Isaac Laquedem

The White House conquers a once-proud law firm

Paul, Weiss, Rifkind, Wharton & Garrison, a prominent New York law firm, gave in to President Trump's sanctions today.  As part of its surrender, the firm agreed to eliminate diversity, equity, and inclusion from its hiring practices, and to provide $40 million of free legal work to civic causes favored by the Trump Administration.

The concession of Paul, Weiss to White House pressure comes just two months after the president revoked John Kennedy's executive order that prohibited federal contractors from discriminating in hiring.  It's especially poignant when set next to the Statement of Firm Principles that its managing partner Simon H. Rifkind laid out in 1963, in a masterful essay that the firm posts on its website to this day (it may still be there next week . . . maybe). 

Judge Rifkind wrote, “We believe in maintaining, by affirmative efforts, a membership of partners and associates reflecting a wide variety of religious, political, ethnic and social backgrounds, characteristic of that community.”  Judge Rifkind also wrote: “We refuse to be deterred by the unpopularity of a client or his cause from accepting a matter which justice and professional responsibility prompt us to take. *** Finally, we are committed to achieving our objectives without wearing any client's collar or any political party's livery.”  

I would like to believe that if Simon Rifkind were to walk into the office of his old firm today he would tear into the current management and then rip his name from the door.

 

A 100% business income tax rate in Oregon? Watch your ballot

Professor Bogdanski's post today about the corporate gross revenues tax that's the subject of Initiative Petition 17, which we may see on our November ballot, prodded me to pursue some math that I'd been working on for a week or two.  The basic premise of the corporate gross revenues tax is that corporations that sold more than $25 million/year in Oregon would pay the state a tax of 3% of their gross revenues above $25 million.  The state would distribute that fund equally to all Oregonians who satisfied a modest residency requirement.  The state believes that prices will increase 1.3% if the measure passes.  Willamette Week quotes the chief petitioner's reply: "Giant corporations can deduct the tax increase in IP 17from what they pay to the federal government.  So they are not going to pay that much more, if anything at all.  And No. 2, these corporations price their goods nationally or regionally, right?  An iPhone costs the same in Portland as it does in Texas.  There's no difference.  So we don't think price increases will happen."

Let's unpack that with an unpopular example.  WalMart, the store that all good Oregonians love to hate when they're not inside shopping, will be our case study.  WalMart's sales are about $650 billion/year.  Its consolidated pretax income was $21.8 billion, income taxes were $5.6 billion, and after-tax net income after a deduction for minority interests was $15.5 billion, which is about 2.4% of its annual sales.  About 0.8% of WalMart's United States stores are in Oregon.  Some of WalMart's operations are overseas.  It's a fair guess that WalMart sells about $4.5 billion/year in Oregon (maybe $90 million per store) and nets about $120 million/year from its Oregon operations.

IP 17 would levy a tax of $135 million/year on WalMart for its Oregon sales, which corresponds to an effective state income tax rate of 113%.  WalMart cannot offset the state income tax against its federal tax obligation - the chief petitioner may have skipped the corporate taxation class -- but it can claim the state income tax as a deduction against its federal income.  WalMart allows about 26% of its income for income taxes, so a state tax of $135 million creates a federal tax savings of about $32.5 million, for a net tax increase of $102.5 million on profits of $120 million, an effective tax rate of about 85%.  That's in addition to the actual state income tax, and will push WalMart's effective tax rate in Oregon to the mid-90s. Put another way, Oregon will collect 15 to 20 times as much profit from WalMart as WalMart will.

To bring a mot of Oscar Wilde up to date, "If this is the way Oregon taxes its enterprises, it doesn't deserve to have any."

 

The hidden economics of working from home

As portrayed by Charles Peattie and Russell Taylor, the authors of the "Alex" cartoon, on February 20 of this year.

An unexpected use for the Portland arts tax: enforcing the short-term rental license regulations

Last September Oregon Public Broadcasting interviewed Ted Sickinger of the Oregonian about the city's efforts to register Portland homeowners who offer their houses for rent through Airbnb.  The Oregonian had published Mr. Sickinger's story on the topic earlier that month.  On March 16 Mr. Sickinger followed up his September piece with a report that hundreds of short-term rentals listed on Airbnb weren't on the city's registry.  Airbnb collects and remits the city's lodging tax for those rentals, but takes the homeowner's word that the homeowner has the required permit.  (The story may have spurred some of the unlicensed to action; the city's received 33 applications for short-term rental licenses since it was published.)

The problem goes back nearly to the start of city licensing: as of October 2017 Portland had issued 1,638 active short-term rental permits.  At the same time, Airbnb had more than 4,600 active listings in Portland, implying that only about a third of Portland Airbnb hosts were bothering to comply with the law.  As of today the city has issued about 1700 active permits and has 600 applications pending.

The city says that it doesn't have the staff or the technology to verify licensing and enforce its short-term rental code, to the ire of neighbors of the unlicensed properties. Isaac believes that the city does have the technology, and would need very little staff time, to make a dent in detecting and combatting the scofflaws.  Our spate of local income taxes holds the answer.

In 2014 Portland amended its code to allow Portlanders to rent their primary residence, or rooms of their primary residence, in zones that don't otherwise allow transient lodging.  One requirement is that the landlord must occupy the residence at least 9 months of the year.  (The "landlord" of a short-term rental may be the property owner, but may instead be a long-term tenant.)  It follows that everyone who holds a short-term rental permit outside a commercial zone must be an individual who is a Portland resident, and who's therefore subject to the Portland arts tax, and who therefore files an arts tax return every year with the taxpayer's name, address, and social security number.  (Let's overlook the non-filers for a moment.)  It also follows that no licensee can own or operate two licensed short-term rentals at different addresses, because only one of them can be the licensee's primary residence for 9 or more months in the year.

The IRS is requiring Airbnb to issue a 1099-K to hosts who receive $5,000 or more from rentals in 2024.  Airbnb's site tells its hosts that "if you have multiple Airbnb accounts using the same tax identification number, these transactions will be aggregated to determine if you meet reporting thresholds.  You will, however, still be issued separate Form 1099-Ks for each account."

If the city could require or persuade Airbnb to send the city electronic copies of the 1099-Ks that Airbnb issues for properties in Portland, the city could readily cross-reference the addresses and social security numbers in those forms against the addresses of licensed properties (available in the licensing data) and the addresses and social security numbers of the arts tax filers.  The city might even catch some folks who have thought of creative ways to avoid the one-to-a-customer goal of the short-term rental licensing.  As an added fillip the city could provide that the booking platform for an unlicensed rental is jointly liable with the host for the fines for operating an unlicensed rental . . . and then go out and enforce the code.

Judge Engoron was the Trump fraud trial judge, but he wrote for the court of appeals

Judge Arthur F. Engoron presided over New York's civil fraud trial against Donald Trump, two of his children, two of his associates, his trust, and nine companies that he controls.  On February 16 Judge Engoron handed down his final ruling on February 16.  In 92 pages he held Mr. Trump and various entities liable for $355 million plus interest, found his sons Eric Trump and Donald Trump, Jr. liable for $4 million each, and barred Mr. Trump, his accountant Allen Weisselberg, and Jeffrey McConney (formerly the Controller at the Trump Organization) from serving as an officer or director of any New York entity for three years. 

Political aficionados with a thirst for blood can be excused for skipping to the last two pages, where the judge laid out the penalties he was imposing, in the manner of the impatient reader of a mystery novel who reads only up to the crime itself and then jumps to the detective's solution, skipping over the 200 pages of investigation in the middle.  The casual reader who skips over Judge Engoron's 6 pages that recite the history of the case, the 67 pages discussing the facts, and the 17 pages of legal conclusions has missed a great deal.  Herewith Isaac's take on what Judge Engoron said.

First, Judge Engoron explained why New York cares about financial fraud.  "New York State, particularly New York City, is the financial capital of the country and one of the financial capitals of the world."  (Page 3.)  "The common excuse that 'everybody does it' is all the more reason to strive for honesty and transparency and to be vigilant in enforcing the rules.  Here, despite the false financial statements, it is undisputed that defendants have made all required payments on time; the next group of lenders to receive bogus statements might not be so lucky.  New York means business in combating financial fraud."  (Page 4.)

Before he dug into the testimony, Judge Engoron threw a dash of shade at Mr. Trump's lead lawyers, Christopher Kise and Alina Habba, stating (correctly) that as the state sought only equitable relief in the form of injunctions and disgorgement of fraudulent profits, the defendants were not entitled to a jury.  The shade came in the form of a footnote on page 6, "In any event, neither party applied nor moved for a jury trial."

Then the judge described the testimony of the 14 non-party witnesses (mostly bankers and outside accountants), the five individual defendants, the eight other witnesses from the Trump Organization, the state's expert, and the 13 expert witnesses that the defendant called.  What's important in his descriptions of the testimony of the witnesses is not what they testified to, but the judge's evaluation of their credibility.  (Isaac will explain why this is important later on.) 

Judge Engoron did not comment on the credibility of the 14 non-party witnesses.  He began his saltiness with four of the five individual defendants.  In the  judge's view, Jeffrey McConney's credibility was "severely impaired" (page 25), then "further compromised" (also page 25), and then further strained when he could not recall if his separation agreement prohibited him from voluntarily cooperating with governmental investigations of the Trump Organization, which lapse the court found "implausible" (page 26).  Allen Weisselberg came in for more direct treatment: his separation agreement bars him from cooperating with the government, which "renders his testimony highly unreliable.  The Trump Organization keeps Weisselberg on a short leash, and it shows." (page 26.)  The judge turned to Eric Trump, whose "credibility was severely damaged when he repeatedly denied knowing that his father ever even compiled a [statement of financial condition] that valued his assets and showed his net worth 'until this case came into fruition.'" (Page 32.)  And the court kept firing salvos in his direction: "When the documentary evidence against him became overwhelming, Eric Trump reversed his previous testimony."  (Page 32.)  "Eric Trump's testimony [about appraisals] was shown to be false when he was confronted with the ample contemporaneous documentary evidence demonstrating otherwise." (Page 33.)

And then there was Donald Trump himself, whom Judge Engoron deflated in a footnote.  On page 36, the judge wrote, "Nonetheless, Donald Trump insisted that he believed Mar-a-Lago is worth 'between a billion and a billion five' today, which would require not only valuing it as a private residence, which the deed prohibits, (footnote 19), but as more than the most expensive private residence listed in the country by approximately 400%."  Footnote 19 reads, "A fact of which he is well aware, having signed the deed himself."  He concluded with this politely damning description of the former president's time on the stand: "Overall, Donald Trump rarely responded to the questions asked, and he frequently interjected long, irrelevant speeches on issues far beyond the scope of the trial.  His refusal to answer the questions directly, or in some cases, at all, severely compromised his credibility."  (Page 37.)

Yet it was not the Trump family but its hired experts that drew the sharpest of the judge's stiletti.  One expert witness, Steven Witkoff, "conceded that he is neither an appraiser nor an accounting expert, nor is he familiar with what 'estimated current value' is under GAAP."  (Page 48.)  Of Steven Laposa, whom the defense offered as an expert witness on real estate research, the court observed that he had "formed no opinion as to whether any of the valuations at issue in this case were accurate, and, prior to this assignment, he had no experience preparing or reviewing personal financial statements."  (Page 50.)  The next expert witness earned a more severe burn from the judge.  He was Gary Giuletti, offered as an expert in surety underwriting and surety brokering.  He testified that he has known Donald Trump for about 25 years, plays golf and eats lunch with him, and is a member of "a bunch of his clubs."  He's also the Trump Organization's insurance broker.  (Page 51.)  The judge's evaluation:  "In its over 20 years on the bench, this Court has never encountered an expert witness who not only was a close personal friend of a party, but also had a personal financial interest in the outcome of the case for which he is being offered as an expert."  (Page 51.)  In 2022, Mr. Giuletti's firm earned $1.2 million in commissions from insurance that he handled for the Trump Organization. 

Mr. Giuletti got off easier than Robert Unell, whom the Trump Organization offered as an expert in commercial real estate finance and banking.  The court summarily disposed of his work: "On the whole, the Court was unable to ascribe any reliability to Unell's 'expert' opinions, finding them unresearched, unsupported, inconsistent, and contradicted by ample other documentary and testimonial evidence."  (Page 56.)

Why are the trial judge's conclusions on credibility important?  Judge Engoron undoubtedly knew that Mr. Trump and the other defendants, except possibly Allen Weisselberg, would appeal his final decision.  It's a principle of appellate law that the appellate court will usually defer to the trial judge's assessment of the credibility of the witnesses.  The trial judge sees and hears the witnesses and their demeanor; the appellate judges read their words from a transcript and only rarely will watch or listen to the testimony. Judge Engoron underscored this point on page 6: "Witnesses testified from the witness stand, approximately a yard from the Court, who was thus able to observe expressions, demeanor, and body language."  My sense is that he's emphasizing to the appellate court that most of the Trump Organization's principal witnesses, including Donald Trump, Eric Trump, and Ivanka Trump, were simply not credible.

As with a good detective story, the description of the crime is at the beginning and the resolution is at the end.  In the case of Judge Engoron's decision, the good stuff is the part in the middle.

The Laquedem Plan to Relieve Our Supreme Court Justices from the High Cost of Vacations

The recent scandalous disclosures that Justice Clarence Thomas and his wife Virginia vacation not only in their 40-foot motor home but on lavish trips financed by billionaire Harlan Crow that have included flights on Mr. Crow's private jet and cruises on his 161-foot yacht were followed by the equally scandalous revelations that Justice Samuel Alito did not report his 2008 trip by private jet as the guest of hedge fund billionaire Paul Singer, to an Alaskan fishing resort where he stayed as the guest of real estate and mortgage servicing billionaire Robin Arkley.  The two stories brought to mind the death of Justice Antonin Scalia in 2016 at a resort in Texas.  "Resort" is a loose term for the 30,000 acre Cibolo Creek Ranch, owned by multimillionaire John B. Poindexter.  (We can't have our justices selecting their friends only from the billionaire class.)  You can book rooms there for $500 to $1200/night, or you can come as the guest of Mr. Poindexter, as Justice Scalia did.  

It's apparent from the examples of Justices Thomas, Alito, and Scalia that the justices of our Supreme Court cannot stretch their salaries, currently $274,200/year, to cover the cost of vacations that befit their status as the nation's senior interpreters of the Constitution and the law.  It's also abhorrent that owners of large corporations with business before the Supreme Court can give the justices over-the-top vacations without the justices thinking it improper to accept the gifts.  Hence the Laquedem Plan to Relieve Our Supreme Court Justices from the High Cost of Vacations.

The LPTROSCJFTHCOV is ridiculously simple, because the mechanism to remove the taint of impropriety already exists.  It's GoFundMe.com.  Let's start a GoFundMe to raise money that the justices and their families can use to pay for their own vacations.   If a million Americans will give just $1/year each, then each justice can spend more than $1 million/year on luxury travel without having to beg for hospitality from their billionaire friends.  If Justice Thomas had $1 million to spend on his vacations, would he still hang out with Harlan Crow?  Or would he and Virginia Thomas buy a larger motor home and hire a driver?  Either way, he could escape his ethical morass.

We already provide public funds to presidential candidates.  Let's offer our Supreme Court a way to escape from the convivial clutches of the kakistocrats.

Shemia Fagan's resignation: the lettuce wins again

The recent scandal that ended the political career of Oregon's soon-to-be-former secretary of state Shemia Fagan and her lucrative consulting contract with a financially struggling leader in the cannabis industry, La Mota, is notable for its celerity. On April 27, Willamette Week published Sophie Peel's story that broke the news that Secretary Fagan was receiving $10,000/month - 55% more than her state salary - from La Mota for providing then-undescribed consulting services.  On April 28 the rest of the Democratic establishment moved quickly to distance themselves from Ms. Fagan, exemplified by Governor Kotek's pithy response to a reporter's question on April 29: "I don't have outside employment.  I only have one job."  On May 2, only five days after the story broke, Ms. Fagan announced her resignation.

Five days is unusually fast for a public official's scandal to go from unveiling to unspooling.  Liz Truss served only 44 days as Britain's prime minister, but she did survive in office for six days after the Daily Star set up a webcam on a head of lettuce to see whether the lettuce or the prime minister would wilt first. [The lettuce won.]

The speed with which Shemia Fagan was expelled from the machine reminds Isaac of the famous scene in A Night At The Opera, in which Otis P. Driftwood (played by Groucho Marx) is welcomed into the offices of the New York Opera, promptly fired, and then kicked down four flights of stairs and thrown out the door.

 

Isaac's 2023 Tax Day reading from A.P. Herbert

Each year at tax time we divert from our support of democratic socialism to think of Sir Alan Patrick Herbert (1890-1971), the British social reformer, member of Parliament from Oxford University (there really was such a post, elected by the alumni), lover of the Thames, playwright, and under the name of A.P. Herbert, a frequent perpetrator of light verse.  Some years, this one included, the tax bite is severe enough to quote from his work.  This month's assortment of impositions is painful not so much because of the amount but by the sheer number of the incoming mosquitos, each looking to take its little bite from the Laquedem thousands under the guise of making work for the post office and the Loyal Accountant.  The outgoing checks and the upcoming ballot measure to add another tax to the menagerie have put me in mind today of this early Herbert verse: 

Well, fancy giving money to the Government!
Might as well have put it down the drain.
Fancy giving money to the Government!
Nobody will see the stuff again.
Well, they've no idea what money's for --
Ten to one they'll start another war.
I've heard a lot of silly things, but, Lor'!
Fancy giving money to the Government!

Our genial support of the social welfare system will return on Tuesday.

Sometimes "20 to 30" is a phrase that describes an age bracket . . .

And sometimes it's a complete sentence.

Why forgiving student loans makes the republican party's indentures fall out

The 13th amendment abolished slavery and "indentured servitude" except as punishment for a crime.  The United States succeeded in abolishing slavery.  An economist might look at the vast realignment in the past 40 years not just of wealth but of debt and conclude that indentured servitude has made a comeback.

 

In 1999, near the end of the Clinton administration, the residents of only three states (Hawaii, Maryland, and California) had average household debt that exceeded 1.5 times household income. By 2008, the last full year of the Bush (43) administration, the household debt-to-income ratio was above 1.5 to 1 in 40 states, and above 2 to 1 in 20 states.  The fortunes of American households improved under Bill Clinton Barack Obama [thank you, Diana H.]; in 2016 only two states (Hawaii and Maryland) were above 2 to 1, and 30 states were above 1.5 to 1.  Household debt to income improved under Trump; in 2020 only Hawaii was above 2 to 1 and 21 were above 1.5 to 1.

 

What is astonishing about the statistics is not that household debt-to-income ratios improved somewhat under the Trump administration and through the pandemic, but how much the burden of household debt has increased since the Clinton administration.  It's from that fact that I derive my theory about indentured servitude: the debt burden of the average American household is what compels many adults to work two jobs, to be unable to save, and to accept low wages. The heads of households are effectively in indentured servitude: compelled to work in order to pay interest on debts without making progress on the principal. The genius of private student loan programs is that they have extended indentured servitude upward into the college-educated classes. Not just the plumber but the psychologist must work to service debt and feed the creditor class.

 

It's perhaps for this reason that the republican party so stridently opposes President Biden's forgiveness of student loans, and the concomitant lessening, however slightly, of the financial ties that bind the graduates to their corporate overlords.  Heaven forbid that the masses should be able to pay their bills on time.