Estate Tax

  • Tax Reform: A Real Cohn Job

    December 13th, 2017 by ewalsh

    Chief Economic Advisor to the President Gary Cohn (pictured left) alongside fellow Goldman alumn Steve Mnuchin, U.S. Secretary of the Treasury. Photo courtesy The Washington Times.


    It seems that Gary Cohn, a trader and former heir apparent at Goldman Sachs—a life-long Democrat, let’s recall—and Trump’s current chief economic advisor, is heading for an early exit. 

    After whiffing on his near-decision to resign on principle when Trump equated the neo-Nazis in Charlottesville with the demonstrators resisting the torch march, he naturally fell out of favor with Trump when he later aired his opinion on Charlottesville with The Financial Times.  Bye-bye, Fed Chairmanship.  He reportedly decided to stay on the job out of “duty to country,” which he is manifesting by pushing the charade called “tax reform” — a brazen power grab by the powerful, and a direct assault on his middle-class childhood friends from Ohio where he grew up.

    I have never met Cohn.  I’ve heard he’s a decent man, tough, and a shrewd trader with a quick mind and a short attention span.  But I do know the trader culture that can subsume “decent men” on Wall Street, where everything—a deal, a job, a house, even a marriage in some cases—gets reduced to and commodified as a “trade”.  Values and sentiments like home rather than house, purpose rather than job, meaning rather than winning, and integrity rather than success are sneered at as “weak”.  Money is the measure.  Exceptions exist, of course, but this trader culture is pervasive on Wall Street. 

    Let’s imagine Cohn reflects such a trader culture (safe bet) and analyze his decision to trade Goldman Sachs for gold man Trump.  A decade ago next year, trader Cohn was trembling in his boots, worried that his entire Goldman Sachs equity, undoubtedly the vast majority of his net worth (recall money is the measure), was at risk of going down the same rat hole that Lehman collapsed into. Tough guy Cohn played a central role in architecting the “big short,” a hedge for Goldman’s mortgage morass that many, including the SEC, would call brazen fraud.  It mirrored the infamous Abacus trade, the architecture of which I called financial evil.  With help from the Fed, the “hedge” saved Goldman at the expense of their reputation and clients.  Whatever it takes.

    Fast forward to Donald Trump’s election.  Our man Cohn senses an opportunity for a trade.  His net worth had recovered along with Goldman Sachs’ stock price (Thank you, Mr. Obama) to “between $250 and $600 million” according to his financial disclosure form.  There he was, worth let’s call it half a billion; the number two at Goldman; and locked in the shadow of his mentor CEO Lloyd Blankfein with no indication from the board he would succeed to the throne.

    If he retired, he would walk away from his unvested stock grants, likely tens of millions (handcuffs are indeed golden at Goldman).  If he then sells his Goldman stock (reported to be $285 million when he left Goldman) to prudently diversify his assets, he pays a large capital gains tax on cheap stock he and other partners helped themselves to around the time of the financial crisis in lieu of cash bonuses, likely additional tens of millions.  Feels like a loser.  So he hatches a trade. 

    He offers his services (and reputation) to the new rogue president hungry for credibility in his cabinet.  In Trump’s eyes, Cohn is a “winner” (he’s rich), and his Goldman bona fides buttress his B team administration.  Never mind that he is an active Democrat, and represents the Wall Street interests Trump ran against. 

    But here’s the key.  If Cohn leaves the private sector to take a cabinet-level job in the Administration, he is required to sell all his Goldman stock (conveniently at the high – good trade) to avoid the appearance of conflicts of interest.  In exchange for his “public service,” the IRS allows him a one-time free pass (deferral) on the liquidation of all that stock and other investments, including his private partnership investments with unrealized capital gains.  To Cohn, he’s been “paid” unknowable tens of millions (in taxes foregone) for a year of going to meetings and standing next to Trump (literally and metaphorically) when he spews narcissism, lies, mouths off his racist and bigoted rants, and disgraces our nation in the eyes of the world.  And the cherry on top: Goldman vests Cohn’s unvested prior stock bonuses as a parting bro hug, likely worth tens of millions more.  No one needs to tell Goldman the importance of having friends in high places.

    But there’s more.  Cohn doesn’t seem to do anything commensurate with his duties as chief economic advisor (he’s a trader, not an economist—big difference) during his year in Washington from what we have seen beyond defending the negligent, grotesquely irresponsible, and blue state-targeted, dynastic wealth-enhancing tax deal, a deal that flies in the face of Cohn’s prior Democratic sensibilities.  He embarrasses himself by suggesting corporate tax cuts will unleash laughable growth rates, and a round of hiring and pay raises by corporate America, an idea that the CEOs in the audience deny (and that makes no economic sense).  And what really matters to dynastic wealth (forget the 1 percent, we are talking about extreme fortunes of hundreds of millions like Cohn’s and billions like others in the administration), is the elimination of the Estate Tax, which could easily be worth another $100 million to Cohn’s family by the time he passes to that great trading desk in the sky. 

    So let’s see how our man Cohn is doing now.  As a thought experiment, let’s assume for this simple analysis that he diversified his $500mm investment portfolio (tax free) into a broadly diversified stock index fund.  The market is up 18% this year, significantly on the promise of lower corporate tax rates (ask our Treasury Secretary who said as much).  Let’s assume 10% of the rise is attributable to the corporate tax cut, and another 10% increase will accrue as the tax cut becomes more certain.  On his $500 million portfolio, that’s another $100 million in Cohn’s pocket, never to be taxed if he passes the stash on to his family without an estate tax since he can now indefinitely defer those capital gains as a gift for his “public service.”

    Several of my neighbors’ kids (and thousands of others’) risked their lives by joining the Marines following 9-11 and did several tours of duty over many prime years of their lives.  It was in response to a genuine call for duty to country.  It was not a trade; it was service. 

    In stark contrast, for a year of “public service,” our shameless Cohn makes off with well more than $100 million (after tax, thank you).  The trade does have a cost most would not afford: selling one’s soul to a corrupt, inept, and dangerous regime.  The seemingly well-intended (but integrity-dependent) tax break to attract our so-called best and brightest to public service has been exploited for personal gain under the gloss of “public service.”  It’s a con. It’s gross.

    Money is the measure.  Abuse of power by scoundrels of all stripes knows no limits (#allofustoo).  Corruption is bringing down the Republic.  And the band plays on.

  • Fix (Don’t Flush) the Estate Tax

    October 31st, 2017 by ewalsh


    “The external glitter of wealth conceals a corrupt political core that reflects the growing gap between the very few rich and the very many poor.” – Mark Twain, The Gilded Age: A Tale of Today (1873)

     

    The Estate Tax, or a tax on wealth passed onto heirs, is not unique to America, but many OECD countries have no such tax. Only Japan, South Korea, and France have statutory estate tax rates higher than the US rate of 40%, but in America, the first $11mm is exempt for couples. By definition, only the truly wealthy pay the wealth tax, although loopholes abound.

    Enacted in 1916 in response to the excesses of the first Gilded Age and a search for revenues, the Estate Tax is on the chopping block in this second Gilded Age. Strangely, it’s getting less attention than the other components of the “tax plan” like a reduction in the corporate tax rate, apparently because it doesn’t raise much money (as if $20 billion is not much money). Defenders of the plan either (falsely) suggest it breaks up family farms and small business, or more cynically, they maintain that “anyone smart enough to amass a large fortune is smart enough to avoid paying it anyway.” That’s the spirit!

    Yet there is probably no aspect of the U.S. tax code more aligned with the values that the Founding Fathers risked their lives for than the law taxing inherited wealth. After all, what the American Revolution was all about was emancipation from the corrupted power of the King and a general, well-considered aversion to Old World aristocratic rule.

    Aristokratia (rule by the best) was originally conceived by the Greeks as a system where the best and brightest — the elite — would rule in the interest of society as a whole. But too often in the real world, aristokratia devolved into tyrannical plutocracy, both in Greece and later with the Roman Empire (followed by centuries of the Dark Ages I must add). Rather than wealth recirculating in a way that served the common good, it became increasingly concentrated within an elite class through marriage and policymaking, further enriching that class and ensuring its hold on power. The pattern has repeated itself throughout history, with disastrous consequences for the rich and the poor alike.

    America was to be an experiment in something different, breaking from the European aristocratic tradition. America was “conceived in Liberty” (specifically liberty from the English Monarchy and from aristocracy more generally), and from that conception grew a unique entrepreneurial and opportunistic culture of discovery and personal fulfillment previously unseen in the Old World. America would go on to lead the world and become the envy of many nations. Some (dangerously) even believed it was America’s God-given “manifest destiny” to spread a system of liberty (by whatever means necessary) based on democratic self-governance (in sharp relief to the Old World’s aristocracies).

    America also has a great philanthropic tradition that is aligned with this experiment and directly opposed to the extreme consolidation of dynastic wealth and power. Andrew Carnegie, perhaps the father of American Philanthropy wrote in his Gospel of Wealth that “the amassing of wealth is one of the worst species of idolatry.” His position on the “duty of the man of Wealth” is clear:

    First, to set an example of modest, unostentatious living . . . and to provide moderately for the legitimate wants of those dependent upon him; after doing so to consider all surplus revenues which come to him simply as trust funds, which he is called upon . . . and strictly bound as a matter of duty to administer in the manner which, in his judgment, is best calculated to produce the most beneficial results for the community…

    Carnegie’s Gospel of Wealth is not perfect and needs an update for the modern context of complexity. But even this “robber baron” of the first Gilded Age – and certainly Mark Twain and our Founding Fathers – would be rolling in their graves if they knew an American-billionaire-narcissist president (with the advice of two former Goldman Sachs partners in his cabinet and politicians corrupted by big-money donors) was trying to ram through a tax plan that eliminates, rather than fixes, the Estate Tax.

    It’s easy to rebut the critics of the Estate Tax. It is a tax triggered by death. So what. Would you prefer it be a wealth tax imposed annually? And it’s not double taxation on the creation of real wealth, rather it is largely a tax on hitherto untaxed unrealized gains—looking at you Jeff Bezos and Walton family. Let’s have a healthy debate on what level the exclusion should be. $1 million or $10 million? One can make the case for an even higher level. But the right number for a healthy civilization is not $1billion, much less no limit at the amount that the next Paris Hilton is born into. It turns out that some people need a little nudge to help them join the Giving Pledge, and the Estate Tax provides such an incentive. The question on the table is not whether the current tax collects enough revenue to be worth the effort. Rather, the question is: do we want to moderate the extreme wealth inequality in America’s second Gilded Age or exacerbate it further?

    I’ve not read anywhere that the Founding Fathers believed in the freedom to amass ever larger concentrations of wealth and to create family dynasties. That’s not the “freedom” the founding fathers sought to protect. Given the long run stakes, it is terrifying to me how little intelligent debate on this topic is even taking place, with all the daily distractions, many around other forms of abuse of power.

    Several years ago, my science colleague Dr. Sally Goerner observed that we are facing two immense challenges at this moment in history: The first is to transition to a new era; what many are calling the Integral Era. It requires us to transcend the mechanistic worldview on which the Scientific Revolution was grounded, and to embrace an integral or holistic understanding of how the world works, consistent with the universal principles and patterns of modern complexity science. This mirrors the necessary transition humanity made from the Medieval era to the Modern Era some four hundred years ago. It will be a monumental undertaking, certain to be filled with chaos and resistance from those in power.

    But the second challenge is one humanity has experimented with and temporarily mastered but never succeeded at over the long term. That is how to organize and maintain a healthy hierarchy that provides the necessary coherence any complex society requires, while at the same time ensuring that those in positions of power act in such a way that serves, not merely their own self-interests, but the health of the whole system, or what we call the Common Good. Recirculating this wealth, either voluntarily or through taxation is fundamental to a healthy metabolism, as we know from the study of all regenerative systems. It’s not ideological.

    When in the history of this great nation have we witnessed, to such a degree, the soul- and civilization-destroying consequences of corruption and the sheer predatory abuse of power as we are experiencing at this moment in time?