Ahead of a major address in New York City, the Democratic hopeful is wrapping her campaign in an anticorruption pitch to Democratic primary voters
Sen. Elizabeth Warren is proposing a federal ban on all fundraising activities hosted by lobbyists as part of a new, broad set of anticorruption proposals, adding weight to a theme that has underpinned her White House bid.
The plan, outlined Monday morning on the blog site Medium, builds on anticorruption legislation Ms. Warren announced last year. It adds the new lobbying prohibitions, as well as a ban to prevent senior executive branch officials and members of Congress from serving on for-profit boards—whether or not they receive compensation from such positions. Ms. Warren, a Massachusetts Democrat, unveiled the proposal ahead of one of the splashiest events of her presidential campaign: an evening speech at New York City’s Washington Square Park.
The ideas are unlikely to become law while Republicans control the Senate and the White House. GOP lawmakers have generally lined up against similar proposals, citing constitutional concerns.
Typically, new restrictions on registered lobbyists lead to more Washington operatives deciding not to register, instead referring to themselves as consultants or strategic advisers. Ms. Warren says her plan would close that workaround by expanding the definition of lobbyist to include “all individuals paid to influence government.”
Such appeals to the idea that Washington is corrupt could pay off at the ballot box in 2020. In a WSJ/NBC News poll conducted last fall ahead of the midterm elections, 77% of all respondents said reducing the influence of special interests and corruption in Washington ranked as either the most important or a very important factor in deciding which candidate should get their vote. The only issue that ranked higher was the economy. Many Democrats who won House seats in 2018 campaigned on decreasing the influence of money in politics.
“Look closely, and you’ll see—on issue after issue, widely popular policies are stymied because giant corporations and billionaires who don’t want to pay taxes or follow any rules use their money and influence to stand in the way of big, structural change,” Ms. Warren wrote Monday.
Ms. Warren is also pushing to alter the definition of a “thing of value” in campaign finance laws to include tangible benefits made for campaign purposes, in what appeared to be a nod to President Trump.
The Wall Street Journal reported in November 2018 that Mr. Trump intervened to suppress stories about alleged sexual encounters with women, including the former Playboy model Karen McDougal and the former adult-film star known professionally as Stormy Daniels, citing interviews with three dozen people, court papers, corporate records and other documents. The president’s former personal attorney, Michael Cohen, told a federal judge that Mr. Trump had directed him during the 2016 campaign to buy the silence of two women who said they had affairs with Mr. Trump.
Mr. Cohen pleaded guilty in August 2018 to eight criminal charges, including campaign-finance violations. Mr. Trump has denied the encounters.
Ms. Warren is additionally proposing making it harder for corporations to seal settlements of product liability litigation, something Democrats have called for in the past, notably in 2014 following a faulty ignition switch installed on 2.6 million General Motors vehicles.
Democratic presidential candidate Joe Biden used a tax loophole that the Obama administration tried and failed to close, substantially lowering his tax bill.
Mr. Biden and his wife, Dr. Jill Biden, routed their book and speech income through S corporations, according to tax returns the couple released this week. They paid income taxes on those profits, but the strategy let the couple avoid the 3.8% self-employment tax they would have paid had they been compensated directly instead of through the S corporations.
The tax savings were as much as $500,000, compared to what the Bidens would have owed if paid directly or if the Obama proposal had become law.
“There’s no reason for these to be in an S corp—none, other than to save on self-employment tax,” said Tony Nitti, an accountant at RubinBrown LLP who reviewed the returns.
“As demonstrated by their effective federal tax rate in 2017 and 2018—which exceeded 33%—the Bidens are committed to ensuring that all Americans pay their fair share,” the Biden campaign said in a statement Wednesday.
The technique is known in tax circles as the Gingrich-Edwards loophole—for former presidential candidates Newt Gingrich, a Republican, and John Edwards, a Democrat—whose tax strategies were scrutinized and drew calls for policy changes years ago. Other prominent politicians, including former President Barack Obama and fellow Democrat Hillary Clinton, as well as current contenders for the 2020 Democratic nomination Sens. Elizabeth Warren and Bernie Sanders, received their book or speech income differently and paid self-employment taxes.
Unlike his Democratic rivals and predecessors in both parties, Mr. Trump has refused to release his tax returns, and his administration is fighting House Democrats’ attempt to use their statutory authority to obtain them. Democratic presidential candidates have released their tax returns and welcomed criticism to draw a contrast with Mr. Trump.
Mr. Biden, who was vice president from 2009 to 2017, has led the Democratic field in polls since entering the race. He is campaigning on making high-income Americans pay more in taxes and on closing tax loopholes that benefit the wealthy.
Mr. Biden has decried the proliferation of such loopholes since Ronald Reagan’s presidency and said the tax revenue could be used, in part, to help pay for initiatives to provide free community-college tuition or to fight climate change.
“We don’t have to punish anybody, including the rich. But everybody should start paying their fair share a little bit. When I’m president, we’re going to have a fairer tax code,” Mr. Biden said last month during a speech in Davenport, Iowa.
Like grave robbers opening King Tut’s tomb, Congress can’t wait to get its hands on America’s retirement-account assets. The House passed the Setting Every Community Up for Retirement Enhancement Act, known by the acronym Secure, in May. The vote was 417-3. The Secure Act is widely expected to pass the Senate by unanimous consent. While ostensibly helping Americans save for retirement, the bill would actually reduce the value of all retirement savings plans: individual retirement accounts, 401(k)s, Roth IRAs, the works.
The main problem with the Secure Act is that it eliminates the stretch IRA, the fixed star in the financial-planning firmament since 1999. The stretch IRA lets savers leave their retirement accounts to children, grandchildren or other beneficiaries. Under current rules, the recipients can parcel out the required minimum distributions from the accounts over the course of their actuarial lifetimes. Payouts tend to be relatively small for children but grow in size over the decades until the inherited IRA might comfortably provide for the child’s retirement through the power of tax-deferred compounding. A parent could die with the knowledge that, whatever vicissitudes their children might experience in life, they won’t have to worry about retirement.
Congress wants to kill this. The Secure Act gives nonspouse beneficiaries 10 years to pull out all the money in an IRA. The effect would be to make more of an IRA subject to higher taxes sooner, as distributions are made in supersize chunks. As much as one-third more of an inherited IRA would get gobbled up by taxes than under current rules. When the Tax Cuts and Jobs Act expires in 2025, taxes will rise across the board. If President Trump signs the Secure Act into law, the stage will be set for a taxpocalypse sometime in the next decade.
In exchange for its windfall under the Secure Act, Congress will push back the age at which retirees must take their first required minimum IRA distributions from 70½ to 72. This isn’t the deal American savers were promised when they made contributions to their IRAs the last 20 years. Before, the optimal approach was for savers to leave their IRAs to their children or grandchildren and stretch the payouts over decades.
Under the Secure Act, an IRA owner could still leave the account to a surviving spouse, who’d remain exempt from the 10-year clock. But the widow would be paying taxes in the higher “filing single” bracket. The bracket can easily jump from 12% to 25% or from 24% to 35% as the mandatory payout ratios automatically increase with age. For example, the required minimum distribution for a 70-year-old is 3.7% of the retirement-account balance; for a 90-year-old it is 8.8%.
Should a $1 million IRA pass to a high-earning adult daughter, at best she would have to take payouts adding $100,000 of annual income on top of her salary for a decade. If she lives in a high-tax state, half the annual payout’s value could be lost to taxes.
It gets worse. The Secure Act would be a college planning nightmare for middle-income parents. If the parents of college-age children inherit a $500,000 IRA, the resulting highly taxed mandatory distributions—say, $50,000 a year for 10 years—would make them richer on paper than they actually are, eviscerating their ability to qualify for need-based financial aid. If those parents decide to postpone taking the distributions for four years to avoid the financial-aid effect, they would need to double up on distributions after graduation to compensate, which would land them in a higher tax bracket. If the grandparents skip a generation and leave the IRA directly to the college-bound grandchild, the “kiddie tax” would require the distributions to be taxed at the parents’ rates. Whichever way the family turns, they lose.
The Secure Act would be an estate-planning catastrophe for people with significant IRAs. It would take the sensible planning done up until now and stand it on its head. In the past, an IRA owner might have established a trust if his intended beneficiaries were young. Under the Secure Act, IRAs will no longer be subject to annual required minimum distributions, so an IRA of $1 million placed in a trust for the benefit of an 8-year-old could conceivably receive nothing for nine years. Then at year 10, by law, the IRA would have to pay out everything. Now the young beneficiary turns 18, and suddenly he gets a windfall. With a decade of additional compound growth, the original IRA could have grown to $2 million or more. All is delivered in one year, so most of it is taxed in the highest brackets. If the trust language allows the trustee to keep the money in the trust, it will be taxed at the exorbitant federal trust tax rate of 37% on income over $12,500. And don’t forget state taxes.
The insurance industry loves the Secure Act’s mandate that annuities be offered as a payout option in all retirement plans. Insurance companies sold more than $230 billion worth of annuities in 2018, and they would like to push that figure higher. Annuitizing retirement-plan assets is generally a bad idea unless the retiree needs all the cash for living expenses and can find a very low-cost annuity that is indexed to CPI-E—the inflation rate facing senior citizens that includes their increasingly expensive medical care. Unfortunately, such an annuity doesn’t exist.
The mandatory offer of an annuity is a first step that could lead to the mandatory annuitization of all retirement accounts. This would shoehorn the distributions into higher brackets, accelerate the collection of tax revenue, and eliminate the “problem” of the inherited IRA. Best of all, politicians would get to accomplish all this without voting to raise taxes.
Ted Cruz of Texas is the Senate’s main holdout against the Secure Act. His concern is that the House version dropped a niche provision that would allow tax-advantaged 529 Plans to pay for home schooling. He might be able to hold out, but it’ll be a stretch.
How not to repeat the mistakes of 2011.
In a couple of days I’m going to be participating in an Economic Policy Institute conference on “excessive wealth disorder” — the problems and dangers created by extreme concentration of income and wealth at the top. I’ve been asked to give a short talk at the beginning of the conference, focusing on the political and policy distortions high inequality creates, and I’ve been trying to put my thoughts in order. So I thought I might as well write up those thoughts for broader dissemination.
While popular discourse has concentrated on the “1 percent,” what’s really at issue here is the role of the 0.1 percent, or maybe the 0.01 percent — the truly wealthy, not the “$400,000 a year working Wall Street stiff” memorably ridiculed in the movie Wall Street. This is a really tiny group of people, but one that exerts huge influence over policy.
Where does this influence come from? People often talk about campaign contributions, but those are only one channel. In fact, I’d identify at least four ways in which the financial resources of the 0.1 percent distort policy priorities:
1. Raw corruption. We like to imagine that simple bribery of politicians isn’t an important factor in America, but it’s almost surely a much bigger deal than we like to think.
2. Soft corruption. What I mean by this are the various ways short of direct bribery politicians, government officials, and people with policy influence of any kind stand to gain financially by promoting policies that serve the interests or prejudices of the wealthy. This includes the revolving door between public service and private-sector employment, think-tank fellowships, fees on the lecture circuit, and so on.
3. Campaign contributions. Yes, these matter.
4. Defining the agenda: Through a variety of channels — media ownership, think tanks, and the simple tendency to assume that being rich also means being wise — the 0.1 percent has an extraordinary ability to set the agenda for policy discussion, in ways that can be sharply at odds with both a reasonable assessment of priorities and public opinion more generally.
Of these, I want to focus on item (4), not because it’s necessarily the most important — as I said, I suspect that raw corruption is a bigger deal than most of us can imagine — but because it’s something I think I know about. In particular, I want to focus on a particular example that for me and others was a kind of radicalizing moment, a demonstration that extreme wealth really has degraded the ability of our political system to deal with real problems.
The example I have in mind was the extraordinary shift in conventional wisdom and policy priorities that took place in 2010-2011, away from placing priority on reducing the huge suffering still taking place in the aftermath of the 2008 financial crisis, and toward action to avert the supposed risk of a debt crisis. This episode is receding into the past, but it was extraordinary and shocking at the time, and could all too easily be a precursor to politics in the near future.
Let’s talk first about the underlying economic circumstances. At the beginning of 2011, the U.S. unemployment rate was still 9 percent, and long-term unemployment in particular was at extraordinary levels, with more than 6 million Americans having been out of work for 6 months or more. It was an ugly economic situation, but its causes were no mystery. The bursting of the housing bubble, and the subsequent attempts of households to reduce their debt, had let to a severe shortfall of aggregate demand. Despite very low interest rates by historical standards, businesses weren’t willing to invest enough to take up the slack created by this household pullback.
Textbook economics offered very clear advice about what to do under these circumstances. This was exactly the kind of situation in which deficit spending helps the economy, by supplying the demand the private sector wasn’t. Unfortunately, the support provided by the American Recovery and Reinvestment Act — the Obama stimulus, which was inadequate but had at least cushioned the effects of the slump — peaked in mid-2010 and was in the process of falling off sharply. So the obvious, Economics 101 move would have been to implement another significant round of stimulus. After all, the federal government was still able to borrow long-term at near-zero real interest rates.
Somehow, however, over the course of 2010 a consensus emerged in the political and media worlds that in the face of 9 percent unemployment the two most important issues were … deficit reduction and “entitlement reform,” i.e. cuts in Social Security and Medicare. And I do mean consensus. As Ezra Klein noted, “the rules of reportorial neutrality don’t apply when it comes to the deficit.” He cited, for example, Mike Allen asking Alan Simpson and Erskine Bowles “whether they believed Obama would do ‘the right thing’ on entitlements — with ‘the right thing’ clearly meaning ‘cut entitlements.’”
So where did this consensus come from? To be fair, the general public has never bought into Keynesian economics; as far as I know, most voters, if asked, will always say that the budget deficit should be reduced. In November 1936, just after FDR’s reelection, Gallup asked voters whether the new administration should balance the budget; 65 percent said yes, only 28 percent no.
But voters tend to place a relatively low priority on deficits as compared with jobs and the economy. And they overwhelmingly favor spending more on health care and Social Security.
The rich, however, are different from you and me. In 2011 the political scientists Benjamin Page, Larry Bartels, and Jason Seawright managed to survey a group of wealthy individuals in the Chicago area. They found striking differences between this group’s policy priorities and those of the public at large. Budget deficits topped the list of problems they considered “very important,” with a third considering them the “most important” problem. While the respondents also expressed concern about unemployment and education, “they ranked a distant second and third among the concerns of wealthy Americans.”
And when it came to entitlements, the policy preferences of the wealthy were clearly at odds with those of the general public. By large margins, voters at large wanted to expand spending on health care and Social Security. By almost equally large margins, the wealthy wanted to reduce spending on those same programs.
So what was the origin of the conventional-wisdom consensus that emerged in 2010-2011 — a consensus so overwhelming that leading journalists abandoned the conventions of reportorial neutrality, and described austerity policies as the self-evident “right thing” for politicians to be doing? What happened, essentially, was that the political and media establishment internalized the preferences of the extremely wealthy.
Now, 2011 was an especially dramatic example of how this happens, but it wasn’t unique. In their recent book “Billionaires and Stealth Politics,” Page, Seawright, and Matthew Lacombe point out the enduring effects of plutocratic political influence on the Social Security debate: “Despite the strong support among most Americans for protecting and expanding Social Security benefits, for example, the intense, decades-long campaign to cut or privatize Social Security that was led by billionaire Pete Peterson and his wealthy allies appears to have played a part in thwarting any possibility of expanding Social Security benefits. Instead, the United States has repeatedly come close (even under Democratic Presidents Clinton and Obama) to actually cutting benefits as part of a bipartisan ‘grand bargain’ concerning the federal budget.”
And here’s the thing: While we don’t want to romanticize the wisdom of the common man, there’s absolutely no reason to believe that the policy preferences of the wealthy are based on any superior understanding of how the world works. On the contrary, the wealthy were obsessed with debt and uninterested in mass unemployment at a time when deficits weren’t a problem — were, indeed, part of the solution — while unemployment was.
And the widespread belief among the wealthy that we should raise the retirement age is based, literally, on failure to understand how the other half lives (or, actually, doesn’t). Yes, life expectancy at age 65 has gone up, but overwhelmingly for the upper part of the income distribution. Less affluent Americans, who are precisely the people who depend most on Social Security, have seen little rise in life expectancy, so there is no justification for forcing them to work longer.
Where do the preferences of the wealthy come from? You don’t have to be a vulgar Marxist to recognize a strong element of class interest. The push for austerity was clearly linked to a desire to shrink the tax-and-transfer state, which in all advanced countries, even America, is a significant force for redistribution away from the wealthy toward citizens with lower incomes.
You can see the true goals of austerity a couple of ways. First, by comparison with other advanced countries the U.S. has low taxes and low social spending, yet almost all the energy of self-proclaimed deficit hawks was expended on demands for reduced spending rather than increased taxes. Second, it’s striking how much less deficit hysteria we’re hearing now than we did seven years ago. The full-employment budget deficit now is about as large, as a share of GDP, as it was in early 2012, when unemployment was still above 8 percent. But this deficit, although far less justified by macroeconomic considerations, was created by tax cuts — and somehow the deficit hawks are fairly quiet.
No doubt many wealthy backers of tax cuts for themselves and benefit cuts for others manage to convince themselves that this is in everyone’s interest. People are in general good at that sort of self-delusion. The fact remains that the wealthy, on average, push for policies that benefit themselves even when they often hurt the economy as a whole. And the sheer wealth of the wealthy is what empowers them to get a lot of what they want.
So what does this imply going forward? First, in the near term, both during the 2020 election and after, it’s going to be really important to ride herd on both centrist politicians and the media, and not let them pull another 2011, treating the policy preferences of the 0.1 percent as the Right Thing as opposed to, well, what a certain small class of people want. There’s a fairly long list of things progressives have recently advocated that the usual suspects will try to convince everyone are crazy ideas nobody serious would support, e.g.
A 70 percent top tax rate
A wealth tax on very large fortunes
Universal child care
Deficit-financed spending on infrastructure
You don’t have to support any or all of these policy ideas to recognize that they are anything but crazy. They are, in fact, backed by research from some of the world’s leading economic experts. Any journalist or centrist politician who treats them as self-evidently irresponsible is doing a 2011, internalizing the prejudices of the wealthy and treating them as if they were facts.
But while vigilance can mitigate the extent to which the wealthy get to define the policy agenda, in the end big money will find a way — unless there’s less big money to begin with. So reducing the extreme concentration of income and wealth isn’t just a desirable thing on social and economic grounds. It’s also a necessary step toward a healthier political system.