Fed to BoA: ‘We Will Not Leave You in the Lurch’

Thursday, the House Committee on Oversight and Government Reform questioned Ken Lewis about Bank of America’s purchase of Merrill Lynch and the subsequent injection of tens of billions of taxpayer funds into Bank of America.

While much of the hearing focused on Lewis’ leadership of Bank of America, the hearing also touched upon the more important questions of government regulators pressuring BoA to purchase Merrill even after BoA realized that Merrill’s losses were greater than expected.

One of the basic tenets of sound regulation, exercised in the public interest, is that regulators remain at “arm’s length” from the entities they regulate. As defined by Black’s Law Dictionary, “arm’s length” relates to “dealings between two parties who are not related or not on close terms and who are presumed to have roughly equal bargaining power; not involving a confidential relationship.”

If anything, it appears that BoA and the federal government were in a bear hug, rather than at arm’s length. As described in Lewis’ notes on one of his many conversations about the Merrill deal with Fed Chairman Ben Bernanke, Bernanke told Lewis, “We will not leave you in the lurch.” Given the funds subsequently injected into BoA, one can say that Chairman Bernanke is at least a man of his word.

One of the significant problems arising from extensive government ownership of private entities is that in regulating those entities, the government no longer has the ability to be a neutral, objective arbitrator. Whether it is BoA or GM, government officials will come under increasing pressure to see a positive return on the taxpayer’s investment. One should not be surprised if that pressure manifests itself by government officials favoring the very companies they have invested in.

While BoA has been saved, it appears that the rule of law has been “left in the lurch.”

So-Called Stimulus Could Lead to $50 Billion of Fraud

MarketWatch reports that experts are predicting about $50 billion of fraud will result from the $787 billion pork-barrel spending bill approved by Congress earlier this year. That’s a huge amount of fraud being financed with borrowed money, but there is a silver lining to this dark cloud. Using basic math, that means only $737 billion of the so-called stimulus can be classified as waste:

Swindlers, con men, and thieves could siphon off as much as $50 billion of the government’s planned stimulus package as the money begins flooding the economy in coming months, according to David Williams, who runs Deloitte Financial Services Advisory and counsels clients on fraud prevention.

…Earlier this month, FBI Director Robert Mueller warned the nation to brace for a potential crime wave involving fraud and corruption related to the economic stimulus package. “These funds are inherently vulnerable to bribery, fraud, conflicts of interest, and collusion. There is an old adage, that where there is money to be made, fraud is not far behind, like bees to honey,” Mueller said.

IRS Wants Worker Cell Phones to Be Taxable

With about 100,000 employees (more than the CIA and FBI combined), the IRS has plenty of people who daydream about new ways of taking money from taxpayers. The latest scheme to emanate from the tax bureaucracy is to classify employer-provided cell phones as a taxable fringe benefit.

To be fair, non-pecuniary forms of compensation should be treated the same as cash income, but a bit of common sense should apply. What happens with cell phone plans with unlimited minutes, meaning that a business is not paying extra for personal calls? And if the IRS does go down this path, why harrass individuals when it would be much easier to simply make a portion of cell phone costs non-deductible for companies? It almost seems as if the IRS wants to instigate a tax revolt.

The Wall Street Journal reports:

The Internal Revenue Service proposed employers assign 25% of an employee’s annual phone expenses as a taxable benefit. Under that scenario, a worker in the 28% tax bracket, whose wireless device costs the company $1,500 a year, could see $105 in additional federal income tax….

The IRS move, which is spurring efforts by the wireless industry and others to kill the idea, would mark a stricter enforcement of an existing rule that classifies employer-provided cellphones as a taxable benefit, rather than a 24-hour-a-day work tool. Under a 1989 law, workers who use company-provided mobile phones for personal calls are supposed to count the value of those calls as income and pay federal income taxes accordingly. But businesses and workers have long ignored the requirement, prompting the IRS to consider steps the agency said would make it easier for businesses and workers to comply.

…Wireless companies also argue the IRS rule is outdated. Rates have declined so dramatically in the past decade — with night and weekend calls free under many plans — that it makes little sense for the IRS to assess employee benefits by nickels and dimes. “This is a regulation from a bygone time, dating back to the infancy of the cellphone business, and it is in desperate need of updating,” said Howard Woolley, a senior vice president with Verizon Wireless, a venture of Verizon Communications Inc. and Vodafone Group PLC.

NEA and Compliant Dems Rolling Back Voucher Programs

The D.C. school voucher program has received a lot of attention in recent months since Congress and President Obama issued its death warrant. Obama has put funding for the children currently in the program in his proposed budget, but this has no force of law and the program as it stands will still end after this year.

Despite a general trend toward increasing bipartisanship on the issue, killing school choice remains a top priority for the powerful and largely Democratic teachers unions, and therefore many in the ranks of the Democratic Party’s leadership.

Now the Milwaukee voucher program, the intensely studied and successful private school choice program that crystallized the national school choice movement nearly two decades ago, is in mortal danger.

The new Democratic majority in Wisconsin has set about reducing the amount of the voucher, adding onerous regulations to participating school, and now is looking to directly reduce the number of children allowed a choice in education.

From the AP:

[Assembly] Democrats voted Thursday night in a closed door meeting to lower the cap on the program from 22,500 to 19,500 over the next two years. The current lid was agreed to in 2006 by Gov. Jim Doyle and Republican lawmakers…

The enrollment change was added to the state budget that will be debated by the Assembly on Friday. It must also pass the Senate and be signed by Doyle to become law.

The Co-op Cop-out

Faced with rising opposition to a so-called “public option” in health care reform, some Democrats are floating the idea of establishing health insurance “co-operatives” as an alternative. Opponents of a government takeover of the health care system should not be fooled.

A “co-op” can be defined as a business owned and controlled by its workers and the people who use its services, in this case presumably the people whom it insures. In that sense, government provision of some sort of legal framework or seed money to help establish health insurance co-ops seems relatively harmless but also relatively pointless. The U.S. already has some 1,300 insurance companies. Adding a few more would accomplish…what?

It is suggested that the “co-ops” would be nonprofits, and therefore would offer better service and lower costs. But many insurance companies, including “mutual” insurers and many “Blues,” are already nonprofit companies. Furthermore, states already have the power to charter co-ops, including health insurance co-ops. In fact, health care co-ops already exist. Health Partners, Inc. in Minneapolis has 660,000 members and provides health care, health insurance, and HMO coverage. The Group Health Cooperative in Seattle provides health coverage for 10 percent of Washington State residents.

If the new co-ops operate under the same rules as other nonprofit insurers, why bother?

And there’s the rub. Supporters of government-run health care have no intention of letting the co-ops be independent enterprises. In fact, Sen. Charles Schumer (D-NY) makes it clear, for example, that the co-op’s officers and directors would be appointed by the president and Congress. He insists that there be a single national co-op. And Congress would set the rules under which it operates.  As Sen. Max Baucus (D-MT) says, “It’s got to be written in a way that accomplishes the objectives of a public option.”

If a “co-op” is run by the federal government under rules imposed by the federal government with funding provided by the federal government, that is government-run health insurance by another name.

An Uneven Playing Field

Cato’s tax experts, Chris Edwards and Dan Mitchell, have written extensively on international tax competition. Their research shows that countries can help attract investment and spur economic growth by lowering their tax rates.

Could countries employ this same strategy to make their sports teams better?

Real Madrid, one of the most popular and successful soccer teams in the world, recently purchased the rights to two of the sport’s top players. They acquired Kaka, who was named the world’s best soccer player in 2007, from Italian powerhouse, AC Milan. And they lured Cristiano Ronaldo, the world’s top player in 2008, away from Manchester United, the reigning champions of the English Premier League.

There are a number of reasons why Kaka and Ronaldo are moving to Spain, but it’s pretty clear that taxes played a significant role. That’s because in 2005, Spain passed a tax break for foreign workers, including soccer players. This gives Spanish teams a huge advantage in bidding wars with teams from higher-tax countries like Italy and England. To make matters worse, England recently raised its top income tax rate.

“The new tax rate in England is going to make things much harder for English clubs,” noted Jonathan Barnett, a leading sports agent whose clients include Glen Johnson, Ashley Cole and Peter Crouch. “It will hinder the [English] Premier League and help the Spanish league because Spain has big tax discounts for footballers, so there’s an enormous advantage to go there. Someone like Ronaldo could be offered the same money at Real Madrid but be 25% better off.”

Similarly, a frustrated executive from AC Milan blames Kaka’s departure on the Italian tax system: “I repeat, this is all a matter of different types of taxation. If we were a Spanish club, we would have saved €40 million.”

Policymakers and soccer fans alike should take note.