Sunday, February 5, 2012

How CEOs are Rewarded for Fraud

Even as the Securities and Exchange Commission has stepped up its investigations of Wall Street in the last few years, our government (via the S.E.C.) has been giving favorable treatment to the biggest banks who were engaged in outright fraud, even though they were repeat offenders.

HuffPo: "The S.E.C. has filed some civil fraud cases -- not many, and not big. Thus far, every single one has been settled with a minor fine, with neither individuals nor banks required to admit guilt. Criminal prosecutions of banks? Zero."

The S.E.C. allows the banks to settle without admitting or denying the charges, even as they had simultaneously settled a case with the Justice Department’s antitrust division admitting the very same conduct. The S.E.C.’s corporation finance director, Meredith B. Cross, reasoned it's "to protect investors, not to punish a company.

But the CEOs and other executive officers of these big Wall Street firms are usually investors themselves, paid with stock-options* as compensation for "performance", and usually makes up the biggest bulk of their personal income, compared to their base-salary wages.

* Sometimes the CEOs of these companies manipulate the stock's value by buying their stocks back (and at strike prices), or by stock dilution.

In the end, the CEOs can commit fraud to boost their company's profits to increase the value of their stock shares, get a slap on the wrist with a small fine (that's shared by all the other stockholders), pay themselves multi-million dollar bonuses and stock-options, and then be rewarded for their deliberate deceptions by paying a less effective tax rate on their personal incomes, than do most honest and hard-working middle-class wage earners.

It all makes perfect sense. This is why financial firms and businesses incorporate to begin with, to avoid personal responsibly for their bad actions and get amnesty under "limited liability" provisions that protect their personal assets from civil lawsuits through their corporate charters. And that's why it's also so difficult to put corporate executives in jail. But if corporations were "people", how can a corporation do time in prison for fraud?

These CEOs are actually enjoying a lower tax rate for their fraudulent activities - - they're being rewarded for their criminal behavior! (See the video I made to honor these uber-wealthy bankers and CEOs.)

The larger banks and corporations ("real people") get away with this all the time, while unincorporated small business owners and individuals (who aren't "real people") must pay the maximum penalties.

Ordinary income, like paychecks, is taxed at a top rate of 35%; but because of loopholes such as carried interest and capital gains, those CEOs are taxed at only 15%. People in the top 1% like Mitt Romney (and other Wall Street CEOs) are paying a lower tax rate that what a middle-class family with an average income pays in federal income taxes...about 25%.

The fact that our tax code favors assets over wages is one factor behind the rise in income inequality. It’s also one reason our government is starved for revenues while trying to keep up with population growth (we have 100 million more people since 40 years ago). Are these CEOs like Mitt Romney really so concerned about helping the poor, middle-class, and unemployed?

This new report from the Joint Committee on Taxation shows that the favorable treatment of capital gains and dividends will cost our U.S. Treasury about $450 billion between 2011 and 2015. But if you go all the way back just to 2003 when Bush lowered the capital gains tax rate to only 15%, it is well over $2 trillion in lost revenues (not including illegal tax evasion).

As Jared Bernstein, a former economic advisor to the White House points out, "The evidence doesn’t support the view that favoring asset-based income [capital gains derived from stock-options, dividends, expensive art, etc.] raises investment, productivity, or job growth."

And it's not high taxes or government regulation that kills jobs, it's low wages overseas.

But so long as naive, fearful, and misinformed Republican voters keep believing the myth of trickle-down economics, and they keep voting against their own best interests, the bankers (and everyone else in the top 1% like Mitt Romney) will keep laughing all the way to the bank.

Mitt Romney's Possible Fraud also Speaks to his Character

Mitt Romney argues: "One of the reasons why we have a lower tax rate on capital gains is because capital gains are also being taxed at the corporate level. So as businesses earn profits, that’s taxed at 35 percent, then as they distribute those profits as dividends, that’s taxed at 15 percent more. So, all total, the tax rate is really closer to 45 or 50 percent."

Mendacious talking point, the first: “double-taxation.”

We don’t tax “funds” in this country, we tax transactions. If a company turns a profit on its transactions, it pays taxes on that profit. When it pays money out to investors as dividends, or when investors sell stock at a profit, those transactions are also taxed. No transaction is taxed twice.

Mendacious talking point, the second: that 35 percent tax rate.

That’s the top corporate tax rate on the books, but because businesses take advantage of all manner of loopholes, the effective rate – what they actually pay — is actually far lower. It’s a classic conservative talking-point that we have the highest corporate tax rate in the world, but the reality is that we collect less in corporate taxes than most developed countries. Studies of some of the biggest companies have shown their effective tax rates to be, on average, less than half of what’s on the books.

And the sleight-of-hand: Bain Capital is a Limited Liability Company (LLC). This is what’s known as a “pass-through” structure, meaning that the company pays zero in corporate income taxes – the partners’ shares are taxed as income or losses on their personal returns, and in this case, most of the gains are investment income taxed at 15 percent.

And businesses can also "un-incorporate". So in other words, even if we bought the “double-taxation” nonsense and the 35 percent rate, Mitt's talking-points still wouldn’t be true (Some would say he was lying).

Is this the man we want leading this nation? A man who admitted to having a "blind trust" but knew it had invested in Freddie Mac while it was betting against homeowners, and then saying he wanted to see the housing market hit rock bottom? Or is this a man who is greedy, deceptive (and maybe even fraudulent), whose character we want as a President of the United States?

Mitt Romney has K Street and Wall Street, We have Obama

* To read more about how these CEOs are rewarded for their fraudulent, deceptive, and criminal behavior (e.g. using other legal tax loopholes, government hand-outs, illegal tax evasion, etc.), see my other posts below.

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