal taxes up to $250,000.
But an investor in Mequon, for example, with $100,000 in taxable gains from the sale of a bond or gold could avoid paying state tax by buying stock in any company that registers with the new Wisconsin Economic Development Corporation.
Reschovsky also details the conclusions of his study of the impact on educational funding in the state here:
“The governor’s budget proposal would result in larger per-pupil reductions in general aid in districts with the highest levels of student poverty,” Reschovsky adds. “The average general aid reduction would be $279 in districts with fewer than 10 percent of pupils from poor families, and $524 in districts with more than 60 percent from poor families.” Wisconsin has 95 school districts where more than half of the students are eligible for the federal government’s program that provides free and reduced price lunches for pupils from economically disadvantaged families. He finds that the majority of these districts would have to reduce property taxes by more than $200 per student.
For me, Governor Walker's original choice of signing venue seems entirely appropriate.
Posted by Menzie Chinn at June 25, 2011 07:23 AMdigg this | reddit
Posted by: Please at June 25, 2011 09:36 AM
Please: I would expect something a little more substantive from U.Chicago.
Posted by: Menzie Chinn at June 25, 2011 09:51 AM
Where is the economic analysis? The is pure socio-political drivel. Quite disappointing.
Can we have more of JDH? He keeps economic analysis and insight ahead of his personal and political leanings and I actually learn something from his posts.
Posted by: Jay A. at June 25, 2011 11:04 AM
Jay A. aka Jason R.: I regret that you were forced to read this post. I would very much welcome knowing if you found anything (1) factually incorrect, (2) statistically incorrect as it relates to the incidence of the tax reductions, and (3) if budgetary/fiscal implications constitute socio-political drivel.
Posted by: Menzie Chinn at June 25, 2011 11:18 AM
Menzie, there isn't much more Please can say.
On one hand I am pulling my hair out trying to understand why our political leaders are willing to use something as serious as the threat of default in order to gain a few choice quotes/headlines come 2012. And then you have posts like this and it becomes a little clearer. Menzie, by consuming this superficial-gottcha-headline political coverage, you are incentivizing our political leaders to focus their attention on generating this nonsense. You should know better.
Posted by: Jeff at June 25, 2011 11:34 AM
As I understand it, Wisconsin uses a rather complex formula in which local real estate taxes are augmented with state taxes to roughly equalize spending per pupil across the state (although this may be some gross oversimplification). The state payments are, if I understand correctly, called equalization payments.
Now, some districts--in fact, 21 of 425--receive no equalization payments, and another 33, receive less than 5% of spend through equalization payments. The 5% district is called NorwayJ7, and the equalization payment there is about $700 per student.
It seems to me, if you want to keep equalization and reduce spending on public education, then you'll have to reduce allowable real estate taxes for those districts receiving very little in the equalization receipts; otherwise, spending per pupil would automatically be higher in districts not receiving equalization payments (there are no equalization payments to cut!). So the governor's budget combines cuts in real estate taxes with reductions in equalizaton payments to reduce the allowable spend per student by approximately the same amount state-wide.
The net result of this, however, is that wealthy districts will not only see spending on students cut, but taxes also cut. In poorer districts, spending is cut, but they can increase their taxes if they want to! In all cases, voters can raise taxes by referendum; in poorer districts, this can be done through the local legislative body (no referendum needed), in general.
So the net effect is to reduce spending across the board, with a real estate tax rate reduction for wealthier communities, if I am reading the numbers right.
I would add that Wisconsin did not see some of the runaway spending on education during the 2000's that some other states did (at least from the state fund). The General Aid Appropriation fund (I believe, the state equalization fund), increased at a pace of only 1.3% per year from 2002/2003 to 2010/2011. No great shakes there.
I'd further add that I can only marvel that I could easily find spreadsheets which (if I were in the mood to torture myself even more on the topic) calculate for you district by district. Now that's a civil service!
Posted by: Steven Kopits at June 25, 2011 12:18 PM
I don't know why liberals are so concerned about capital gains tax incentives to encourage investment. Of course the wealthy will benefit, because by definition they have more money to invest. I really think that instead of decrying the rich having all the money, liberals should do more introspection as to why the poor are poor. BIG HINT: to a certainly non-trivial extent, the poor are poor because of their own bad decisions in life. Quit blaming the "rich." It's their investment in businesses like this tax policy is designed to encourage that creates jobs for the poor to lift themselves out of poverty. Class warfare is a non-starter.
Posted by: Brian at June 25, 2011 12:49 PM
The proper tax rate for capital gains is zero.
Posted by: Ed Hanson at June 25, 2011 01:07 PM
I'm not saying anything in the cited content was incorrect, or that it was drivel. However, the post's only addition was "For me, Governor Walker's original choice of signing venue seems entirely appropriate." Might as well have just contained links as this comment didn't add anything of substance.
Posted by: Jay A. at June 25, 2011 02:51 PM
Hmmmm....just a few months ago Gov. Walker was claiming that the state was in dire financial straits and that's why it was imperative that public employees take a hit. And now he signs a second major tax cut that only benefits his wealthy cronies? Something smells like limburger.
I would add that Wisconsin did not see some of the runaway spending on education during the 2000's that some other states did
Really? Then why was Gov Walker only recently saying that he had to cut public employee (mostly teacher) benefits? It was only a few months ago that the usual suspects on this very blog were waving the bloody shirt about runaway education spending in Wisconsin.
I don't know why liberals are so concerned about capital gains tax incentives to encourage investment.
It doesn't encourage investment; it simply defers a tax. "Reinvesting" in this context primarily means buying some kind of claim to an asset that was previously held by someone else. If I own an equity share and sell it to someone else at a profit, that does not directly increase the physical investment or directly increase the number of jobs; it's just an ownership swap. And for someone who is constantly obsessed about the evils of malinvestment, what could be worse than a bill that limits a capital gain deferral only if the profits are "reinvested" in a qualifying Wisconsin firm? Even if you believe the capital gains tax deferral actually did stimulate real physcial investment, doesn't restricting it to only qualifying Wisconsin firms smell an awful lot like that dreaded "economic planning" that you're always talking about?
Posted by: 2slugbaits at June 26, 2011 04:43 AM
Brian to a certainly non-trivial extent, the poor are poor because of their own bad decisions in life. Quit blaming the "rich."
Some people are poor because of bad decisions in their lives; but what we're talking about here is school aid for kids, and kids are not poor because of bad decisions they've made in their lives. They didn't get to decide their parents. So even if their parents made bad decisions, how is that at all relevant to anything when it comes to school funding? Or are you one of those "sins of the father" kooks? An awful lot of life is just dumb luck. Some rich people are rich because of good life choices, but most rich people are rich because of dumb luck...right set of parents, right set of genes, right color skin, being at the right place at the right time, etc. Look at Gov Walker himself. This man is a clownshow, morally repugnant, a bit dimwitted, and someone who stumbled into office at just the right time. If the election were held today he would lose by a mile. Right place at the right time. He's the poster child for dumb luck. Chauncey Gardner. And a lot of poor people are poor because of dumb luck, and that's especially true during a recession.
When you write crap like that you should keep in mind that one random mistake in your genetic code and you could just as easily be a depressed drug addict sleeping under a bridge. Or a one night stand by one of your parents while on spring break and you could be crawling over garbage dumps in Mexico. You would do well to read John Rawls.
Posted by: 2slugbaits at June 26, 2011 06:30 AM
It is disturbing but not surprising to see the extent of Dickensian narcissism in the comments from the right.
The real question is what is the utility of having extremely wealthy people if they do not contribute to the common good and betterment of the state in which they reside? Money sitting around does them no good save for the ability to flaunt to people the state may have to defend them from. Eventually the avaricious will have another shot at the money-their main source of entertainment is acquiring it-so someone must take it from them at some point so they may be pleasurably engaged in reacquiring it.
Not to tax the wealthy to the point of penury is like letting the Budweiser clydesdales sit in the wagon while the people pull the beer and horses.
Posted by: Robert Cratchit at June 26, 2011 01:46 PM
(AP) Republican Wisconsin Governor Scott Walker signed his first budget Sunday, a two-year $66 billion deal that will balance the state’s $3 billion shortfall without raising taxes.
No wonder progressives could not find anything to like about it.
Posted by: tj at June 26, 2011 04:21 PM
This is all you have to note after the complete victory for the taxpayers in Wisconsin?
Posted by: Rich Berger at June 26, 2011 04:50 PM
XIII too many articles spent on this issue.
Posted by: Anonymous at June 26, 2011 05:27 PM
?????? What is the point? Were you trying to tell us that the Gov. of the great State of Wisconsin was signing the first truly balanced budget in 10 years? Yeah for WI! Now if the feds can get their stuff together, perhaps a call from Obama to Walker is in order, the Country can also balance our budget as well. Cut spending, keep the tax rates low, it's not brain surgery.
Posted by: Steve at June 27, 2011 06:55 AM
It is pretty well established that if you want less of something tax it. The state of Wisconsin seems to have decided in the past that they want less capital in the state. Now it appears that Gov. Walker has decided that the state could use more capital. Sounds like a good call.
So how powerful is the class warfare of the "progressives?" Is there one "poor" person harmed by reducing taxes on capital. Now the class warefare argument is that we should increase taxes on the rich because ... well, they are rich and no person has the right to be rich except politicians and the politically connected.
Now on federal returns an "S" Corporation is reported for income tax purposes as personal income. I assume that this is the case for Wisconsin. So, when capital gains are taxed "S" Corporations see the value of their assets stripped away. Any new equipment will be more expensive than the old equipment it replaces but if there are any "capital gains" realized because of inflation or other phantom increase in the asset's value then it is taxes away before it can be replaced. Then simply because capital appreciates funds for emplyment and reinvestment are confiscated by the state. Lowering capital gains taxes acutally allows "S" Corporations to invest more in capital and people, contrary to progressive prejudices.
Progressive class warfare is always more important to progressives than employment.
Posted by: Ricardo at June 27, 2011 07:19 AM
Ricardo: ... when capital gains are taxed "S" Corporations see the value of their assets stripped away. Any new equipment will be more expensive than the old equipment it replaces but if there are any "capital gains" realized because of inflation or other phantom increase in the asset's value then it is taxes away before it can be replaced.
This makes no sense. Corporate capital investments are tax deductible. The easiest way to prevent taxation of capital gains is to invest the gain in new production. Contrary to your claim, taxes increase the incentive for capital investment. Capital gains are taxed only if hoarded.
Posted by: Anonymous at June 27, 2011 08:18 AM
"The proper tax rate for capital gains is zero."
The proper tax rate for a realized capital gain, which is then reinvested, might well be zero. The proper tax rate for a realized capital gain used for consumption is the same as the rate on any other form of income.
Posted by: Michael Cain at June 27, 2011 08:34 AM
You obviously don't work accounting for a corporation. Capital investments are depreciated. If there is gain on the capital at the time of disposal it must be recognized as a gain.
Posted by: Ricardo at June 28, 2011 08:54 AM
Here's a couple of additional links along the lines of your post...
41 Obama White House aides owe the IRS $831,000 in back taxes -- and they're not alone
Stimulus contractors owe millions in back taxes
Oh wait. I forgot that tax avoidence from BO's team, or from people that he pays off with stimulus funds was not to be mentioned in this blog post... Sorry about that.
Posted by: Jack at June 28, 2011 04:44 PM
Jack: Correct me if I am wrong, but isn't there a difference between owing back taxes, and being convicted of deliberately evading taxes?
Posted by: Menzie Chinn at June 28, 2011 05:29 PM
Ricardo: Capital investments are depreciated. If there is gain on the capital at the time of disposal it must be recognized as a gain.
I'm not sure if you misunderstand taxes or misunderstand how to run a business, or both. When selling capital equipment you generally have a gain only because you depreciated the equipment faster than the value of the equipment actually declined in market value. You pay tax on the phantom gain because you previously took an excess deduction for phantom depreciation. This is called depreciation recapture.
Real companies that create real jobs don't generally have real capital gains on capital investments. Capital equipment that creates jobs declines in value over time so it's strange that you are so hung up on taxes on capital gains. They are a trivial concern for most corporations.
Since you are so worried about capital gains, I can only guess that you are talking about an S-corp that is flipping condos or some such. Not exactly a job generating business. Apparently you are just looking for a way to suck all the personal income out of your operation tax-free. For an S-corp, all income passes through to the owners. If you don't like that arrangement, then don't use an S-corp.
As people who run real businesses that hire real people know, the best way minimize taxes is to invest your money in growing your business.
Posted by: Anonymous at June 28, 2011 11:20 PM
You may live in a non-inflation world but most people do not. When you sell a piece of equipment it is not based on the same currency value as when you bought it. Capital gains tax is actually an inflation tax.
Example very simplified: You buy a piece of equipment for $100K. In one year you determine to replace the machine. For the sake of argument we will say that you depreciated the machine straight line over a 10 year life. Your book value is $90K but you sell it for $99K. In your "S" corp that becomes personal income. So you pay 38% (we will ignore state and other taxes). Your return from the sale of the machine is $61.4K after tax.
When you go to purchase another machine you find that the same machine is now $110K rather than 100K. You cannot buy another machine by simply paying the difference between the depreceated value and the salvage value.
The inflation rate has been 10% and you have paid tax on that 10%. The government has essentially confiscated a portion of your machine by forcing you to pay tax on the inflation. This destroys wealth.
Many other countries recognize this inflation tax and so do not have capital gains taxes. Because of this they are seeing increases in capital. The US taxes capital and so we are seeing a decline in capital.
Posted by: Ricardo at June 29, 2011 11:17 AM
Ricardo, do yourself a favor and see a tax professional. If you have a basis of $90K and sell it for $99K, your capital gain is only $9K, not $99K. You are overpaying your taxes by ten times. No wonder you are upset. Your tax ignorance is causing you to vastly overpay your taxes.
The recaptured capital gain becomes ordinary income because you previously used the deduction against ordinary income. This is perfectly symmetrical.
Posted by: Anonymous at June 29, 2011 12:45 PM
This is great fun for a Canadian to read: we get a great view of why Wisconsin gave you both Lafollette and Tail Gunner Joe.
And aren't your right wingers a hoot! Never forget, never learn.
Posted by: David Lloyd-Jones at June 29, 2011 04:49 PM
Menzie, when will we see an article on: Remember that ole Wisconsin issue re: unions and spending? C'mon now Y'all remember it!
Well here's the newest budgetary fallout.
"Cost savings from worker contributions to health care and retirement, taking effect today as part of the new collective bargaining laws, will swing the Kaukauna School District from a $400,000 budget deficit to an estimated $1.5 million surplus, the Post-Crescent in Appleton reports. The district tells the Post-Crescent that it plans to hire teachers and reduce class size." (My bolding) From here: http://www.jsonline.com/blogs/news/124727554.html
There's spending and then there's good spending resulting in even more jobs. Uh oh, it resulted from conservative economic policies.
Posted by: CoRev at June 30, 2011 06:24 AM
Menzie, I'm shocked at your failure to respond. This was your opportunity to regale us with the power and history of the Wisconsin democratic economic policies/actions.
Posted by: CoRev at July 1, 2011 04:38 AM
A slip of the finger, but the principle remains. You are paying tax on phantom profit.
This question from a June 28, 2011 New York Sun editorial may help your confusion.
Suppose you had $1.5 million. At today’s gold price that would buy approximately 1,000 ounces of gold. Suppose now that President Obama, the Congress, and the Federal Reserve began managing the American economy in such a way that by the end of President Obama’s second term, the dollar was back to where it was when President George W. Bush began his first term. Were that to happen, your $1.5 million could purchase 5,660 ounces of gold.
So, do you think you should have to pay taxes on the increase in the value of your money?
Posted by: Ricardo at July 1, 2011 08:38 AM
Correcting my previous example, because of inflation and capital gains tax you pay $95.9 out of the sale of the old machine on the new machine, so you have to take $14.1 out of profit. With no capital gains tax you would pay $99 out of the sale of the old machine and take only $11K out of profit. The $3.4 difference is the amount confiscated by the government from your capital.
Posted by: Ricardo at July 1, 2011 08:55 AM
I say take the tax breaks away from the rich. They supposedly got them because they would use the money productively to create jobs. Instead all they produced was worthless paper which almost tanked the economy. Let them keep what they earn but don't give them any more freebies to squander creating bubbles. As far as jobs Obama has already produced more jobs than were created after the Bush tax cuts.
They had their chance with that money and blew it and almost took down the world economy. They can't be trusted with money and don't deserve any kind of tax breaks at my expense. This is not about economics. It is about disciplining certain miscreants who demonstrably badly mishandled what we gave them.
Eric Cantor (R-VA)is in a fund which is aggressively shorting treasuries while he is playing chicken with the deadline missing which could make him big capital gains as well as wreck our economy: (http://www.salon.com/news/politics/war_room/2011/06/27/eric_cantor_conflict_of_interest) Does he deserve a tax break on this money if he gets it by helping wreck US bond ratings?
Posted by: Richard A at July 2, 2011 08:34 AM
Menzie, we now have the second school district, the Hartland-Lakeside School District, reporting saving due to the Walker Bill changing union negotiation rights. A 28% savings in health care costs for a small district is a significant savings for a small district. I expect an article hailing this development. ;-)
Posted by: CoRev at July 8, 2011 08:42 AM