Restoring Tax Fairness To Rebuild The American Economy

by Ethan Strimling

The wheels have come off the American economy.

We are no longer a nation that invests in jobs, innovation, invention or manufacturing. We are a nation that invests in things like hedge funds, OTC derivatives, credit default swaps and other complex financial instruments.

This huge shadow economy that is completely unregulated and virtually invisible to the average person today attracts more investment dollars than traditional stocks and bonds. The people managing and profiting from these “dark markets” are not hard-working entrepreneurs who are building a business to help working families put food on the table, but people who sit all day in front of their computer screens placing bets on whether interest rates will rise or fall or whether sub-prime mortgages will be paid off or not.

The deregulation of the credits and futures markets that began in the late 1980s has turned Wall Street into one giant casino with the players uninterested in the underlying fundamentals of the business, or even whether it succeeds or fails, only whether they put their money on winners or losers. As Donald Sussman, founder of the hedge fund Paloma Partners, explained to the Bangor Daily News, “It doesn’t matter whether a stock goes up or down, just that it does.”

Even the bankers who were making all those sub-prime home loans – and collecting a commission for doing so – no longer cared whether the borrowers were truly able to make their payments because the loans were quickly bundled and sold to other institutions as “mortgage-backed securities,” someone else’s problem. For awhile they sat on a company’s ledger fattening its assets, until housing prices collapsed turning the loans overnight into huge liabilities.

That’s why Warren Buffett, the richest man in America, has termed these complex financial instruments economic “weapons of mass destruction.” We’re already seeing the damage they cause in the sub-prime mortgage mess that has led to millions of home foreclosures, and the huge taxpayer bailout of Bear Stearns. Even though you can’t read about this invisible unregulated market on the pages of the Wall Street Journal – like you can stocks and bonds – or watch it on MSNBC, this shadow economy is at the root of our current economic problems that are causing such distress for average Maine families.

The hedge fund and derivative managers respond by saying, “You just aren’t smart enough to understand these complex financial transactions.” To which I say, “You aren’t smart enough to prevent this market that you created from collapsing and bringing down the entire US and world economy.” That’s why action is needed now.

We don’t need another taxpayer bailout for the barons of Wall Street. We need to restore economic fundamentals to help the people and the workers on Main Street.

Here’s what Congress can do:

• Regulate the investment banks and hedge funds. Congress should impose capital requirements for investment banks and hedge funds, and require them to pay into a stabilization fund that can be drawn down when things go south. If they’re going to come running to the Federal Reserve and make a claim on the public’s money every time they get into trouble, these restrictions are a reasonable trade-off.

• Restore tax fairness. Top hedge fund managers make $11 million a week, yet pay a lower tax rate than the janitor who empties their wastebasket, or the soldiers fighting in Iraq. And many hedge fund managers – like Sussman – move part-time to the Virgin Islands where, due to another tax dodge established by Congress, they pay an effective tax rate of just 3.5% on their income. (You and I pay around 30%.)

These loopholes are absurd and indefensible, particularly given the vast sums of income earned by the hedge fund managers and the potential they have for disrupting the overall economy. Why won’t Congress close them? Because the hedge fund industry showers Congressional candidates with millions of dollars in donations.

Taxing the earnings of these super-wealthy hedge fund managers as ordinary income would reap a conservative $6 billion a year for the US treasury, according to the Economic Policy Institute. Doing the same to equity fund managers would bring in another $6 billion a year.

• Invest in education. The additional tax revenue from closing these loopholes would allow us to double the amount of money currently spent on Pell Grants to help more low and middle-income students get into college. The huge growing gap between the super-rich and the middle class is at least partly explained by a similar gap between the number of skilled and unskilled workers. The research is clear that each year of college raises a person’s wages by nearly 13%.

A college degree won’t guarantee that everyone will become a billionaire hedge fund manager who can hire an army of lawyers and accountants to dodge their fair share of taxes. But it will increase the pool of skilled workers and help diminish the current economic inequalities. And it just might produce some young, creative entrepreneurs who will decide to invest in real jobs and real growth and get our nation’s economy back on track.

http://pressherald.mainetoday.com/story.php?id=184966&ac=PHedi