Thursday, December 25, 2008

A Metaphor Of The Bush Administration

In a Washington Post article dated November 10, 2008, staff writer Amit R. Paley described a stealth change to Section 382 of the tax code, undertaken when "the financial world was fixated on Capitol Hill as Congress battled over the Bush administration's request for a $700 billion bailout of the banking industry." It took effect with a five-sentence notice which radically changed twenty-two years of tax policy by allowing "some banks to keep more money by lowering their taxes as a way to help financial instituitions during a time of economic crisis." Paley explains further:

Section 382 of the tax code was created by Congress in 1986 to end what it considered an abuse of the tax system: companies sheltering their profits from taxation by acquiring shell companies whose only real value was the losses on their books. The firms would then use the acquired company's losses to offset their gains and avoid paying taxes.

Lawmakers decried the tax shelters as a scam and created a formula to strictly limit the use of those purchased losses for tax purposes.

The notice came one day after troubled Wachovia Bank had agreed, with a guarantee by the Federal Deposit Insurance Corporation, to be acquired by Citigroup. Aided by the tax change, dubbed "the Wells Fargo Ruling," a more attractive bid made by Wells Fargo four days later resulted in its merger with North Carolina-based Wachovia. Over the next month, PNC acquired National City and saved approximately $5.1 billion, and Banco Santander netted $2 billion as it acquired Sovereign Bancorp.

This radical change to the tax code had all the earmarks of a classic Bush Administration policy, for it was:

- sudden, coming "out of the blue," the day after the House of Representatives initially rejected a bailout bill, "when Treasury's work seemed focused almost exclusively on the bailout;"

- secretive, with the Treasury Department neglecting to inform the tax-writing committees of Congress;

- fiscally irresponsible, given the calculation by Jones Day, a law firm which represents banks that could benefit from the notice, that it could cost taxpayers approximately $140 billion;

- brash, described by a partner at Jones Day as "a shock to most of the tax community. It was one of those things where it pops up on your screen and your jaw drops. I've been in tax law for 20 years and I've never seen anything like this."

- (probably) illegal, with even several lawyers representing banks poised to reap a bonanza conceding the Department of the Treasury lacked authority to issue the notice.

This corporate giveaway reflects the notion that a company deserves a refund from the federal govenment in a year when it loses money. (Sarcasm Alert) Consequently, we can be confident that Alaska Governor Sarah Palin will condemn this change in the tax code given her opinion about rescuing another industry with failed management:

When you talk about rewarding for work ethic and good management decisions and then consequences are the results of the opposite of that, and those decisions lead to some mistakes that are made in some industries, taxpayer bailouts should not be looked to as the be-all, end-all solutions.

Unfortunately, the former vice presidential candidate may have concluded that $14 billion loaned to car companies threatens the Republic while a handout of $140 billion to financial institutions is sound fiscal policy.

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