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Romney's Tax Plan Isn't Concerned About The Very Poor

Feb. 3 (Bloomberg) — By now it seems everyone has chewed over Mitt Romney’s gaffe about poor people and spit out the ideologically determined opinion. Speaking this week to CNN anchor Soledad O’Brien after his victory in the Florida Republican primary, Romney blurted out, “I’m not concerned about the very poor.”

For Democratic partisans, the video, an early valentine, speaks for itself. But even conservatives criticized Romney for ham-handedness or for failing to articulate the proper vision of upward mobility. The news media, facing a dreaded lull in the presidential contest, naturally piled on.

The harsh reaction was unfair, but in a particularly galling fashion. Pressed to clarify his remark, Romney said, “My focus is on middle-income Americans,” and added, “These are the people who’ve been most badly hurt during the Obama years.”

However awkwardly expressed, Romney’s meaning seemed plain for those willing to hear him out: He was pitching his lot with the middle class, but meant no harm to the poor. In fact, in the interview Romney made a commitment: “I’m not concerned about the very poor that have a safety net, but if it has holes in it, I will repair them.” You can read the transcripts of all 19 Republican presidential debates and not find a more compelling promise to the hard-pressed.

The real problem with Romney’s remarks is that they bear little resemblance to his comparatively uncontroversial economic plan. According to the Tax Policy Center, a joint project of the Brookings Institution and the Urban Institute, “Believe in America,” Romney’s economic blueprint, would impose fresh burdens on the poor, cutting anti-poverty programs while simultaneously depriving lawmakers of the money to repair the holes. As for the middle class, it is hard to argue that it is a primary “focus,” at least if you follow the money in the candidate’s plan.

A few examples. Romney would end tax credits for higher education, the expansion of the Earned Income Tax Credit and other provisions enacted in 2009 to counter the recession. While taxes for many poor people would rise, taxes on the middle class would generally decline somewhat and taxes on the wealthiest would decline substantially. Romney would repeal health insurance for the working poor, repeal the estate tax and permanently extend the Bush tax cuts. The Tax Policy Center calculates that in 2015 Romney’s plan would generate an average break of $865,637 to the top 0.1 percent of taxpayers.

Romney’s plan would also put government on less solid footing. Compared with current federal policy, Romney’s plan would add an additional $180 billion to the federal deficit in 2015. Calculated by a more exacting standard — current law — his policies would increase the deficit by $600 billion. Nothing in the plan suggests that the middle class would be exempt from interest and principal payments on the extra debt accrued.

In the foreword to Romney’s “Believe in America,” economist R. Glenn Hubbard, who served as chairman of the Council of Economic Advisers under President George W. Bush, notes that “U.S. GDP growth has averaged 3.3 percent over the past 50 years. But in the 2002-2007 period, before the crisis’s eye of the storm hit the financial system and the economy, that growth averaged just 2.6 percent.”

Why this forthright assessment of the record of the Bush administration appears in a Republican campaign document is a mystery. For most of the half century of higher growth that Hubbard cites, U.S. tax rates were sharply more progressive than they have been since the Bush tax cuts took effect after 2001.

Instead of being pummeled for his inartful statements, Romney should be asked to spell out how his economic plan affects the poor, middle class and wealthy alike. Having a political career reduced to caricature is unfair to any candidate; not pressing candidates to explain how their rhetoric meshes with their proposals is unfair to us all.

That Salmon Sushi Roll Might Have A Big Hidden Price Tag

Nov. 17 (Bloomberg) — Salmon, once a pricey delicacy, is now an affordable staple at supermarkets and sushi restaurants everywhere. For that, we can thank fish farms. They produce 70 percent of the salmon eaten by consumers, who savor its subtle texture and rich flavor. Medical researchers say the fatty acids in salmon might help prevent cancer and heart disease.

So it was troubling that researchers over the past few weeks may have found an infectious disease known as salmon anemia in wild fish in British Columbia. Lawmakers and fisheries managers in the U.S. and Canada see the illness as a threat to a $3 billion industry. Although Canadian officials said further tests seemed to be negative, the episode is a reminder of the need to make serious improvements in aquaculture practices.

The virus that causes the disease originated in the mid-1980s in Atlantic salmon fish farms in Norway and spread to Scotland, Canada, and the United States. Farms in Chile also were infected, probably via imported eggs.

A benign variant of the disorder existed in the wild, but it mutated in farms’ netted pens, where hundreds of thousands of fish can be held in water fouled by waste and unconsumed feed. Fish, much like domesticated animals on commercial farms, often are fed a diet laced with drugs to ward off bacteria, fungi, and parasites that can result from overcrowding.

There is no cure for salmon anemia. Once it strikes, a farm’s entire stock usually must be destroyed. Often the farm has to be shut. Humans aren’t affected.

Wiped Out

Just how much harm the disease caused to wild Atlantic salmon is hard to judge. Most of them had already been wiped out, long before the advent of aquaculture, by pollution, overfishing, and dams that cut off their river spawning grounds. Pacific salmon, though more abundant, face the same threats.

Senators from Washington, Oregon, and Alaska have taken the right step with a legislative amendment calling for a study of the possible impact the infection might have on the Northwest Pacific’s fishing industry. U.S. agencies, including the Department of Agriculture, along with Canadian and American Indian tribes, are developing plans to conduct more tests, trace the origin of the disease, and begin developing ways to combat it.

Fighting salmon anemia shouldn’t require banning fish farms. The industry is indispensable, because the demand for seafood is driving wild stocks to the point of collapse. The United Nations Food and Agriculture Organization estimates that Atlantic populations of cod, haddock, and flounder have declined by as much as 95 percent.

But reforms are needed. For one thing, governments should consider stricter guidelines on how many fish can be packed into netted pens. This would cut pollution and reduce the stress on fish that makes them susceptible to disease.

Farms also should be placed farther apart. One lesson from the outbreak of foot-and-mouth disease among livestock in the U.K. a decade ago was that when farms are dispersed, contagion is reduced.

And as in most fights against infectious disease, cleanliness helps. Norway, where salmon anemia first appeared, reduced its incidence by as much as 90 percent by aggressively decontaminating the equipment that’s used to contain and transport fish, and by treating effluent from fish-processing plants.

Norway also established harvest insurance programs, which gave fish farms the incentive to quickly destroy infected fish. If private insurers in Canada won’t offer adequate coverage, government guarantees might be needed as a backstop.

Finally, some fish farms, particularly in British Columbia, should be relocated away from the migratory corridors of wild fish, so that any anemia outbreak that might occur there would be less likely to spread.

Better still would be an increased industry effort to explore moving fish farms inland, where it can be easier to isolate and control pathogens. This wouldn’t be cheap, but it might prevent much of the potential environmental harm to coastal areas from overly intensive aquaculture.

Banks' Lending Should Start Playing Catch-Up With Economy

Oct. 28 (Bloomberg) — There are tantalizing signs that the worst of the disastrous credit crunch may be over. The most tangible evidence can be found in the latest earnings reports from some of the U.S.’s largest banks.

With a few exceptions, financial institutions such as JPMorgan Chase & Co. and Wells Fargo & Co. reported increases in lending to big businesses and, to a lesser extent, to consumers. Since consumers power growth, making up about two-thirds of the U.S. economy, their ability to get credit may determine whether the fragile recovery endures.

There are several things regulators and banks can do to ensure that the lending revival doesn’t fizzle. Although many bankers might disagree, regulators should continue to press banks to increase their capital. As we have argued before, more capital gives lenders a greater cushion to absorb losses, thus lowering risk to the financial system and the economy.

One of the reasons the credit crunch was so severe is that huge losses ate into banks’ capital, which was too thin before the recession began. This robbed them of their ability to keep lending. At the moment, the 24 banks in the KBW Bank Index have average tangible common equity, the hardest measure of capital, of 7.4 percent, which puts them on much sounder footing than before the crisis.

Capital Beauty

The beauty of capital is that the more of it a bank has on hand, the more loans it can make. The U.S. Treasury has estimated that every $1 in capital can be used to create roughly $10 in loans. Even if banks didn’t apply this level of leverage, more capital can still fuel an expansion in credit.

One concrete step that regulators can take to ensure banks maintain adequate capital is to keep a check on dividend payments, which come straight out of capital. Although it is gratifying to see most of the nation’s lenders return to profitability, the Federal Reserve erred earlier this year when it gave some of the nation’s 19 largest banks permission to resume or increase their payouts to shareholders.

We have nothing against stockholders. But until the nation’s banks have been restored to full health their interests should take a backseat to taxpayers who inevitably would be called upon in another crisis. Another method of raising capital is issuing common stock.

Banks can use this increased capital to step up lending to consumers, millions of whom own small businesses and mingle their personal and professional finances. The Fed’s latest survey of senior bank-loan officers showed that only about 10 percent of lenders have relaxed their standards for making consumer loans. And that applies mainly to customers with pristine credit records. For everyone else, it’s almost as difficult to get a loan approved as it was at the peak of the credit crunch in 2009.

This hits small businesses hard. Pepperdine University’s business school surveyed 2,595 small businesses that sought bank loans in the past year; 50 percent said they were turned down.

Outlived Usefulness

The industry’s caution is partly understandable. The financial crisis jeopardized the solvency of some of the biggest U.S. banks.

But the recession ended more than two years ago and a level of risk aversion that made sense in the turmoil of 2008 and 2009 has outlived its usefulness. Banks can afford to ease some of the benchmarks they use, such as credit scores, down payments, employment history and repayment records. Mortgages lenders, in particular, should show more flexibility for borrowers who don’t have 20 percent to put down, perhaps giving breaks to those with excellent credit records and stable job.

Bankers are sure to respond that demand for credit is low as consumers try to reduce personal debt, and businesses see little need to expand in the face of slack demand. There is some truth to this. Yet there are signs in the Fed’s survey of bank loan officers that more consumers want to borrow.

Banking is a cyclical industry. Credit tends to be too lax during booms and overly restrictive when the economy needs credit most. We would never recommend a return to the reckless lending of the bubble years. But the economy is growing again, and yesterday the government said gross domestic product rose 2.5 percent in the third quarter. Banks need to start playing catch-up.

On Corporate Taxes, Put The Public In Publicly Traded

Oct. 6 (Bloomberg) — How can you tell how much federal income tax a publicly traded company pays in a specific year? You can’t.

Writing in the Washington Post last month, journalist Allan Sloan suggested this can be corrected by demanding that the Financial Accounting Standards Board require companies to disclose this number. This was a follow-up to his critique of a New York Times article published in March reporting that General Electric Co. had paid no U.S. income tax in 2010.

Sloan asked for anyone who supports his call to stand up and be counted. And so we endorse Sloan’s idea and will up the ante: Make the income-tax returns of all companies with shares traded on U.S. stock markets available to the public.

It’s not such a radical idea. In fact, it would restore the intent of the law when the first permanent federal corporate income tax was adopted by Congress in 1909, stating that returns “shall constitute public records.” Over the years, legal rulings and regulations placed limits on disclosure. An impermeable wall was erected in 1976 in response to the Nixon administration’s misuse of tax returns to harass those on its notorious “enemies list” of journalists and anti-Vietnam War protesters, according to a 1981 study by Boris Bittker, a now-deceased professor at Yale Law School.

Cookie Jar

That has left us with the current sorry state of U.S. financial reporting: Although U.S. company financial statements are choked with numbers on taxes, they omit critical and needed information. There is an entry for how much cash is paid in taxes, but no indication to whom or where. There is another line known as the provision for taxes. This is little more than a cookie jar that companies can use to stuff with money for pulling out later as needed.

Making corporate tax returns public would enhance investor understanding of how a company makes money. It might even lead to changes that would lower the cost of doing business.

Here’s why. Today, there are two sets of books for keeping track of a company’s financial performance. These parallel universes are, in many ways, at odds with each other. One reporting system suits the purposes of the Internal Revenue Service, whose goal as the tax collector is to maximize income and thereby increase its claim. The other, known as generally accepted accounting principles, contains the information now made available to the public and investors. The goal of this system is to keep taxable income in check while preventing investors from being deceived.

Financial Clarity

Mihir A. Desai, a professor of finance at Harvard Business School, says public regulators should consider reconciling most of the differences between the two reporting systems. This would provide more financial clarity, and let companies spend a lot less time taking the same information and shaping it to conform to different rules.

Disclosing corporate tax returns might be a simpler alternative. It may well accomplish something beyond the reach of the IRS: intense scrutiny by private investors, the best financial minds in the world.

Companies are sure to resist, insisting that making their returns public would divulge proprietary information.

To which we would ask: What exactly are the secrets hidden in a company’s tax returns? A drugmaker doesn’t disclose the molecular formula for a new medication in its tax filings. A software maker doesn’t include the code for a novel program that makes Web searches faster.

No, the main secrets in corporate tax filings are the dodges that companies and their auditors cook up to game tax collection. Indeed, recent history is full of examples of companies and accounting firms creating phony losses to lower taxable income. In even more perverse cases, unprofitable companies such as Enron Corp. goosed their returns to make it look as if they had taxable income.

Unique Strategies

But in those rare instances when a company can convince the IRS that its tax strategies are unique and need protecting, there can be a provision for keeping that part of a return confidential.

As for the privacy rights, we wouldn’t advocate public disclosure of personal tax returns. More importantly, there should be an honest acknowledgement of the difference between individuals and businesses. In spite of recent court rulings, which disingenuously conflate personal freedoms with corporate rights, companies aren’t people and never will be.