Thursday, August 30, 2012

Appeals court grants George Zimmerman's request for new judge

Pool / Getty Images
Judge Kenneth Lester was asked by George Zimmerman's attorney to disqualify himself from Zimmerman's murder trial.
A Florida appeals court on Wednesday granted George Zimmerman's request for a new judge.
Zimmerman, the former neighborhood watch volunteer charged in the fatal shooting of Trayvon Martin, had said the judge presiding over his case has made disparaging remarks about him.

The opinion said: "Although many of the allegations in Zimmerman's motion, standing alone, do not meet the legal sufficiency test, and while this is admittedly a close call, upon careful review we find that the allegations, taken together, meet the threshold test of legal sufficiency."The Fifth District Court of Appeal wrote in a decision that Circuit Judge Kenneth Lester Jr. should "enter an order of disqualification which requests the chief circuit judge to appoint a successor judge."
The dissenting judge wrote: "Although the trial court's order clearly manifested an exceedingly strong belief by the trial judge that Zimmerman 'flouted' and 'tried to manipulate' the system, I do not believe the order 'crossed the line' so as to require the granting of this motion."The appeals court ruling was 2 to 1 in favor.
Zimmerman said in the appeal that he fears Lester is biased against him and he wants a new judge to handle his case.
Zimmerman is charged with second-degree murder in the Feb. 26 death of the unarmed Martin, 17, of Miami Gardens, in a gated community in Sanford, Fla.
Zimmerman has pleaded not guilty, saying he acted in self-defense. He remains free on bail.
A telephone message left with Zimmerman's attorney, Mark O'Mara, wasn't immediately returned.
O'Mara had argued that Lester should disqualify himself after he said the judge made disparaging remarks about Zimmerman's character and advocated for additional charges against him in setting his $1 million bond in July.

First Thoughts: Mitt's moment

Mitt’s moment and his four objectives… How we got to here -- a story of endurance and survival… Ryan makes his mark with last night’s speech… He also makes some misleading and unfair assertions… And the GOP’s diversity on display.
Brian Snyder / REUTERS
Republican presidential candidate and former Massachusetts Governor Mitt Romney addresses the American Legion's national convention in Indianapolis, Indiana August 29, 2012.
TAMPA, Fla. -- After Ann Romney's introduction on Tuesday and Paul Ryan's rousing speech last night, Mitt Romney gets his moment tonight when he accepts the Republican Party's 2012 presidential nomination. If tonight’s speech is to be successful, Romney has to meet four objectives. One, he has to better introduce himself to the American public; it remains striking that after running for president for much of the past five years, voters still don’t have more than a two-dimensional understanding of the soon-to-be nominee. Two, he needs to convince the public that, while he looks the part, he’s the man Americans are comfortable seeing on their TVs for the next four years. Three, he has to try to close the empathy gap; our most recent NBC/WSJ poll found President Obama holding a 22-point advantage on who cares more about average people. And four, he needs to put some meat on the policy bone to make the case how his plans could actually work better than Obama’s -- and how they are different from the past Republican administration. If four hours are going to decide this presidential election, the first hour comes tonight.

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The Daily Rundown's Chuck Todd explains what's at stake for Mitt Romney – who is giving his speech at the RNC Thursday night.
*** How we got here -- a story of endurance and survival: Remember that Romney’s upcoming moment tonight almost didn't happen during one of the wildest presidential nominating cycles we can remember. After Rick Perry jumped into the race in Aug. 2011, the Texas governor became the immediate front-runner in the GOP race, but a combination of the Romney campaign’s attacks on his immigration record and Perry’s own stumbles in the debates (“Oops”) sank his chances. Then, about a month before the Iowa caucuses, Newt Gingrich made his surge, becoming the new GOP front-runner. But entered the pro-Romney Super PAC Restore Our Future, whose negative TV ads pummeled Gingrich so hard that the former House speaker finished fourth in Iowa. And then there was Rick Santorum’s surge in Feb. 2012. We often forget how close the former Pennsylvania senator came to upsetting Romney in his native state of Michigan -- it was 41% to 38% -- and had Romney lost that contest, it’s fair to say that he probably wouldn’t be standing on the stage tonight in Tampa accepting the GOP’s presidential nomination. Romney’s story, at least as it relates to the GOP nominating contest, is one of endurance and survival.

*** How will he use it? So how will Romney use this hour? Focus on the personal? Emphasize the policy? Talk to the base? Reason with the swing voter? All of the above? There is no obvious answer here. But we’ll find out 13 hours from now, at 10:00 p ET. What’s more, it’s interesting how many of the things Romney has to accomplish tonight were the same things that Al Gore had to accomplish 12 years ago, and Gore’s story proves you can turn it around. By the way, the Romney camp says it’s holding more than 250 watch parties in 13 battleground states to celebrate Romney becoming the GOP’s official nominee. Meanwhile, the Obama camp has unveiled a new web video, hitting Romney for trying to shake “an Etch-A-Sketch of epic proportions.”
*** Ryan makes his mark: As for Paul Ryan’s acceptance speech last night, it was quite an introduction for the Wisconsin congressman, and he did the things you’d expect from the VP speech. He gladly took on the role of attack dog. “Ladies and gentlemen, these past four years we have suffered no shortage of words in the White House. What’s missing is leadership in the White House.” He proclaimed that he and Romney -- with Ryan’s budget plan -- were the reformers. “Medicare is a promise, and we will honor it. A Romney-Ryan administration will protect and strengthen Medicare, for my Mom’s generation, for my generation, and for my kids and yours.” And following Ann Romney’s lead from Tuesday night, he tried to humanize the man at the top of the ticket. “Mitt and I … go to different churches. But in any church, the best kind of preaching is done by example. And I’ve been watching that example. The man who will accept your nomination tomorrow is prayerful and faithful and honorable.” And Ryan did all of these things projecting youth and energy, although it didn’t appear his target audience was swing voters.  

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Todd Akin's apology tour is over…President Obama endorses
*** The VP speech typically doesn’t have a long shelf life: We want to make a final point about Ryan’s acceptance speech, and it’s the same one we made yesterday: Don’t get carried away by a strong VP speech; it typically doesn’t have a long shelf life. Think Ferraro in ’84, Bentsen in ’88, Kemp in ’96, Lieberman in ’00, and Edwards in ’04. The exception, of course, is Sarah Palin in ’08. But she isn’t the rule.

*** And he also makes some misleading or unfair assertions: That was the positive part of his speech last night. The negative came from the facts and fairness of some of his assertions. Perhaps the most egregious was his hit on Obama over Simpson-Bowles. “He created a bipartisan debt commission. They came back with an urgent report. He thanked them, sent them on their way, and then did exactly nothing.” But here’s the thing: Ryan served on that same debt commission, and voted AGAINST it. Had Ryan voted for it (and convinced his fellow House members on the commission to do the same), Simpson-Bowles would have become law. Ryan also knocked Obama for the S&P downgrade, not mentioning the role that House Republicans like him played in that debt-ceiling debate. He also again attacked the president over those $716 billion in cuts/savings to Medicare -- the same $716 billion in cuts/savings that Ryan includes his budget. And he argued that Obama was unable to keep a GM plant open in Ryan’s hometown of Janesville, WI, when that plant closed before Obama became president. Out of all of the assertions, the only one the Romney-Ryan camp is pushing back on today is the GM plant, saying it was put on “standby” -- not shut down -- during the Bush administration. 
*** Diversity on display: Democrats, by far, have a more diverse electorate. But Republicans have done their best at this convention to demonstrate they have a more diverse bench. On Tuesday, they showcased Mia Love, Ted Cruz, and Nikki Haley; last night, it was Condi Rice and Susana Martinez; and tonight, it will be Marco Rubio. A few words on Rice’s speech: She started slowly, but won the crowd over, especially when she talked about how a young girl who grew up in the Jim Crow South later became secretary of state. It was a campaign speech without being ideological, and that’s hard to pull off. Rice’s biggest shortcoming was to talk about foreign policy but not acknowledge the role the administration she worked for played in the long wars in Afghanistan and Iraq. And we’ll say this about Martinez’s speech: It might have been the most underrated address at this convention. She was strong. 
*** Thursday’s schedule (the theme is “We Believe in America”)
7:00 pm ET hour: Connie Mack, Newt and Callista Gingrich
8:00 pm hour: Jeb Bush, Romney adviser Bob White
9:00 pm hour: former MA Lt. Gov. Kerry Healey, former Olympians Michael Eruzione, Derek Parra and Kim Rhode
10:00 pm hour: Marco Rubio, Mitt Romney 
Countdown to Dem convention: 4 days
Countdown to 1st presidential debate: 34 days
Countdown to VP debate: 42 days
Countdown to 2nd presidential debate: 47 days
Countdown to 3rd presidential debate: 53 days
Countdown to Election Day: 68 days

One of most dangerous cities in US plans to ditch police force

Mel Evans / AP
Police are seen in a downtown shopping area in Camden, N.J.
One of the most dangerous cities in the U.S. is getting rid of its police department.
Amid what they call a “public safety crisis,” officials in Camden, N.J., plan to disband the city's 141-year-old police department and replace it with a non-union division of the Camden County Police.
Camden city officials have touted the move as necessary to combat the city’s growing financial and safety problems. The entire 267-member police department will be laid off and replaced with a newly reformatted metro division, which is projected to have some 400 members. It will serve only the city of Camden starting in early 2013.
“It’s not a money-saver, it’s living within the budget you’ve got to get more boots on the ground,” Camden County spokesperson Joyce Gabriel told NBC News. “There has been an uptick in violence this year, and the city decided to go with the county’s police department.”
Camden isn’t the first cash-strapped city to be faced with the decision to eliminate or merge its police department.
Bernard Melekian, director of the Justice Department’s Community Oriented Policing Services (COPS) office, told NBC News that as communities around the country recover from the recession, police mergers are part of a new reality that will likely continue through the next decade.

San Bernardino, Calif., files for bankruptcy with over $1 billion in debts

“This really reflects a much broader issue, which is that the economy is changing the delivery of police services profoundly,” Melekian said, “and those agencies undergoing regionalization and consolidation – in particular, smaller ones that are financially distressed – are going to have to find another way of delivering those core services.”

'Recipe for disaster'
Given Camden’s exceptionally high rate of violence (the city recorded this year’s 41st homicide earlier this month), city police officers in danger being laid off say the transition is risky at best.

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“We’re concerned, we’re definitely concerned,” Camden Fraternal Order of Police President John Williamson told NBC News. “You’re going to create a police department and staff it with people who are unfamiliar with the city and say, ‘Go ahead and fight crime.’ That’s a recipe for disaster.”
Afflicted by homelessness, drug trafficking, prostitution, robbery and violence, Camden has consistently ranked high among the top 10 most dangerous cities in the U.S. since 1998, according to Morgan Quitno Press, a research firm that compiles statistical data on cities. In 2010, Camden had the highest crime rate in the U.S., with 2,333 violent crimes per 100,000 people, more than five times the national average.
Camden Mayor Dana Redd underscored the importance of the new, regionalized police force in her proposal for the next fiscal year’s budget.
“The senseless acts of violence occurring in our city affect every one of us,” Redd said in a statement. “We need to assure our residents that all life matters and that we are serious about making our city safe by expanding the number of boots on the ground. This decision to move towards a Camden Metro Division is being made solely on what is right for our residents – nothing more, nothing less.”

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Baltimore officials are considering plugging budget deficits by selling advertisement space on the side of fire trucks. NBC's Gabe Gutierrez reports.

Layoffs of the city’s police force will begin by the end of the month, according to the mayor’s office. County officials said that at most 49 percent of the city’s police officers, based on an application process, will be transferred to the new county division under the plan.
Gabriel said the terms of contract for current officers of the city's police department, which include longevity bonuses, day-shift differentials and other costs, make it too expensive to transfer all of them to the new force, so the rest of the Metro Division will be staffed by new hires. Louis Cappelli Jr., director of the Camden County Board of Freeholders, told NBC News that more than 1,500 people from various states and police backgrounds have already applied for the county positions.
The new division, to be fully funded by the city of Camden and the state of New Jersey, will begin field training on the streets as early as October for a period of 17 to 19 weeks.
But no matter how long the training, Rockefeller Institute Director Thomas Gais told NBC News that consolidating into one system and increasing cost-effectiveness takes time.
“It’s going to be a disruption at least for a while before some kind of consolidation happens, before the reorganization begins to work as intended,” Gais said. “There’s a tradeoff generally in the responsiveness to local needs and efficiency in reallocating resources, so the question becomes whether the reorganization reduces the quality of service and whether the short-term risk is worthwhile in the long run.”

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Gabriel said that cities within Camden County have the option to cede their municipal police force to a county department.

Saving money
Union officials argue that Camden's move is a way for the city to get out of collective bargaining with police. The county's new metro division officers will be non-union members.
The police department in Camden has been under state control since 2005, when then-mayor Gwendolyn Faison called for the takeover. The agreement is set to expire at the end of the year, and New Jersey Gov. Chris Christie has thrown his support behind the transition to county control.
“A county police force that has a reasonable contract and that’s going to provide a huge increase in the number of police officers on the streets here in Camden is a win for everybody,” Christie said at a recent event at Rutgers-Camden University. “I’m willing to put my name on the line for this concept.”
Other state officials have backed similar initiatives.
A 2011 report by the Major Cities Police Chiefs Association, a group representing the nation’s 63 largest police forces, found that 70 percent were consolidating some law enforcement functions to compensate for recent budget cuts.
  • Faced with mounting costs and declining revenue, the city of Midvale, Utah, was forced to merge four local police agencies with the Salt Lake County Sheriff’s Department.  
  • In Pennsylvania, the state police are increasingly taking on more patrol duties following the recent closures of municipal departments. Since 2010, at least 33 cities scattered throughout the state have closed or scaled back their agencies, according to state records.
  • Police agencies in Oakland and Detroit have raised concerns about their ability to respond to routine resident burglaries, theft, and public nuisance calls because they were stretched too thin providing support for other agencies. 
“We’re seeing the economy do a lot of different things to the agencies, which are looking at various forms of consolidation, all of which is driven by the economy,” Melekian said, adding that he knows of at least 100 police agencies around the country undergoing some form of service consolidation.
Cities that have made the switch from municipal to county or regional forces have reported saving millions of dollars and passing grades on the street, but Melekian said a shakeup of the current system in Camden won't eradicate crime or solve budgetary woes.
“The consensus seems to be that this saves money, but it does not produce instantaneous savings,” Melekian said. “There are too many issues that need to be resolved, too many expenses, so at some point they’ll have to work through these inefficiencies before they get the results they want.”

WSJ on Romney’s management fee conversion                  Published: Aug 29th, 2012

Here’s Mark Maremont (WSJ):
Mitt Romney’s attorney said Tuesday the GOP presidential nominee didn’t participate in a fee-waiver program at Bain Capital in which the firm’s executives sought to lower their taxes by converting more than $1 billion of ordinary income into capital gains.
R. Bradford Malt, an attorney who manages the Romney family finances, mostly through blind trusts, said in an email that Mr. Romney’s retirement agreement from Bain “did not give the blind trust or him the right to do this, and I can confirm that neither he nor the trust has ever done this, whether before or after he retired from Bain Capital.”
I’m not sure I get it.  The fee waivers date back to Fund VII, if not earlier, which was organized before he fully retired from Bain in January 2003.  Romney still owned 100% of the management company that would have waived the fees in 2002.
Page 32 of Romney’s 2006 financial disclosure lists over $1 million in income from Bain Capital Partners VII, the partnership that would have received the converted management fees from Bain Capital Fund VII.  That income is reported as dividends, interest, and capital gains, which is consistent with fee conversion, not ordinary income.  The same financial disclosure reports income from “Bain Capital,” which appears to be Bain Capital LLC, the management company.  That income is reported as “dividends,” which presumably means distributions from the LLC.
So the documents show that Romney held a financial interest in both the management company and the GP of Fund VII, and Fund VII performed $55 million in fee conversions as of the end of 2009.  I would need to see the severance agreement and the partnership agreement to confirm what Mr. Malt is saying, but at this point, the documentary evidence suggests that Romney benefited directly from fee conversion.
It’s unlikely that Mr. Malt would have been involved in any decision to waive the fees.  The fee waiver provisions are set up in the underlying partnership agreement, and the active partners at Bain, not Mr. Romney or Mr. Malt, would have made the election to waive the fees.  But that election would have been binding on Mr. Malt and Mr. Romney, and would have benefited Romney directly.
  • Published: Aug 27th, 2012

Fee Conversions: A How-To Manual

Bain Capital’s conversion of management fees into capital gains generated a lot of news interest over the weekend.  Over the next few days I’ll try to expand the analysis for those who are interested.
How do they work?  Conversion of management fees is a tax-motivated transaction that transforms a fund manager’s management fees (payable in cash) into a “priority allocation” of partnership equity.  The goal of the transaction is to add just enough entrepreneurial risk to the payment to change its tax treatment, without changing the actual economics of either the fund managers or investors.  Each arrangement is a little bit different, and the details matter for tax purposes.  Bain’s arrangement was fairly aggressive, as the Bain managers could elect each quarter whether to waive the fees and take “priority profit” or instead take the cash.  If the chose to waive the fees, they could cherry-pick which investment to allocate the waived fees to.  Because the fund managers are in a good position to know which portfolio company is likely to have some accounting income in the following year, it’s not very risky at all.  In theory, the managers could lose some of their management fees.  In reality, the Bain managers always got paid in full (at least as far as we can tell from the financial disclosures.)
Back in 2001, Wilson Sonsini published a presentation on how to convert management fees.  From the manager’s perspective, it’s quite an attractive deal.  Suppose you’ve got a $10 million fee due in the next year.  You can take the cash, and get $6.5 million after-tax, or you can wait a few months and get a special allocation of partnership equity, coupled with a special distribution of cash, and get $8.5 million after-tax.  The objective is simple, according to Wilson Sonsini: “… to achieve Carried Interest tax treatment, without reducing GP cash flow or adding unacceptable risk. (p.4)”  How much economic risk is there?  Not that much — the presentation shows examples where the managers get paid in full even if the fund breaks even (p. 11).
Is it legal?  No, at least not the way Bain did it.  Wilson Sonsini and many other law firms advised fund managers that conversion of management fees was a balance of tax risk and economic risk.  I don’t think any law firms made a practice of offering legal opinions to bless the fee conversions, as they would for a tax-free reorganization or securities offering.  The choice of how to structure the fund is ultimately up to the fund managers, and we don’t know what their outside counsel said.  But close analysis of the arrangement shows that fee conversions are subject to serious challenge by the IRS, and in my opinion, if challenged in court, Bain would lose.
Is Romney responsible?  In my view, yes.  He was the sole shareholder of the management company when some of the funds were created.  (Fee conversions are set up when the fund is first organized.)  This means that he was responsible (in both the legal and business sense) for determining how Bain was structuring its compensation arrangements.
What is the IRS doing about it?  We don’t know.  We do know that the IRS issued a statement in 2007 identifying fee conversions and other common tactics as “possible areas of noncompliance.”  Because audits are private, however, we do not know whether the IRS has challenged Bain, and if so, what kind of settlement was reached.  My best guess is that the IRS does raise these issues on audit, and the results probably vary from fund to fund, depending on the arrangement and the amount of time the auditor is willing to devote to the issue.
For the last five years, the tax community has been in a bit of a holding pattern because of the possibility that Congress would change the tax treatment of carried interest, which would moot the issue of fee conversions.  So I’m not too surprised that the IRS and Treasury have declined to issue authoritative guidance in the meantime.  With billions of tax dollars at stake, however, and no end to the carried interest battle in sight, an additional statement would be appropriate.
  • Published: Aug 23rd, 2012

Romney’s Management Fee Conversions

Two and Twenty.  Private equity fund managers are compensated in two primary ways: management fees and carried interest.  The management fee, traditionally two percent annually, is paid to the managers to cover overhead, salaries, and so forth.  The carried interest, traditionally twenty percent, is a share of the profits from the underlying investments.  My paper Two and Twenty described the typical arrangement.  Management fees are taxed at ordinary income rates; carried interest is often taxed at capital gains rates.   I focused in the article on why the carried interest portion is better viewed like bonus compensation and should be taxed at ordinary income rates.
Management Fee Conversion.  Current law on carried interest is already a sweetheart tax deal for private equity, but why not make it better?  Private equity folks are not the type to walk past a twenty-dollar bill lying on the sidewalk.  In the 2000s it became common for private equity fund managers to “convert” their management fees into carried interest.  There are many variations on the theme, but here’s how many deals worked: each year, before the annual management fee comes due, the fund manager waives the management fee in exchange for a priority allocation of future profits.  There is minimal economic risk involved; as long as the fund, at some point, has a profitable quarter, the managers get paid.  (If the managers don’t foresee any future profits, they won’t waive the fees, and they will take cash instead.)   In exchange for a minimal amount of economic risk, the tax benefit is enormous: the compensation is transformed from ordinary income (taxed at 35%) into capital gain (taxed at 15%).  Because the management fees for a large private equity fund can be ten or twenty million per year, the tax dodge can literally save millions in taxes every year.
The problem is that it is not legal.  Because the deals vary in their aggressiveness, there is some disagreement among practitioners about when it works and when it doesn’t.  But in my opinion, and the opinion of many tax practitioners, the practices that were common in the private equity industry in the 2000s became very, very questionable, and it’s unlikely that they would have stood up in court.
Fund VII.  Gawker today posted some Bain documents today showing that Bain, like many other PE firms, had engaged in this practice of converting management fees into capital gain.  Unlike carried interest, which is unseemly but perfectly legal, Bain’s management fee conversions are not legal.  If challenged in court, Bain would lose.  The Bain partners, in my opinion, misreported their income if they reported these converted fees as capital gain instead of ordinary income.
Here’s one example, from Bain Capital Fund VII LP (2009), pp. 13-14 (see here).   In any given year, the manager (Bain) can waive its management fees, and allocate the fees instead to a particular investment in the fund.  If that investment appreciates in the future, the general partner (Bain) takes a “Priority Profit” off the top.  While Bain did not waive its fees for this fund in 2009, it had done so earlier in the life of the fund, to the tune of tens of millions of dollars.  (5% of its total holdings of Bombardier Recreational, for example, came from fee conversions — making the fee conversions alone worth about $7 million in 2009).
To be clear, there is some economic risk, and presumably this is how Bain’s tax counsel justified its reporting.  The economic risk is that the priority profit must come from future profits, presumably from the investment to which the converted fee is allocated.  On the other hand, the managers get to choose which investment in the portfolio they want to skim, and they are in a good position to know which investments are safest.  Because the fees come off the top, they are not subject to real investment risk, but only the limited risk that even their best investments will decline in value, every single quarter, for the rest of the life of the fund.  Even in 2009, an iffy year for Fund VII, the priority profit share increased in value by $3.8 million.
(UPDATE: Here’s another example.  Bain Capital Fund X LP reported that it converted $338 million as of the end of 2009.  At a 20% tax rate differential, that $67 million in taxes unpaid. Plus deferral.)
Bottom line: Mitt Romney has not paid all the taxes required under law.
(UPDATE: Yes, Romney left Bain in 1999 or 2002.  But as part of his severance agreement, he continues to receive interests in these funds, which he has reported on his financial disclosures.  In the usual case, a departing partner would receive an economic stake in the GP (Bain Capital Partners X, LP), rather than an economic stake in the LP (Bain Capital Fund X, LP) — representing a payment for the management services he provided in the past.  Indeed, because he filed an 83(b) election, we can be sure that he received GP interests as part of his severance agreement, and that he therefore benefited personally from management fee conversions.
(UPDATE: A couple more points.  The Romney camp has complained that because Romney was a “blind investor” in the funds after 2002, it’s unfair to blame him for any tax dodging.  They don’t deny that he benefited economically from the fee conversion or the lower taxes that followed.  So the question is, can we fairly attribute the tax dodge to Romney?
Romney here is not like a passive mutual fund investor.  He helped engineer the funds in the first place.  For at least some of the funds, the fee conversion was set in place at the time of the fund’s formation — in the case of Fund VII, when Romney was the sole shareholder of the management company that actually waived the fees (2000).  It seems reasonable to infer that fee conversions were in place for earlier vintages of Bain Capital funds as well.  I haven’t yet reviewed all of the Gawker documents, but we are talking hundreds of millions of dollars in tax liability on these funds — one hundred million in Fund IX alone (20% of the $500 million converted), another $70 million in fund X.  It is unthinkable that in the 1990s through 2002, when Romney was putting together funds, that he was unaware of the fee conversion strategy, or that he was unaware that he continued to benefit from it today.
A note on the economic risk in these deals.  The whole tax argument rides on the fact that, in theory, the priority allocation is not guaranteed.  If it were as good as cash, then it would be taxed as cash (ordinary income on receipt).  So the argument is that if the fund performs badly, the manager might not receive the waived fees.  But here’s the thing.  It’s hard to imagine a worse financial catastrophe than what we saw in 2008-09.  And yet Bain did just fine and received most or all of its fees.  The economic risk is entirely ginned up for the benefit of the tax authorities, and it’s not surprising that even in the midst of a financial crisis, the Bain managers got paid their compensation, in full, at capital gains rates.  (Remember this is the part of the compensation that’s supposed to be taxed at ordinary income rates.)  Now, I’ll check the financials of these funds to see if any of the waived allocations were impaired during the crisis.  But from what I looked at today, the economic risk was indeed as ephemeral as it was designed to be.
Finally, I should underscore that fee conversions were really widespread in the PE industry.  But that doesn’t make it legal.  Audits are private, so I don’t know what, if anything, the IRS has been doing about it.  There are no litigated cases that I am aware of, though I haven’t checked in a while.  I’ll try to find some time to do that tomorrow; I welcome any assistance from practitioners who are more up to date than I am.)

I talk about management fees on page 23-24 of Two and Twenty (NYU Law Review 2008).
Gregg Polsky (North Carolina) has a terrific paper on the topic: Private Equity Management Fee Conversions (Tax Notes 2009)

Egypt's Morsi calls for intervention to end 'oppressive' Syria regime

Ayatollah Ali Khamenei via EPA
A handout picture made available by Iranian supreme leader Ayatollah Ali Khamenei's official website shows (L-R), United Nations Secretary General Ban Ki-moon, Iranian president Mahmoud Ahmadinejad, Egyptian president Mohammad Morsi and Indian prime minister Manmohan Singh at the opening ceremony of the summit of the Non-Alligned Movement (NAM), the group of countries not aligned with any of the powers blocs , Thursday.
Egyptian President Mohammed Morsi criticized Syria’s "oppressive regime" Thursday at an international conference in Iran – one of President Bashar Assad's few remaining allies - and called for outside intervention to end the civil war.
Morsi, a moderate Islamist, told a summit of non-aligned nations in Tehran that Assad’s government had “lost its legitimacy” and the international community had an “ethical duty” to help the Syrian people.
The Syrian delegation at the summit walked out during Morsi's speech, regional news channel al-Jazeera reported.
By ousting military chiefs, Egypt's Morsi shows he's a force to be reckoned with
Morsi said bloodshed in Syria would only end if there were "effective interference" from outside.

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President Bashar Assad spoke to a pro-government Syrian TV station Wednesday and said the situation is "better" , but his troops need more time to "win the battle". ITV's John Ray reports.

"The bloodshed in Syria is our responsibility on all our shoulders and we have to know that the bloodshed cannot stop without effective interference from all of us," Morsi said.
As Morsi takes symbolic oath, many fear the 'Islamization of Egyptian society'
"We all have to announce our full solidarity with the struggle of those seeking freedom and justice in Syria, and translate this sympathy into a clear political vision that supports a peaceful transition to a democratic system of rule that reflects the demands of the Syrian people for freedom."
Al-Jazeera's Imran Khan reported that Morsi's comments caused "unease" in the room "especially for the Iranians who are close to Syria."
Reuters contributed to this report.

Rolling Stone

Party of the Rich
Matt Mahurin

How the GOP Became the Party of the Rich

The inside story of how the Republicans abandoned the poor and the middle class to pursue their relentless agenda of tax cuts for the wealthiest one percent

The nation is still recovering from a crushing recession that sent unemployment hovering above nine percent for two straight years. The president, mindful of soaring deficits, is pushing bold action to shore up the nation's balance sheet. Cloaking himself in the language of class warfare, he calls on a hostile Congress to end wasteful tax breaks for the rich. "We're going to close the unproductive tax loopholes that allow some of the truly wealthy to avoid paying their fair share," he thunders to a crowd in Georgia. Such tax loopholes, he adds, "sometimes made it possible for millionaires to pay nothing, while a bus driver was paying 10 percent of his salary – and that's crazy."

Preacherlike, the president draws the crowd into a call-and-response. "Do you think the millionaire ought to pay more in taxes than the bus driver," he demands, "or less?"
The crowd, sounding every bit like the protesters from Occupy Wall Street, roars back: "MORE!"

The year was 1985. The president was Ronald Wilson Reagan.

Today's Republican Party may revere Reagan as the patron saint of low taxation. But the party of Reagan – which understood that higher taxes on the rich are sometimes required to cure ruinous deficits – is dead and gone. Instead, the modern GOP has undergone a radical transformation, reorganizing itself around a grotesque proposition: that the wealthy should grow wealthier still, whatever the consequences for the rest of us.
Modern-day Republicans have become, quite simply, the Party of the One Percent – the Party of the Rich.

"The Republican Party has totally abdicated its job in our democracy, which is to act as the guardian of fiscal discipline and responsibility," says David Stockman, who served as budget director under Reagan. "They're on an anti-tax jihad – one that benefits the prosperous classes."

The staggering economic inequality that has led Americans across the country to take to the streets in protest is no accident. It has been fueled to a large extent by the GOP's all-out war on behalf of the rich. Since Republicans rededicated themselves to slashing taxes for the wealthy in 1997, the average annual income of the 400 richest Americans has more than tripled, to $345 million – while their share of the tax burden has plunged by 40 percent. Today, a billionaire in the top 400 pays less than 17 percent of his income in taxes – five percentage points less than a bus driver earning $26,000 a year. "Most Americans got none of the growth of the preceding dozen years," says Joseph Stiglitz, the Nobel Prize-winning economist. "All the gains went to the top percentage points."

The GOP campaign to aid the wealthy has left America unable to raise the money needed to pay its bills. "The Republican Party went on a tax-cutting rampage and a spending spree," says Rhode Island governor and former GOP senator Lincoln Chafee, pointing to two deficit-financed wars and an unpaid-for prescription-drug entitlement. "It tanked the economy." Tax receipts as a percent of the total economy have fallen to levels not seen since before the Korean War – nearly 20 percent below the historical average. "Taxes are ridiculously low!" says Bruce Bartlett, an architect of Reagan's 1981 tax cut. "And yet the mantra of the Republican Party is 'Tax cuts raise growth.' So – where's the fucking growth?"
Republicans talk about job creation, about preserving family farms and defending small businesses, and reforming Medicare and Social Security. But almost without exception, every proposal put forth by GOP lawmakers and presidential candidates is intended to preserve or expand tax privileges for the wealthiest Americans. And most of their plans, which are presented as common-sense measures that will aid all Americans, would actually result in higher taxes for middle-class taxpayers and the poor. With 14 million Americans out of work, and with one in seven families turning to food stamps simply to feed their children, Republicans have responded to the worst economic crisis since the Great Depression by slashing inheritance taxes, extending the Bush tax cuts for millionaires and billionaires, and endorsing a tax amnesty for big corporations that have hidden billions in profits in offshore tax havens. They also wrecked the nation's credit rating by rejecting a debt-ceiling deal that would have slashed future deficits by $4 trillion – simply because one-quarter of the money would have come from closing tax loopholes on the rich.

The intransigence over the debt ceiling enraged Republican stalwarts. George Voinovich, the former GOP senator from Ohio, likens his party's new guard to arsonists whose attitude is: "We're going to get what we want or the country can go to hell." Even an architect of the Bush tax cuts, economist Glenn Hubbard, tells Rolling Stone that there should have been a "revenue contribution" to the debt-ceiling deal, "structured to fall mainly on the well-to-do." Instead, the GOP strong-armed America into sacrificing $1 trillion in vital government services – including education, health care and defense – all to safeguard tax breaks for oil companies, yacht owners and hedge-fund managers. The party's leaders were triumphant: Senate Minority Leader Mitch McConnell even bragged that America's creditworthiness had been a "hostage that's worth ransoming."

It's the kind of thinking that only money can buy. "It's a vicious circle," says Stiglitz. "The rich are using their money to secure tax provisions to let them get richer still. Rather than investing in new technology or R&D, the rich get a better return by investing in Washington."

It's difficult to imagine today, but taxing the rich wasn't always a major flash point of American political life. From the end of World War II to the eve of the Reagan administration, the parties fought over social spending – Democrats pushing for more, Republicans demanding less. But once the budget was fixed, both parties saw taxes as an otherwise uninteresting mechanism to raise the money required to pay the bills. Eisenhower, Nixon and Ford each fought for higher taxes, while the biggest tax cut was secured by John F. Kennedy, whose across-the-board tax reductions were actually opposed by the majority of Republicans in the House. The distribution of the tax burden wasn't really up for debate: Even after the Kennedy cuts, the top tax rate stood at 70 percent – double its current level. Steeply progressive taxation paid for the postwar investments in infrastructure, science and education that enabled the average American family to get ahead.

That only changed in the late 1970s, when high inflation drove up wages and pushed the middle class into higher tax brackets. Harnessing the widespread anger, Reagan put it to work on behalf of the rich. In a move that GOP Majority Leader Howard Baker called a "riverboat gamble," Reagan sold the country on an "across-the-board" tax cut that brought the top rate down to 50 percent. According to supply-side economists, the wealthy would use their tax break to spur investment, and the economy would boom. And if it didn't – well, to Reagan's cadre of small-government conservatives, the resulting red ink could be a win-win. "We started talking about just cutting taxes and saying, 'Screw the deficit,'" Bartlett recalls. "We had this idea that if you lowered revenues, the concern about the deficit would be channeled into spending cuts."

It was the birth of what is now known as "Starve the Beast" – a conscious strategy by conservatives to force cuts in federal spending by bankrupting the country. As conceived by the right-wing intellectual Irving Kristol in 1980, the plan called for Republicans to create a "fiscal problem" by slashing taxes – and then foist the pain of reimposing fiscal discipline onto future Democratic administrations who, in Kristol's words, would be forced to "tidy up afterward."

There was only one problem: The Reagan tax cuts spiked the federal deficit to a dangerous level, even as the country remained mired in a deep recession. Republican leaders in Congress immediately moved to reverse themselves and feed the beast. "It was not a Democrat who led the effort in 1982 to undo about a third of the Reagan tax cuts," recalls Robert Greenstein, president of the nonpartisan Center on Budget and Policy Priorities. "It was Bob Dole." Even Reagan embraced the tax hike, Stockman says, "because he believed that, at some point, you have to pay the bills."

For the remainder of his time in office, Reagan repeatedly raised taxes to bring down unwieldy deficits. In 1983, he hiked gas and payroll taxes. In 1984, he raised revenue by closing tax loopholes for businesses. The tax reform of 1986 lowered the top rate for the wealthy to just 28 percent – but that cut for high earners was paid for by closing tax loopholes that resulted in the largest corporate tax hike in history. Reagan also raised revenues by abolishing special favors for the investor class: He boosted taxes on capital gains by 40 percent to align them with the taxes paid on wages. Today, Reagan may be lionized as a tax abolitionist, says Alan Simpson, a former Republican senator and friend of the president, but that's not true to his record. "Reagan raised taxes 11 times in eight years!"

But Reagan wound up sowing the seed of our current gridlock when he gave his blessing to what Simpson calls a "nefarious organization" – Americans for Tax Reform. Headed by Grover Norquist, a man Stockman blasts as a "fiscal terrorist," the group originally set out to prevent Congress from backsliding on the 1986 tax reforms. But Norquist's instrument for enforcement – an anti-tax pledge signed by GOP lawmakers – quickly evolved into a powerful weapon designed to shift the tax burden away from the rich. George H.W. Bush won the GOP presidential nomination in 1988 in large part because he signed Norquist's "no taxes" pledge. Once in office, however, Bush moved to bring down the soaring federal deficit by hiking the top tax rate to 31 percent and adding surtaxes for yachts, jets and luxury sedans. "He had courage to take action when we needed it," says Paul O'Neill, who served as Treasury secretary under George W. Bush.

The tax hike helped the economy – and many credit it with setting up the great economic expansion of the 1990s. But it cost Bush his job in the 1992 election – a defeat that only served to strengthen Norquist's standing among GOP insurgents. "The story of Bush losing," Norquist says now, "is a reminder to politicians that this is a pledge you don't break." What was once just another campaign promise, rejected by a fiscal conservative like Bob Dole, was transformed into a political blood oath – a litmus test of true Republicanism that few candidates dare refuse.

After taking office, Clinton immediately seized the mantle of fiscal discipline from Republicans. Rather than simply trimming the federal deficit, as his GOP predecessors had done, he set out to balance the budget and begin paying down the national debt. To do so, he hiked the top tax bracket to nearly 40 percent and boosted the corporate tax rate to 35 percent. "It cost him both houses of Congress in the 1994 midterm elections," says Chafee, the former GOP senator. "But taming the deficit led to the best economy America's ever had." Following the tax hikes of 1993, the economy grew at a brisk clip of 3.2 percent, creating more than 11 million jobs. Average wages ticked up, and stocks soared by 78 percent. By the spring of 1997, the federal budget was headed into the black.

But Newt Gingrich and the anti-tax revolutionaries who seized control of Congress in 1994 responded by going for the Full Norquist. In a stunning departure from America's long-standing tax policy, Republicans moved to eliminate taxes on investment income and to abolish the inheritance tax. Under the final plan they enacted, capital gains taxes were sliced to 20 percent. Far from creating an across-the-board benefit, 62 cents of every tax dollar cut went directly to the top one percent of income earners. "The capital gains cut alone gave the top 400 taxpayers a bigger tax cut than all the Bush tax cuts combined," says David Cay Johnston, the Pulitzer Prize-winning author of Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich – and Cheat Everybody Else.

The cuts also juiced irrational exuberance on Wall Street. Giving a huge tax advantage to investment income inflated the dot-com bubble, observed Stiglitz, "by making speculation more attractive." And by eliminating capital gains taxes on home sales, the cuts fueled the housing bubble: A study by the Federal Reserve estimated that the tax giveaways boosted housing transactions by 17 percent through 2007.

The most revealing aspect of the tax cuts, however, came from a simple mistake. In a major blow to the inheritance tax – America's most progressive form of taxation – the GOP cuts nearly doubled the amount that the rich could pass on to their heirs tax-free. From now on, the first $1 million would be exempt from federal taxes – unless your estate was worth more than $17 million. In those rare cases, the superwealthy would have to pay taxes on their entire inheritance.

Then something strange happened. Due to a "drafting error," the final bill failed to include the exception for the superwealthy. Everyone in both parties agreed that it had been a mistake. But instead of fixing the error, Republicans blocked a pro forma correction to the law – meaning that even the wealthiest estates would pay no taxes on the first $1 million. The move effectively secured an $880 million tax cut for the rich – one that Congress never intended, and never voted for. Ari Fleischer, the then-spokesman for Rep. Bill Archer of the House Ways and Means Committee, exulted over the undemocratic tax cut for the wealthy. "When a mistake works against the government and for the taxpayers," he explained, "we're in no rush to correct it."

Republicans, abetted by conservative Democrats, passed the tax cuts with a veto-proof majority, and Clinton signed them into law. But for the remainder of his term, Clinton repeatedly blocked Republican demands for further cuts. "He vetoed one tax cut after another," says Robert McIntyre, director of Citizens for Tax Justice. In 1999, in a triumph for fiscal sanity, Clinton rejected a massive $792 billion cut to inheritance and investment taxes. The mood during the veto ceremony in the Rose Garden was festive. A five-piece band played "Summertime," and the living was easy. Unemployment stood at 4.2 percent, and stocks were booming. "Our hard-won prosperity gives us the chance to invest our surplus to meet the long-term challenges of America," Clinton declared. The Republican tax cuts, he warned with eerie prescience, would return America to a period of "deficit upon deficit" that culminated in "the worst recession since the Great Depression."

Then came the election of George W. Bush, the first president of the Party of the Rich.
Within months of taking office, Bush delivered a tax break to the rich that trumps anything he accomplished through the actual tax code. "The most important thing the Bush administration did in the whole area of taxes," says Johnston, "was to kill tax harmonization."

"Tax harmonization" was economic jargon for a joint project by the world's developed countries to shut down offshore tax havens in places like the Cayman Islands. At the time, such illicit havens were costing U.S. taxpayers $70 billion a year. For Republicans, going after big-time tax evaders should have been as American as apple pie. As Reagan once said of such cheats: "When they do not pay their taxes, someone else does – you and me."
But for Bush and other leaders of the Party of the Rich, blocking corporations from hiding their money overseas wasn't an act of patriotism – it was tyranny. Rep. Dick Armey, the GOP majority leader, railed against tax harmonization as an effort to create a "global network of tax police." One of Bush's biggest donors, Enron, was using a network of nearly 900 offshore tax hideaways to pay no corporate taxes – while reporting massive profits that later turned out to be fraudulent. In one of his first acts as president, Bush "basically vetoed the initiative," says Stiglitz.

The veto spurred a cavalcade of corporations – including stalwart American firms like Stanley Works – to pursue phony "headquarters" in Bermuda and other lax-tax nations. The move not only encouraged some of the world's richest companies to avoid paying any U.S. taxes, it let them book overseas-"expenses" that qualified them for lucrative tax deductions. In one of the most notorious cases, GE filed for a $3 billion tax rebate in 2009, despite boasting profits of more than $14 billion.

But Bush wasn't content to simply make the world safe for corporate tax evaders: He also pushed to deliver $1.6 trillion in tax cuts for the wealthiest individuals. On paper, at least, the federal government looked like it would soon be rolling in cash. Assuming the economy continued to grow as it had under Clinton, the Congressional Budget Office forecast a federal surplus of $5.6 trillion by 2011. Nearly half that bounty was already spoken for – the government needed some $3 trillion to shore up Social Security and Medicare – but that still left $2 trillion to play with.

Still, those numbers were only a projection. "It's certainly not money in the bank," Fed chairman Alan Greenspan warned incoming Treasury Secretary O'Neill over breakfast at the Federal Reserve. Yet there was no such note of caution in the White House. The month after Bush took office, the president's then-budget director, Mitch Daniels, suggested in an internal memo that $5.6 trillion was likely too small a figure. Daniels concluded that Bush's plan was "so fiscally conservative" that even after cutting $1.6 trillion in taxes, fixing Social Security and setting aside $900 billion in a contingency fund, the government would still have enough money left over to retire $2 trillion in debt.

"Everybody for a good while accepted that the surpluses were real," insists Daniels, now the governor of Indiana. When pressed, however, he also concedes that by the time Bush took office, "the economy was already unraveling." Indeed, a wave of layoffs at the end of 2000 prompted Dick Cheney to warn, "We may well be on the front edge of a recession here."

The conflicting forecasts – one of sunshine and surplus, the other of gloom and contraction – should have set off alarm bells in the White House. But instead of rethinking the prudence of its massive giveaway to the rich, the Bush team dreamed up a new rationale for cutting taxes: to provide a needed jolt to the economy. "It's a fair thing to say that the stimulus argument was added in the spring of '01, when it had not been there before," Daniels says.

The stimulus argument was lousy economics. The previous two decades, after all, had demonstrated that "trickle-down" tax cuts don't juice the economy – they create bubbles and balloon deficits. Proponents pointed to Reagan's original tax cut in 1981, claiming it had spurred economic growth. But that is nothing more than "urban legend," Stockman says. The economy "did recover after 1982," he says, "but mainly because the Federal Reserve defeated inflation."

In fact, Stockman insists, Bush's tax cuts for the rich represent a bastardization of Reaganism. "The Republican Party originally said that prosperity comes from the private sector," he says. "But today's Republicans have become Chamber of Commerce Keynesians – using tax policy as a way of stimulating, boosting, prodding the economy." The Party of the Rich, in essence, was offering up a twisted version of New Deal policies that laissez-faire Republicans like Reagan had long opposed.

Spinning the tax giveaways as a stimulus plan did serve one useful function: It helped obscure the true purpose of the Bush tax plan. In an internal memo written just days after the inauguration, O'Neill advised Bush that he had a "great opportunity" for quick action on his tax cuts if he framed the choice for Congress as tax cut vs. recession. "We can get this argument on our ground," O'Neill wrote, "and stop the drumbeat about a tax cut for the rich."

With no patience for the specifics of tax policy, Bush deputized Vice President Dick Cheney to push through his tax cut for the rich. Once a deficit hawk who confessed that he was "not convinced that the Reagan tax cuts worked," Cheney had emerged from his tenure as CEO of Halliburton as a leading advocate for rewarding big corporations and their executives – even as GOP moderates warned that Bush's tax cut would foreclose needed investments in education and infrastructure. "The vice president had no interest in what I had to say," recalls Chafee. "He ran the show right from the beginning, and he suffered no compromise."

As the economy worsened, even the president's Treasury secretary grew concerned about the tax cuts. O'Neill pushed Bush to include a trigger mechanism that would rein in the cuts if the projected surpluses failed to materialize. "The trigger was a good idea – having the foresight that if things turned bad, we wouldn't have to reverse course in a difficult time," O'Neill says now. "But there was never any serious interest in it" from the Bush administration.

To Chafee, the opposition to a trigger mechanism seemed to offer a clue about the real goal of the tax cuts: They were designed not to boost the economy, but to force the kind of spending cuts championed by Grover Norquist and other small-government activists. His suspicion that the starve-the-beast crowd was driving the cuts was confirmed, he says, by a conversation he had while walking the Senate corridors with Trent Lott, then the GOP majority leader.

"What's going on here?" Chafee asked. Why not safeguard the economy by adopting a trigger mechanism?

Lott turned to Chafee. "We're going to strangle the spending," he said. On the stump, Bush hyped the benefits of his plan by emphasizing how much in taxes it would save a single waitress. But the real action was at the top rung of the income ladder. Over 10 years, the bottom fifth of income earners could expect to pocket an extra $744. That waitress might be left with enough cash to change out the clutch on her Corolla. The top one percent, meanwhile, would receive more than $340,000 on average – enough to buy his and hers Bentleys.

To mask such glaring inequality, Republicans inaugurated the tax cut with an across-the-board rebate. The waitress would get a $300 check, along with everyone else from Warren Buffett on down. But in reality, the tax cuts were backloaded with benefits for the wealthy. In the first year of the deal, the top one percent would pocket just seven percent of the tax cuts – but by the time the cuts were set to expire in 2010, the rich would be reaping more than half of the windfall. What's more, the cuts were nefariously designed so that small-business owners and upper-middle-class professionals – primarily those earning between $200,000 and $500,000 a year – would see as much as three-quarters of their tax break eroded by the Alternative Minimum Tax, a levy Congress originally intended to keep rich people from cheating on their taxes.

Every year since the Bush tax cuts were approved, Congress has passed a multibillion "patch" to prevent this politically potent group of professionals from being denied their tax breaks. But at the time, Cheney used the money "saved" by the AMT claw-back to finance another favor exclusively for the rich: a series of cuts to the estate tax culminating in a one-year abolition, set to take effect in 2010. Rejecting a less costly bargain proposed by Democrats that would have provided a permanent escape from estate taxes for all but the richest of the rich, Republicans instead demanded a more expensive plan catering to the wealthiest 0.25 percent of all estates.

In May 2001, Republicans in the House voted in lock step to approve the Bush tax cuts, which cleared the Senate with the support of 45 Republicans and 12 conservative Democrats.

But then reality intervened. The bursting of the dot-com bubble, followed by the attacks of September 11th, tipped the economy headlong into recession. Rather than reversing course, however, Republicans rallied around another tax giveaway for the rich. That October, a bill passed by the House – and endorsed by Bush – not only called for eliminating a law requiring that tax-dodging corporations pay at least something in taxes, it ordered rebate checks to be cut to corporate giants for their past taxes. Under the bill, 16 companies of the Fortune 500 would have each received $100 million or more – including $1.4 billion for IBM, $671 million for GE and $254 million for Enron. Democrats in the Senate ultimately sank the bill, producing a stimulus package that extended unemployment benefits for the middle class and awarded tax incentives to corporations for new investments.

But Republicans kept their eyes on the prize. The following year, after the GOP regained control of the Senate and expanded its majority in the House, Cheney immediately pushed forward with an even deeper tax cut for the wealthy that O'Neill today describes as "an atrocity."

"We won the midterms," the vice president told O'Neill at the time. "This is our due."
By that point, any economic rationale for cutting taxes had vanished. September 11th, the recession and the 2001 tax cuts had plunged the nation $158 billion into the red. The mirage of the $5.6 trillion surplus had vanished – replaced with a forecast that America would rack up some $3 trillion in debt by 2012. But rather than put the brakes on tax cuts, as a trigger mechanism might have done, Cheney was determined to accelerate them, so the rich would get their money even sooner. To further reward the wealthiest, Cheney also wanted to slash taxes on capital gains and corporate dividends, with half of the money going to the top one percent.

To secure the new tax cuts, however, Cheney would first have to overcome opposition not only from Alan Greenspan, but from some of Bush's top advisers. The Fed chair had personally presented Cheney with a 20-page econometric analysis showing that soaring deficits caused by the tax cuts would sink long-term growth. Instead of communicating Greenspan's alarm to Bush, Cheney tasked a deputy named Cesar Conda to draft a memo disputing the study. Conda, a former tax lobbyist, blithely dismissed the projections of the Fed's senior economist as "completely wrong."

In November 2002, at a meeting in the White House, the president and his top economic advisers packed tightly around a mahogany table in the Roosevelt Room. With the administration's own forecasts showing that the economy had already regained its footing, one after another of Bush's deputies sounded the alarm about the dangers of a new tax cut. "This burns a big hole in the budget," deputy chief of staff Josh Bolten told the president. "The budget hole is getting deeper," added Daniels, "and we are projecting deficits all the way to the end of your second term." O'Neill warned the president that a "tax cut that benefits mostly wealthy investors" could imperil the budding prosperity. "With the economy already improving, this could cause an unnecessary boost," he said. "That's how you get a bubble." Entertaining the chorus of doubters, Bush himself voiced qualms about more cuts for the rich. "Won't the top-rate people benefit the most?" he asked. "Didn't we already give them a break at the top?"

But Cheney was having none of it. When O'Neill warned Bush that America was headed for a "fiscal crisis," the vice president, sitting at the Treasury secretary's right elbow, dismissed him midsentence by citing the ultimate champion of Republican tax cuts: "Ronald Reagan proved that deficits don't matter, Paul."

A true student of Reagan would have understood that 2002 was the moment for a tax increase. When his 1981 tax cut overshot the mark, Reagan had put aside ideology and raised taxes, putting the needs of the country above the desires of the wealthy. Bush's father had also raised taxes to avoid passing massive deficits on to future generations. Moreover, the Bush administration had already committed the country to a costly war in Afghanistan, and was on the brink of invading Iraq. Historically, Republican and Democratic administrations alike had met the financial burdens of war by raising taxes. But this was a new Republican Party, one determined to aid the rich even as it sent the military budget soaring. As House Majority Leader Tom DeLay would soon declare, "Nothing is more important in the face of a war than cutting taxes."

After the meeting, Cheney set out to remove anyone who stood in the way of the new tax giveaway. He phoned O'Neill and demanded the Treasury secretary's resignation. He also dispensed with economic adviser Larry Lindsey, whose frank assessment of the possible costs of the Iraq War had threatened to derail the tax cut.

Budget-conscious Republicans in Congress who opposed the tax cuts could not be disposed of – but they could be strong-armed. Voinovich and Sen. Olympia Snowe of Maine, who refused to go along with cuts of more than $350 billion, were summoned to the White House for a meeting with Bush and Cheney. "The president wanted nearly a trillion dollars when he started with us," recalls Voinovich. "They were working on us: We need more, we need more." The senators held out for a smaller bill – though in hindsight, Voinovich says, there shouldn't have been any tax cuts. "Just think where we'd be if we'd gone along with what the president wanted," he says, laughing bitterly. "Where would we be today? Oh, my God."

In the end, Cheney's voice was the only one that mattered. In April 2003, when the bill reached the floor, the Senate deadlocked 50-50. The vice president cast the deciding "aye" that moved the tax cut into law. The benefits were even more tilted to the rich than the first Bush tax cuts. When fully phased in, 53 percent of the new cuts went to the top one percent. Those making $10 million or more pocketed an average of $1 million a year – twice the haul they made from the earlier cuts, and every cent of it borrowed. "It was a deficit-financed tax cut," concedes Hubbard, who chaired Bush's Council of Economic Advisers.

The deal privileged gambling on stocks over working for a living: The tax rate the richest pay on their long-term capital gains was slashed by 25 percent, while their rate on dividends fell by almost 60 percent. The move not only fueled speculation of Wall Street, it further widened the considerable gap between rich and poor. "It was a very destructive combination to have a national economic policy that stimulated debt-financed capital gains and then taxed the windfall at the lowest rate imaginable," says Stockman. "That contributed, clearly, to the growing imbalance in household income and wealth."
But Republicans didn't stop there. The following year, they passed the little-noticed American Jobs Creation Act. Named in the same Orwellian fashion as Bush's "Clear Skies" and "Healthy Forests" initiatives, the 2004 law allowed corporations to bring home billions in profits they had stockpiled in offshore tax havens – the very flight of capital that Bush had blessed by torpedoing tax harmonization three years earlier. Under the tax amnesty, corporations repatriated $300 billion in profits they had stashed offshore. But instead of paying the nominal corporate tax rate of 35 percent, they were taxed at just 5.25 percent.
The title of the bill notwithstanding, corporations invested almost none of their windfall in new factories or other measures to create the 500,000 jobs that Republicans had promised. In fact, many companies that received the biggest tax break actually slashed jobs. Hewlett-Packard laid off 14,500 workers – one pink slip for every $1 million in profits it shipped back home from overseas. All told, according to an analysis by the National Bureau of Economic Research, up to 92 percent of the "jobs creation" money was handed out to top executives and shareholders in a frenzy of dividend payments and stock buybacks. And thanks to the GOP's cut on investment income the previous year, wealthy individuals who pocketed the offshore profits paid the same rate on their bonanza, 15 percent, that a waitress at a diner might pay on her tips.

When Democrats regained control of both the House and Senate in 2006, they temporarily halted the GOP's binge of borrowing from the Treasury to give tax cuts to the wealthy. But that didn't stop Republicans from finding other ways to aid the rich. As the economy collapsed in 2008, the Bush administration used the crisis to provide a stealth handout to the nation's banks – even those at no risk of failing. Under the TARP bailout, overseen by Treasury secretary and former Goldman Sachs CEO Hank Paulson, taxpayers were forced to give banks $254 billion for assets worth just $176 billion – a handout of $78 billion to the financial sector, including $2.5 billion for Paulson's cronies at Goldman. "Paulson pushed the money into the hands of the banks – no strings attached, no accountability, no transparency," Elizabeth Warren, then-chair of the Congressional Oversight Panel, told Rolling Stone last year.

As with the offshore profits, the banks used the money to line the pockets of executives and investors – while doing little to speed the recovery of Main Street. "We gave an enormous subsidy to these financial institutions, and they have not returned it to the American people," said Warren. "The administration could have said, 'All right, take this and multiply it throughout the economy.' But Paulson never made that a condition of taking the money."

Taken together, the Bush years exposed the bankruptcy behind the theory that tax cuts for the rich will spur economic growth. "Let the rich get richer and everybody will benefit?" says Stiglitz. "That, empirically, is wrong. It's a philosophy of trickle-down economics that's belied by the facts." Bush and Cheney proved once and for all that tax cuts for the wealthy produce only two things: "lower growth and greater inequality."
The GOP's frenzied handouts to the rich during the Bush era coincided with the weakest economic expansion since World War II – and the only one in modern American history in which the wages of working families actually fell and poverty increased. And what little expansion there was under Bush culminated in the worst fiscal crisis since the Great Depression. "The wreckage was left by Dick Cheney, Grover Norquist and the gang," says Chafee. "This was their doing."

By driving the economy into the ditch, Republicans left the next president little choice but to drive up deficits in the short term by launching a massive campaign of federal spending to ward off a global depression. But even the $787 billion stimulus engineered by President Obama was hamstrung by his predecessor's ongoing giveaway to the wealthy: Republicans insisted that nearly 10 percent of every stimulus dollar be devoted to financing the annual "patch" to the Alternative Minimum Tax – the off-budget legacy of Bush's tax cuts for the rich. This was a $70 billion handout that inflated the cost of the stimulus package without stimulating anything – other than the paychecks of wealthy Americans.

From the outset of the Obama presidency, in fact, Republicans have engaged in a calculated, across-the-board campaign to protect the tax privileges of the wealthiest Americans. Their objective was made explicit by Rep. Eric Cantor during the height of the stimulus debate: "No Tax Increases to Pay for Spending" declared one bullet point on Cantor's website. "House Republicans are insisting that any stimulus package include a provision precluding any tax increases, now or in the future, to pay for this new spending." Having racked up the largest deficits in American history, Republicans suddenly found it expedient to return to their old-school rhetoric of deficit-bashing. "Under Bush, they had a story about deficits not mattering," says Michael Ettlinger, who directs economic policy at the Center for American Progress. "Then, all of a sudden Obama becomes president, and deficits matter again."

The battle reached a fever pitch over health care reform. To truly understand the depth of the GOP's entrenched opposition to Obamacare, it's crucial to understand how the reform is financed: The single largest source of funds comes from increasing Medicare taxes on the wealthy – including new taxes on investment income. According to the Tax Policy Center, Americans who make more than $1 million a year will pay an extra $37,381 in annual taxes under the plan. The top 400 taxpayers would contribute even more: an average of $11 million each.

Rarely in American history has a tax so effectively targeted the top one percent. "It took Republicans about four months to figure out how much they hated it," says McIntyre, president of Citizens for Tax Justice. Republican rage over the president's health care plan has far less to do with the size of government or the merits of the individual mandate than the blow to the investor class. If Obamacare remains in place and the Bush cuts for the wealthy expire as planned, top earners will be paying a tax of 23.8 percent on capital gains – more than they have at any time since Clinton cut the capital gains tax in 1997. Health care reform, griped The Wall Street Journal, was nothing but a "sneaky way" for Democrats to wage a "war on 'the rich.'"

A key element of the GOP's war on the poor was cemented by the surprise election of Scott Brown to replace Ted Kennedy in the Senate in January 2010. As a candidate, Brown had made his high-mileage GMC pickup truck the star of his campaign commercials. "I love this old truck," he said. "It's brought me closer to the people." But Brown's real allegiance was to his wealthy donors: the billionaire Koch brothers, who bankrolled the Tea Party, and the financial interests who made a last-minute investment of more than $450,000 to propel Brown into office.

As soon as he was sworn in, Brown set about hollowing out the so-called Volcker Rule, which was designed to bar big financial institutions from using their own money to make risky, speculative bets on the market. By agreeing to provide Democrats with the crucial 60th vote on finance reform, Brown secured an exemption from the trading ban for mutual funds and insurers – a move directly benefiting Massachusetts-based financial giants like Fidelity and MassMutual. Brown also insisted that the Wall Street giants who caused the financial collapse – banks like Goldman Sachs and JP Morgan Chase – be allowed to continue using taxpayer-subsidized capital to gamble on hedge funds and private-equity deals. Former Fed chair Paul Volcker was furious: "Allowing a bank to invest in a speculative fund," he said, "goes against the very intent of the bill."

But Brown wasn't done. At the 11th hour, he forced Democrats to spike a tax on big banks and hedge funds that was designed to generate $19 billion to pay for the costs of financial reform. As a result, consumers and small banks had to pick up the tab. Brown, meanwhile, was richly rewarded for his efforts on behalf of Wall Street: During a three-week period at the height of negotiations, he raked in $140,000 in campaign cash from big financial firms, including Fidelity and MassMutual, Goldman Sachs and JP Morgan.

When Republicans won back control of the House in last year's midterm elections, they followed Brown's lead and moved swiftly to betray their Tea Party backers by running up more deficits on behalf of the rich. Within days of the election, Republicans not only secured a two-year extension of the Bush tax cuts for the wealthy, they also enabled America's richest scions to inherit millions of dollars without paying a dime in taxes. All told, the GOP's two favors for the party's biggest donors were secured in a lame-duck bargain that adds another $858 billion to the debt – an amount greater than the original stimulus plan the Republicans opposed so bitterly.

First, the GOP filibustered a Democrat-led effort to extend the Bush tax cuts on only the first $250,000 of income. The party leadership's hard-line stance – supported by barely a third of all voters – turned $90 billion over to the wealthiest Americans. It also set a precedent for further extensions that would cost nearly $1 trillion over the next decade. At the same time, the GOP drove through a deal that actually raised taxes for couples who make less than $40,000 a year – and then turned much of the extra cash over to couples who earn more than $200,000. Obama agreed to this massive transfer of wealth in order to retain the Bush tax cuts for the middle class – but the only other significant thing he got in return was a one-year extension of jobless benefits for the long-term unemployed.
But even the GOP's big payday for the wealthy pales in comparison to the handout that Republicans secured by gutting the estate tax. With the expiration of the Bush tax cuts, the inheritance tax was set to snap back to its Clinton-era standard: exempting the first $1 million of all estates from taxation, and stepping up the tax rate on the wealthiest estates to 55 percent. Instead, Obama agreed to raise the exemption to $5 million and lower the top tax rate to 35 percent – an apparent horse trade demanded by the Senate's second-ranking Republican, Jon Kyl of Arizona, who then allowed the president's nuclear-stockpile treaty with Russia to move forward in the Senate.

Shockingly, the deal actually sweetened the bargain the super-rich had received in 2009, enabling the heirs to the richest 0.25 percent of estates to pocket an extra $23 billion they would have otherwise owed in taxes under Bush. In fact, under the terms Kyl demanded, the federal government will spend more to eliminate or cut taxes for 100,000 rich people than it will to extend unemployment benefits for 7 million Americans.

In a little-noticed detail, the two-year deal also created a loophole that allows the wealthiest couples to pass on $10 million to a child today – while they're still living – without paying a penny of tax. That means the rich can offload their wealth to their children before it increases in value – evading higher estate taxes in the future. "In the next two years," one tax attorney crowed to The Wall Street Journal, "wealthy people have an unprecedented opportunity to push a lot of the value of their assets out of the estate-tax system." According to tax historians, the new rules create the most generous tax environment for wealth transfers for the super-rich since 1931.

And that was just the beginning of the budget-busting handouts the GOP demanded for the rich. In April, Republicans in the House passed a budget that would have slashed income taxes on corporations and the wealthiest Americans to just 25 percent – a $3 trillion giveaway that would have been financed by doubling out-of-pocket expenses for future retirees on Medicare. Top Republicans like Cantor have also pushed for a replay of the American Jobs Creation Act – endorsing a new tax amnesty that would allow corporate giants like Apple and Pfizer to bring home $1.4 trillion in offshore profits that would be taxed at just 5.25 percent – a favor for the wealthy that would generate another $79 billion in deficits. "At the same time they're talking about these big deficit problems, running around saying, 'We're broke,' they're contemplating one of the most egregious tax giveaways in recent memory," says Greenstein of the Center on Budget and Policy Priorities. "The potential windfall gains are beyond enormous – and the lion's share would go to shareholders of these big corporations and their executives."

Never mind that the previous tax amnesty in 2004 created virtually no new jobs, as corporate executives eagerly pocketed the windfall for themselves: Republicans are once again claiming that the tax amnesty will enable corporations to spend their repatriated wealth putting Americans back to work. Mitt Romney, the GOP presidential front-runner, promises that the flood of corporate cash will generate "hundreds of thousands if not millions – of good, permanent, private-sector jobs." That flies in the face of basic economics, given that corporate America is already sitting on hundreds of billions in domestic cash reserves. What the tax amnesty would do, however, is boost stock prices. According to an analysis by JP Morgan, as much as two-thirds of the $1.4 trillion that would be brought back into the country would go to stock "buybacks and dividends" rather than "new factories, new jobs and new equipment," as Romney claims.

JP Morgan has a big stake in the debate – as do fellow bank-bailout beneficiaries Citigroup, Bank of America and Goldman Sachs. Combined, the four financial giants have $87 billion in untaxed profits stockpiled offshore. That's similar to the combined offshore profits of drug giants Pfizer and Merck at $89 billion. Tech giants Cisco and Microsoft have more than $61 billion they'd like to bring home, while Big Oil companies Exxon and Chevron have $56 billion. The company with the most to gain, by far – with offshored reserves of $94 billion – is corporate America's most notorious tax scofflaw, GE.
Romney's rival for the GOP nomination, Rick Perry, has also endorsed the tax amnesty for giant corporations. But for Perry, the proposal doesn't go far enough on behalf of the rich. "Why not talk about how you are going to repatriate those dollars at a substantially lower rate than 35 percent?" Perry said recently, stumping in New Hampshire. "Like zero."

In September, Perry went even further, proposing a flat tax that would take a sharp bite out of the paychecks of the poorest Americans – while slashing taxes by more than 40 percent for the wealthiest. When confronted by a reporter over the fact that his plan would give millions to the rich, Perry replied: "I don't care about that." His plan is almost as regressive as Herman Cain's original 9-9-9 plan, which called for increasing taxes on 84 percent of Americans – squeezing $4,400 a year out of every middle-class couple to finance a $455,000 tax cut for millionaires. What's more, both Perry and Cain want to abolish the estate tax entirely and eliminate all taxes on capital gains. A similar plan by Michele Bachmann would enable 23,000 millionaires to pay no taxes at all – while allowing the top 400 earners to pocket nearly two-thirds of their income tax-free, and then pass those riches on to their heirs without paying a penny. "It's madness," says Stiglitz. "And it is dangerous to the fiscal order. The wealthy know very well how to convert normal income to capital gains income."

The Republican mania for rewarding the rich with tax cuts has become so warped that the normal rules of budgeting no longer seem to apply. Arguing for an extension of the Bush tax cuts, Sen. Kyl spelled out what could well serve as the Party of the Rich's credo: "You should never have to offset the cost of a deliberate decision to reduce tax rates on Americans." The same rule, of course, doesn't apply to spending for those in need: At the time he called for more borrowing on behalf of the rich, Kyl was also fighting to deny unemployment benefits to 5 million Americans. "Continuing to pay people unemployment compensation," he scoffed, "is a disincentive for them to seek new work."

In retrospect, the true victor of the midterm elections last year was not the Tea Party, or even Speaker of the House John Boehner. It was Grover Norquist.
"What has happened over the last two years is that Grover now has soldiers in the field," says Bartlett, the architect of the Reagan tax cuts. "These Tea Party people, in effect, take their orders from him." Indeed, a record 98 percent of House Republicans have now signed Norquist's anti-tax pledge – which includes a second, little-known provision that played a key role in the debt-ceiling debacle. In addition to vowing not to raise taxes, politicians who sign the pledge promise to use any revenue generated by ending a tax subsidy to immediately finance – that's right – more tax cuts.

Norquist insists the measure is necessary to force Congress to rein in spending. "I'm not focused on the deficit," he says. "The metric that matters is keeping spending down." But in the real world, the effect of Norquist's oath is to prevent the government from cutting the deficit by ending tax breaks to the rich. All told, tax breaks cost the government $1.2 trillion each year – far more than defense spending ($744 billion), Medicare and Medicaid ($719 billion) or Social Security ($701 billion). And most of the breaks – think of them as government subsidies delivered through the tax code – go to the wealthy. The richest one percent of Americans receive a 13.5 percent boost in their incomes from such subsidies – almost double the benefit the bottom 80 percent receives. Under Norquist's pledge, lawmakers are forbidden from ending any kind of tax break – mortgage deductions for luxury vacation homes, subsidies for giant oil companies, lower tax rates for private-equity millionaires – without using the money to pay for another tax cut. "If you can't get rid of tax expenditures – if old Grover is going to call that a 'tax increase' – it's not just ludicrous, it's deception," says Simpson, the former GOP senator.

Ludicrous or not, Norquist's intransigence on tax expenditures killed the "grand bargain" that President Obama proposed during the debt-ceiling standoff. In return for $1 trillion in cuts to social spending and national security, plus another $650 billion in reductions to entitlements like Medicare, Obama asked Republicans to get rid of $1.2 trillion in wasteful tax subsidies. "Democrats weren't talking about raising taxes – they were talking about eliminating tax expenditures, for God's sakes!" says Voinovich. "Many of them should have been eliminated a long time ago." But with so many Republicans committed to Norquist's anti-revenue pledge, Boehner was forced to walk away from the deal.

"Grover's got 'em terrified," says Simpson. "I always tell Republicans, 'Hell, Grover can't kill ya. He can't burn down your house. The only thing he can do to you is defeat you in re-election – and if re-election means more to you than your country, then you shouldn't be in the legislature.'"

The battle over the debt ceiling underscores the GOP's rapid evolution into the Party of the Rich. The budget savings projected from the compromise that Republicans wound up agreeing to – $2.1 trillion – won't even begin to pay for costs incurred by the Bush tax cuts. In their first decade alone, the cuts wound up depriving the Treasury of $2.5 trillion – with 38 percent of the money now going to the richest one percent of Americans. For all their talk of cutting the deficit in recent years, Republicans have spent far more of the public's money to subsidize the wealthy.

Indeed, since Republicans began their tax-cut binge in 1997, they have succeeded in making the rich much richer. While the average income for the bottom 90 percent of taxpayers has remained basically flat over the past 15 years, those in the top 0.01 percent have seen their incomes more than double, to $36 million a year. Translated into wages, that means most Americans have received a raise of $1.50 an hour since the GOP began cutting taxes during the Gingrich era. The most elite sliver of American society, meanwhile, saw their pay soar by $10,000 an hour.

America became a great nation with a prosperous middle class on the strength of a progressive tax code – one that demands the most of those who benefit most from our society. But the Party of the Rich has succeeded in breaking the back of that ideal. Today, says Johnston, "the tax system ceases to be progressive when you get to the very top of the wealthiest one percent." Above that marker, the richer you get, the lower your relative tax burden. "We have moved toward a plutocracy," Warren Buffett warned in a recent interview. "As people have gotten richer and richer, they have been favored by taxation – and have gotten richer to a greater degree."

Far from creating the trickle-down economics promised by Reagan, the policies pursued by the modern Republican Party are gusher up. Under the leadership of Majority Leader Eric Cantor, the House's radicalized GOP caucus is pushing a predatory agenda for a new gilded age. Every move that Republicans make – whether it's to gut consumer protections, roll back environmental regulations, subsidize giant agribusinesses, abolish health care reform or just drill, baby, drill – is consistent with a single overarching agenda: to enrich the nation's wealthiest individuals and corporations, even if it requires borrowing from China, weakening national security, dismantling Medicare and taxing the middle class. 

With the nation still mired in the worst financial crisis since the 1930s, Republicans have categorically rejected the one financial policy with a proven record of putting the country back on a more prosperous footing. "You hear the Republicans say that you don't dare raise taxes in a weak economy," says Stockman. "Ronald Reagan did – three times." Not even the downgrading of America's debt – which placed the world's only superpower on credit par with New Zealand and Belgium – has given GOP leaders cause to reconsider their pro-wealth jihad. In August, as the so-called Supercommittee began its work to complete the debt-ceiling deal by reducing future deficits by another $1.5 trillion, Cantor issued the Party of the Rich's marching orders, insisting that Republicans not buckle under the "tremendous pressure" to hike taxes and instead target spending cuts in "mandatory programs."

The composition of the committee offers little hope that Congress will hold the rich accountable for their share of the deficit burden. While Democrats appointed deal-oriented centrists like Sen. Max Baucus to the committee, Republicans stocked it with anti-revenue hard-liners, including Sens. Jon Kyl and Pat Toomey, who used to run the Club for Growth – an ally of Norquist's Americans for Tax Reform. "Your wallet is safe," Norquist tweeted after the Republican roster was announced.

In an interview with Rolling Stone, Norquist expresses pride that the GOP has been so thoroughly transformed since the days of Reagan. "It's a different Republican Party now," he says. Norquist even goes so far as to liken the kind of Republicans common in Reagan's day – those willing to raise taxes to strengthen the economy – to segregationists. The "modern Republican Party," he says, would no sooner recognize a revenue-raiser than the "modern Democratic Party would recognize George Wallace."

Norquist expresses no discomfort at the moral impact of his project – providing tax favors for the wealthy that are paid for by cutting services to those who truly need them. "I understand greed and envy," Norquist says. "The idea that somebody's making money and you want to steal some of it? That's an interesting idea. But it's not morality. It's certainly not justice."

Such extremist rhetoric – equating taxation with theft – is exactly the kind of talk that dismays old-line Republicans. Many of those who fought for years at the side of Ronald Reagan say they no longer recognize traditional GOP values in the new Republican Party. Fighting for the rich, after all, is not the same as championing the right.

"You can look up my record: On conservatism and taxes I was better than Jesse Helms," says Simpson, the former senator. "But whatever happened to common sense? People are going to look around in five or 10 years and say, 'Whatever happened to the things that made me comfortable? That made our streets and schools good things?' And they'll look, hopefully, at Grover Norquist. I can say to you with deepest sincerity: If this country and this legislature are in thrall to Grover Norquist, we haven't got a prayer."

This story is from the November 24, 2011 issue of Rolling Stone.

Grover Norquist: The Billionaires' Best Friend
The Enablers: Democrats On Board With the Party of the Rich
Must-Read Books on the GOP and the One Percent
Timeline: How the GOP Became the Party of the Rich