On Thursday, the Senate approved, by a vote of 61-39, H.R 1586, providing $26 billion to states to continue funding Medicaid programs and to avoid teacher layoffs. House Speaker Nancy Pelosi announced that she would bring her chamber back into session next week to approve the bill. 

The bill includes revenue-raising provisions to offset the $26 billion cost, including the set of provisions that would clamp down on abuses of the foreign tax credit and which were originally part of the ill-fated "tax extenders" bill (H.R. 4213). (Some other revenue-raising provisions included in the bill are not ideal.)

The foreign tax credit ensures that a U.S. individual or corporation with income generated in a foreign country is not double-taxed on that foreign income. These taxpayers are allowed a credit against their U.S. taxes for any foreign taxes they pay on the foreign income. The problem is that many corporations have found ways to receive foreign tax credits in excess of what would be necessary to avoid double-taxation.

Predictably, business associations representing multinational corporations oppose the provisions to prevent these abuses. A previous report from CTJ addressed their arguments, one of which focused on the provisions' supposed retroactivity (which is addressed by the version of the provisions in H.R. 1586). Another of the multinational corporate community's arguments was that the practices in question are necessary to keep U.S. corporations abroad competitive with foreign companies, which seems like an admission that the foreign tax credit is being used for more than just preventing double-taxation.

In June, the Peter G. Peterson Institute (funded by, and named after, the billionaire who is ostensibly concerned with the federal budget imbalance) released a remarkable report opposing the provisions to prevent abuses of the foreign tax credit. Another CTJ report responds to the Peterson Institute's arguments.

President Obama wants to sign a jobs bill into law. The majority of members of the House and Senate want the same thing. So do the two million out-of-work Americans who will have lost their unemployment benefits by July because of Congress's inaction. Not to mention the millions of Americans who will see public services like education and public safety slashed because their states have to make up shortfalls in Medicaid funding. And then there are the mainstream economists who conclude that some deficit-spending on measures that pump money immediately into the economy and create jobs are entirely justified when unemployment is hovering around ten percent. In the face of all this, a minority of 42 Senators has managed to block legislative action.

Congress has fought a months-long battle over the bill, H.R. 4213, which includes an extension of emergency unemployment benefits and Medicaid funding to states, two spending measures that economist Mark Zandi has argued are the most effective way to stimulate the economy. These measures result in immediate spending, which leads to a boost in consumer demand, and the retention or creation of jobs to produce the goods and services needed to meet that demand.

The bill also includes a collection of provisions that extend short-term tax breaks for business that Congress enacts every year or so. Members of Congress and Hill staffers often call these the "tax extenders." CTJ has criticized the tax extenders for years. But, we support them this year because they are coupled with provisions that would offset their costs by clamping down on unfair tax loopholes. This is a major step forward for Congress. See CTJ's many reports on these loophole-closing provisions.

To their credit, Democratic leaders have tried every conceivable tactic to win over the so-called "moderates" who are blocking the bill.

For example, the House passed legislation three times to completely eliminate the infamous "carried interest" loophole that allows certain wealthy investment fund managers to treat their compensation as capital gains and thus enjoy a lower tax rate. This time, the House scaled back its provision to close this loophole, and Democratic leaders in the Senate scaled the provision back multiple times in their versions of the bill. Eliminating this loophole, which was proposed by the Obama administration, was estimated to raise about $24 billion over a decade. Democratic leaders in the Senate whittled that down to $13.6 billion. The provision is not so much a loophole-closer any more as a loophole-reducer.

Other compromises made to secure votes were even more alarming. The most recent proposal would have taken over $9 billion of unspent funds from the recovery act that are supposed to be used for food stamps to help offset the costs of this bill. This is preposterous. Food stamps are one of the most effective types of stimulus, along with unemployment insurance benefits and fiscal aid to states, according to Mark Zandi.

The country needs the Senate to pass, some way or another, a jobs bill. Sadly, Democrat Ben Nelson and the 41 Republican Senators have the ability, under the Senate's bizarre rules, to stop that from happening.

Federal benefits for the long-term unemployed have been expired for over a week and the Senate still has not approved a bill (H.R. 4213) that would extend these and other vital measures. The bill also includes badly needed Medicaid funding for states and other provisions that would stimulate the economy. (See CTJ's recent reports on this legislation).

Call your Senators and urge them to vote for H.R. 4213.

Use this toll-free number provided by AFSCME to make your call: 888-340-6521

Part of the consternation among some Senators is that the spending provisions in the bill would add (modestly) to the deficit. Economists have explained that short-term deficit-financed spending measures can be used to effectively boost consumer demand, and thus job creation, during a recession, without adding to the long-term budget crisis.

Many of the Senators who have supported tax cuts that created long-term deficits (the kind of deficits that actually do lead away from fiscal sustainability) now oppose this bill out of their concern about "fiscal responsibility." Other Senators are more genuine in their concern about deficits but have wildly misplaced fears about a bill that has little, if anything, to do with our long-term budget situation.

A number of Senators are still concerned about the tax provisions in the bill. It includes an assortment of small tax cuts (mostly for business), which are often called the "tax extenders" by members of Congress and their staffs. While these tax breaks probably accomplish very little, the good news is that their cost would be offset with provisions that close unfair tax loopholes.

It's the Senators' devotion to maintaining these loopholes that is another factor slowing down progress on this bill.

Battle Continues Over "Carried Interest" Loophole for Investment Fund Managers

The most controversial tax provision would clamp down on the "carried interest" loophole, which allows investment fund managers to treat their earned income as capital gains and thus benefit from a much lower income tax rate. Over the past few weeks, some honest investment fund managers have spoken up to tell Congress that their loophole really is unjustified, and it was also reported that two Republican Senators favor closing the loophole.

The draft of the bill proposed by Senate Majority Leader Reid already watered down this reform a great deal (compared to the version that passed the House) by allowing the lower capital gains rate to continue to apply to a larger portion of carried interest. As a new report from the Center on Budget and Policy Priorities explains, the last thing Congress should do is weaken this provision any further.

Senators Defend the "John Edwards" Loophole

Another controversial reform would close the "John Edwards" loophole for "S corporations." Payroll taxes apply to wage income, but not other types of income. So, some people want to disguise their wage income as non-wage investment income to avoid payroll taxes. People who own S corporations have to determine (and tell the IRS) how much of their income is wage income and how much of it is other income, and of course there is a huge incentive to underestimate the amount that is wage income.

John Edwards famously played this trick by saying that his name was an asset and this asset, rather than his work, was generating most of the income of his S corporation.

Some Senators have expressed concern about the effect this reform would have on small businesses. But none have explained coherently why we should allow this type of scheme to continue.

A new report from Citizens for Tax Justice explains that the new jobs and "extenders" bill released by the chairmen of the House and Senate tax-writing committees on Thursday contains several long-overdue provisions to close tax loopholes. The bill (H.R. 4213) takes aims at corporations that shift profits offshore, investment fund managers who use the "carried interest" loophole to pay lower tax rates than their secretaries, and business people who use the "John Edwards" loophole to avoid their Social Security and Medicare taxes.

Many people are more familiar with the important spending provisions in the bill geared to speed up the economic recovery, including an extension of unemployment insurance and COBRA health care benefits for the unemployed, Medicaid funding for states, TANF jobs and emergency funding for states and other measures that will help boost the economy.

The tax loophole-closing provisions are used to offset the costs of extending several small tax breaks. The spending portion is mostly considered emergency spending that does not have to be paid for under Congress's budget procedures because it is temporary and necessary to prevent the economy from drifting back towards recession. (The Center on Budget and Policy Priorities explains why the spending portions of the bill are economically necessary and fiscally sound.)

Call your lawmakers now and urge them to vote in favor of H.R. 4213. Visit the website for Jobs for America Now, which makes it extremely easy for you to make a toll-free call to your lawmakers to support this bill.

The Coalition on Human Needs is circulating a sign-on letter for organizations in support President Obama's proposals to make permanent some of provisions in the recovery act that expand refundable tax credits to help working families.

If you are authorized to sign on behalf of an organization, please sign your group onto this letter to preserve and build upon tax credits for low-income children, working families, and students.  The deadline is Friday, April 30.

Read the letter. 

Sign the letter. 

CHN is seeking local, state, and national organizations to sign this letter, which will be sent to every Representative and Senator in Congress.  Congregations, service providers, labor, civil rights, social action, policy, and advocacy groups are all asked to join the letter. PLEASE SHARE THIS INFORMATION WITH OTHERS IN YOUR STATE.  

Poverty and hardship are rising across the nation.  Tax credits can help families buy what they need, protecting children and boosting the economy too.  The Child Tax Credit, Earned Income Tax Credit, and American Opportunity Tax Credit (for low-income college students) can make a real difference in providing income to millions of families.  But if Congress does not act, these tax credits will expire.  

Why it matters:  A family with two children with a parent working full-time at the minimum wage now receives about $1,750 from the Child Tax Credit.  If the current tax credit law expires, this low-income family will lose $1,500 — and receive only $250.  If the law expires, families with 3 or more children will lose up to $629 in their Earned Income Tax Credit.  And, if the law expires, low-income students will lose up to $1,000 to help with their college expenses.

At a time when unemployment is high, and near depression levels among people with little education, in communities of color, and in some urban and rural areas, this is no time to drastically reduce the help low-income tax credits provide.

The voices of local, state, and national organizations are needed to show Congress very strong support for preserving and improving these tax credits.  Please add your voice by signing this letter — and forward this request to other organizations.

Congress will act on extending tax cuts for the middle class, and must also decide about tax cuts for the rich and for business interests.  Please make sure they remember the millions of low-income families who need help the most — and whose help provides the biggest economic boost.

The 2009 federal income taxes that come due on April 15 have been cut for nearly all working Americans, including Americans at all income levels, by the Recovery Act signed by President
Obama last year. But no one seems to be aware of this. Recent polls indicate that the vast majority of Americans think that the President either raised taxes or left them the same for 2009.

CTJ has new state-specific reports that aim to clear up this widespread misunderstanding. They show that the President cut taxes for working people at all income levels for 2009 and they show who was helped by each individual tax break.

Read the fact sheet and report for your state.

The U.S. Chamber of Commerce recently said that it will not try to repeal the new health care reform law. Has big business seen the light?

No. Actually, the Chamber is still planning on spending $50 million to defeat lawmakers who voted in favor of reform. And they will work to shape regulations and try to repeal parts of the law that are not in the interest of big business, which presumably includes the health insurance industry. Which means it's hard to see what part of the new law the Chamber does NOT want to repeal.

Business groups are already taking aim at particular provisions. For example, the American Benefits Council is complaining that several large corporations must take write-downs ranging from $50 million to $1 billion on their financial statements because the health care reform law repealed a tax break enacted as part of the Medicare prescription drug law in 2003.

The tax break in question should never have been enacted. The prescription drug law subsidizes companies that provide prescription drug coverage for their retirees, ostensibly to prevent those retirees from shifting over to the government program. On top of this subsidy, the companies were also allowed to continue deducting the entire costs of the drug coverage, including the 28 percent subsidy paid by the government.

The health care reform law leaves in place those 28 percent subsidies but repeals the deductions. Telecommunications giant AT&T announced that it would take a $1 billion charge against its profits to reflect the likely future impact of this tax change. Verizon announced a $970 million charge, and other companies, including Exelon, 3M, Caterpillar and John Deere, announced charges in the millions or tens of millions.

But this is only because they're losing a tax break that was never really justified in the first place. The point of deductions is that they account for expenses that companies pay and that reduce their bottom line, i.e., reduce their profits, because profit is what is ultimately taxed. It makes no sense for a company to deduct a subsidy from the government because it does not reflect an expense paid by the company itself.

It seems that Congress really wanted to give these companies a larger subsidy than just the 28 percent, but decided that it would be easier to do so through the tax code. Whether or not larger subsidies were justified, it's generally poor policy to provide them through the tax code because it creates more tax complexity (causing corporations to pour more resources into figuring out how to lower their tax liability) and is less transparent. At least direct spending on subsidies for corporations show up as "costs" each year in government budget documents and are debated extensively by lawmakers. Corporate subsidies provided through the tax code, however, rarely receive this much attention.

It's also worth pointing out that the charges that the companies are announcing may sound like big numbers, but they're actually costs to the companies over many, many years. They reflect the costs of paying full taxes on those subsidies for retiree drug coverage over the course of the retirees' lives, which will be decades. They do NOT represent costs that they must pay this year.

Also, to the extent that the health care reform law provides any benefits to these companies, those are not going to show up on their financial statements today, which is another reason that they are a poor measure of how reform will affect them. Health and Human Services Secretary Kathleen Sebelius recently said that company executives she has communicated with "admit at the outset that what they will give up in terms of closing that kind of a loophole on tax benefits is well overcome by the kind of savings they're looking at with not only incentives for businesses to keep health insurance for their employees, but the kind of wellness and prevention efforts to lower costs in the long run."

Finally, it's entertaining to see conservatives tie themselves in knots as they try to defend the massive subsidies provided in the Medicare prescription drug law (enacted under President Bush) despite their supposedly "free market" philosophy. The Wall Street Journal, presumably, does not support government subsidies, but their opposition seems to melt when some part of the subsidy takes the form of a tax break.

The paper essentially argues that the subsidy and the tax break are justified because they actually save the government money by keeping retirees off of the Medicare prescription drug program. It may or may not be true that the 28 percent subsidy ends up saving the government money, but there is no reason to think that the double deduction, on top of that subsidy, does so, too. On the contrary, the Joint Committee on Taxation estimates that scrapping this unjustified tax break will save the government $4.5 billion from fiscal 2013 through fiscal 2019.

This week, the United States Congress and President Obama gave us another reason to be proud that we are Americans. On Tuesday, the President signed into law a major health care overhaul. Yesterday, the House and Senate both approved a second bill that completes the job.

Events like this — the creation of Social Security, the passage of the Civil Rights Act, the first manned visit to the moon, comprehensive health care reform — don't happen very often. We feel privileged and awed to belong to a generation that has witnessed this sort of change.

There is work ahead to ensure that the health care reform is implemented properly and improved upon. And the reform itself must be protected from opponents who already call for its repeal.

But in the years to come, we will look back and remember this as the time when our health care system stopped being a black spot on the nation's conscience and started to grow into another reason to love this country. 

This legislation to extend health insurance to 32 million Americans and protect Americans who already have insurance from the industry's abuses was nearly thwarted by several disputes over issues both real and imaginary, and some of these disputes were over taxes.
 
For thirty years, Citizens for Tax Justice has argued that the Americans who benefit the most from the educated workforce, infrastructure, stability and other public goods provided by government are those Americans who have made fortunes in this dynamic country. It is entirely reasonable that the richest Americans pay taxes at higher effective rates, particularly to finance concerted action to resolve the problems that threaten to unravel our society.

Over the last several years, lawmakers have moved dangerously far from that ideal. The tax cuts enacted during the previous administration went disproportionately to the wealthy investor class. The massive bailout for financial institutions enacted under the previous administration only seemed to shovel more benefits to the same wealthy investor class.

When it came time for Congress to consider how to finance health care reform, progressives demanded that the wealthy pay their fair share. Congress answered that call by reforming the Medicare tax, the one significant tax that we already have to pay for health care. It will be transformed from a regressive tax to a progressive tax that no longer exempts the income of wealthy investors.

The new health care legislation has many imperfections, and yet it undeniably is a vast improvement over the status quo. Tax policy is not the centerpiece of this reform, but disputes over tax policy could have sunk it altogether.

We applaud the House and Senate for working through these disputes and putting the public interest above special interests.

We hope that the lawmakers who supported reform like the way success feels. We hope that members of Congress realize that they're good at making history, and they should do it more often.

Read about How Health Care Was Reformed (and Financed Partly with a Progressive Tax)

The House and Senate yesterday approved the final piece of the historic health care reform that will extend health insurance to 32 million Americans currently uninsured and prevent health insurers from discriminating against people with pre-existing conditions and capping benefits when people are sick. The legislation will also make it easier for small businesses to provide affordable health coverage without locking workers into employer-provided plans that they will lose if they switch jobs.

The bill passed by both chambers yesterday was the smaller "corrections" bill that made several fixes to the larger bill that the House approved on Sunday and that the Senate approved on Christmas Eve. The President signed the larger bill into law on Tuesday.

The corrections bill increased the number of Americans receiving subsidies to make health care affordable and removed some "sweetheart" deals that individual Senators demanded in the larger bill and later came to regret. The corrections bill also scaled back an excise tax on high-cost employer-provided health insurance while adding an expansion of the Medicare tax.

The debate over how to finance health care reform went through several tumultuous stages over the past year. From the start, lawmakers wanted to finance the reform with savings from within the health care system as much as possible, but it was clear that other revenue sources would be needed.This was one of the key sticking points for many lawmakers.

Progressive Action on Revenue for Health Care Reform

In May of last year, CTJ first presented some ideas about how Congress could finance health care reform in a progressive way. All changes made to the tax code in the previous eight years under President George W. Bush had disproportionately benefited the wealthiest Americans. The bailout for the financial industry seemed to reward Wall Street for its mismanagement, at the expense of ordinary taxpayers. It was time for the wealthy investor class to pay their fair share to help fix America's broken health care system.

We worked for several months with a broad coalition of policy advocates, think-tanks, faith-based groups and labor unions to bring progressive financing options to the attention of members of Congress. State-based groups released reports with state-specific figures while national organizations educated lawmakers about progressive financing options and dispelled the myths that were manufactured to block any increase in revenues.

One of the progressive revenue measures that we championed would reform the Medicare tax so that it is more progressive and no longer exempts investment income.

CTJ worked to significantly modify another revenue measure, the excise tax on high-cost employer-provided health insurance plans. We pointed out that this tax, in the form originally proposed, would affect more middle-income taxpayers than most people realized and would actually make the tax system less progressive overall.

Eventually, the excise tax on high-cost employer-provided plans was scaled back to a reasonable level and Congress adopted the proposal to reform the Medicare tax. But the path to this success was not an easy one.

Attempts at Bipartisanship

It's difficult to remember this now, but a year ago lawmakers and their aides, particularly in the Senate, seemed to honestly believe that a bipartisan agreement on health care reform was possible if enough compromises were made. Democrats were negotiating with Republicans. And not just the Republicans that are often considered "moderates" like Olympia Snowe (R-ME) and Chuck Grassley (R-IA), the ranking Republican on the Senate Finance Committee. Democrats even negotiated with Mike Enzi (R-WY), an unabashed conservative and the ranking Republican on another relevant committee.

It did not work. After being heavily involved in health care negotiations, Senator Grassley abruptly changed his tune. He held up a chart on the Senate floor one day with a children's book drawing of a dragon to illustrate the "Debt and Deficit Dragon," and then held up another chart illustrating a character he called "Sur Taxalot." He then rambled on about how "the surtax [included in the House health bill] is a large, heavy, painful weapon, and lethal to America's job engine, the goose that laid the golden egg," and said that Sur Taxalot "does nothing to slow the dragon's exponential growth."

Then Senator Enzi, during a committee markup, offered countless amendments that essentially contradicted the most fundamental goals of reform.

Meanwhile, the grassroots base of the conservative movement made it clear that they could not be appeased by anything other than a continuation of the status quo. Right-wing organizations such as "FreedomWorks," "Americans for Prosperity," and "Conservatives for Patients Rights," organized a campaign to send hecklers to town hall meetings held by any member of Congress who might possibly vote in favor of any health care reform bill.

The anti-reform protesters, whose main goal seemed to be shutting down any public discussion on the topic of reform, even admitted in some cases that they were not constituents of the lawmakers they were heckling. In other cases, those town hall protesters who claimed to be merely “just a mom from a few blocks away” and “not affiliated with any political party” turned out to be Republican party officials.

Congress Moves Forward and then Stops

By the fall, the battle lines were clearly drawn. On September 9, the President made a special address to Congress and told lawmakers that his health care objectives could be accomplished for less money than was spent on the Iraq and Afghanistan wars and less money than was lost due to the Bush tax cuts for the wealthy.

A day earlier, CTJ had released figures showing that the Bush tax cuts actually cost two and a half times as much as the House Democrats' health care plan. The figures showed that the President was right. The Bush tax cuts for the richest 5 percent alone cost more than the $900 billion price tag that President Obama put on health reform.

In early November, the House approved a health reform bill that included a surcharge on adjusted gross income (AGI) above $1 million for married couples and AGI over $500,000 for unmarried taxpayers. Only one Republican in the House voted for the bill.

On Christmas Eve, the Senate passed its own health care bill, and this one included the version of the excise tax on high-cost employer-provided health plans that CTJ found problematic. In addition to having less progressive revenue provisions, the Senate bill was also less bold in terms of how it reformed health care. For example, unlike the House bill, the Senate bill did not have a "public option," a government-sponsored health plan that could compete with private insurers.

The bizarre rules of the Senate usually require 60 out of 100 votes to pass legislation. Since Democrats had exactly 60 seats in the Senate, every member of the caucus had to vote for the bill for it to pass.

The House and Senate seemed to be on their way, with the help of the White House, to working out the differences between the two bills. The public option was, unfortunately, lost. The high-income surcharge in the House-passed bill was also out. But the excise tax on employer-provided health plans would be scaled back to a reasonable level and the Medicare tax reform would be included.

Then in January the Democrats lost their 60th vote in the Senate when Scott Brown won the Massachusetts Senate seat formerly held by the late Ted Kennedy.

Pro-Reform Lawmakers Stop Panicking and Start Making History

After a period of hysteria among the members of Congress who supported health care reform, a strategy was devised to finish the job even though the Senate now had only 59 members who supported reform.

First the House would pass the Senate bill, which the President would sign into law. To complete this step, the House passed the Senate bill on Sunday while anti-reform protesters swarmed the Capitol in an attempt to intimidate and harass lawmakers. The President signed this bill into law on Tuesday.

Then Congress needed to pass the various amendments that would make the health reform look like the compromise that the House and Senate were moving towards before the Senate lost its 60th vote for reform. These amendments would all be included in a second bill that the Senate would pass through the "budget reconciliation" process. Reconciliation is simply a procedure to allow the Senate to pass legislation that has some impact on the federal budget picture with a simple majority of votes.

Despite their howls of protest against this procedure, the Republicans had actually used it to enact the Bush tax cuts (which actually worsened the fiscal outlook by running up huge deficits) and several other measures.

The "corrections" bill was passed by the Senate on Thursday using the budget reconciliation process and then was passed by the House later that evening. After this long, tortured journey, the dream that has eluded progressive Americans for a century is now a reality.

The Medicare tax reform proposal included in the President's proposal several weeks ago was slightly modified in the compromise health bill that was released by Democratic leaders in Congress yesterday.

Tax policy is an area in which two people can look at the exact same set of facts and come to exactly opposite conclusions. Take the American Enterprise Institute's latest assault on the Medicare tax reform that President Obama has included in his health care reform plan.

The President has adopted an idea that CTJ has championed for months, to change the Medicare tax so that it no longer exempts investment income and to make the tax more progressive. The President would raise the Medicare tax rate for earnings exceeding $200,000 for unmarried taxpayers and $250,000 for married taxpayers, and he would apply the existing 2.9 percent Medicare tax to investment income for those with adjusted gross income (AGI) above $200,000/$250,000.

CTJ's recent report on this proposal found that only 2.3 percent of taxpayers would be affected by this tax in 2014. (The tax would go into effect in 2013).

But that's no comfort to Alan D. Viard and Amy Roden, who argue against this tax reform in AEI's online journal. They write:

"Of course, the high-income cutoffs mean that the new Medicare tax wouldn’t apply to most American savers. But the savers hit by the tax are precisely the ones who provide the largest volume of funds to finance investment in our economy. In 2007, tax returns from households with incomes greater than $200,000 reported 47 percent of all interest income, 60 percent of all dividends, and a staggering 84 percent of all net capital gains. We can’t afford to discourage this group from investing in America’s future."

So they fully agree with us that the sort of income they don't want Congress to tax predominately flows to the rich.

As a judge would say, the facts in this case are not in dispute.

What is in dispute is whether we have to avoid taxing the types of income that mostly flow to the wealthy in order to keep our economy running smoothly. AEI says yes, we need to have preferential rates in some taxes for these types of incomes (like the capital gains and dividends break in the income tax) and wholesale exemptions in other taxes (like the Medicare tax).   

We disagree. We have seen no evidence that the economy functions better when taxes on investment income are slashed or eliminated. Even when it comes to capital gains, which is where libertarians think they have their strongest case, there is no evidence that tax cuts have enhanced economic efficiency. Capital gains income certainly has fluctuated as a result of the ups and downs in the overall economy, and libertarians often attribute the upswings to tax cuts for capital gains. Sadly for them, capital gains realizations have, throughout the Bush years and today, been lower than they were at the end of the Clinton years, when the top rate for capital gains was higher.

Taxing investment income the same way that income from work is taxed is only fair. The President's Medicare tax reform is a step in the right direction. It would end the current exemption in the Medicare tax for investment income to help finance a health care reform that really will help our economy to function more efficiently.

A new report from Citizens for Tax Justice examines the Medicare tax reform included in the health care plan recently put forward by President Obama. The report concludes that this reform would affect only 2.3 percent of taxpayers in 2014. The richest one percent would pay about 84 percent of the resulting tax increase, and the richest five percent would pay virtually all of the tax increase.

The report also discusses one flaw in the President's proposal: It would preserve what is often called the "John Edwards loophole," which is a scheme that some wealthy owners of "S corporations" use to avoid the Medicare tax.

Read the report.

On Monday, the White House released its health care reform proposal, bringing together the elements of the health bills already approved by the House and Senate. The proposal is the result of months of negotiations between Democratic leaders in the House and Senate and is an attempt by the President to nudge the chambers along towards agreement.

One of the disagreements between the House and Senate has been over how to finance the reform. Both chambers would rely partly on savings from within existing government health programs and partly on new revenue measures. The largest revenue-raiser in the House version is a high-income surcharge on millionaires, while the largest revenue-raiser in the Senate version is an excise tax of 40 percent on insurance companies for each high-cost benefits plan they provide.

Analyses from CTJ concluded that the House surcharge is very progressive and, despite claims to the contrary, would have no noticeable impact on small businesses. The Senate's excise tax, on the other hand, would impose costs that would be passed on to many middle-income families, and would make the overall tax system less progressive than it is now.

Before the Senate approved its bill on Christmas Eve, the excise tax was softened somewhat, and another revenue-raiser was added: an increase in the Medicare tax by 0.9 percent for wages in excess of $200,000 for unmarried taxpayers and $250,000 for married couples. While this made the bill more progressive overall, there were still rumblings, particularly in the House, about the potential impact of the excise tax for high-cost health insurance plans.

President Obama's Proposal

The President's proposal has resolved this issue to a significant degree by further softening the excise tax for high-cost health insurance and adding another element to the Medicare tax. The Medicare tax would now apply to investment income, which is currently exempt.

In other words, the Medicare tax would be expanded in two ways. First, an additional 0.9 percent would apply to wages in excess of $200,000 for unmarried taxpayers and $250,000 for married couples. Second, the existing 2.9 percent Medicare tax would apply to investment income for the first time (but only for taxpayers with adjusted gross income above $200,000/$250,000).

Citizens for Tax Justice is currently working to produce estimates of the impact of this change, but given that only the richest two percent have incomes over the $200,000/$250,000 threshold, this is obviously a tax increase that does not affect low- or middle-income people at all.

Why the Medicare Tax Needs to Be Reformed

Starting in May of last year, Citizens for Tax Justice worked with a broad coalition of policy advocates, think-tanks, faith-based groups and labor unions to bring progressive financing options like this to the attention of members of Congress. Early on, CTJ pointed out that while lawmakers scrambled to find revenue to finance health care reform, they were ignoring a huge hole in the one large tax we already have to finance health care.

The Medicare payroll tax is a 2.9 percent tax on earnings, half of which is nominally paid by employers while the other half is nominally paid by workers. (Economists agree that workers ultimately pay the employer half as well, in the form of reduced wages or benefits.) We noted that this existing tax for health care completely exempts people who live off of investment income.

Imagine someone who does not have to work because he or she collects capital gains, stock dividends, interest, rents, royalties, or others type of investment income. This individual does not have to pay any payroll tax (Medicare tax or Social Security tax) on this income. Eligibility for Medicare is still possible upon reaching age 65 as long as he or she worked (and thus paid the Medicare payroll tax on earnings) for about ten years at some point in the past.

By the time she reaches age 65, even Paris Hilton may have appeared on television and in other venues enough to have worked a full ten years (and thus be eligible for Medicare). But something tells us that there will be a whole lot of years when she did not work and didn't have to pay a cent towards Medicare. Under the President's proposal, everyone will contribute towards the health of the nation, and the tax system will be fairer overall.

A new report from Citizens for Tax Justice explores the tax proposals included in the federal budget outline that President Obama submitted to Congress on February 1. Like the budget he submitted last year, it is a vast improvement over the policies of the Bush years and continues to outline a progressive reform agenda.

But, also similar to last year, the President’s budget could be greatly improved with more aggressive policies to raise revenue. Over the coming decade, the President proposes to cut taxes by $3.5 trillion. We include in this figure the cost of extending most of the Bush tax cuts and relief from the Alternative Minimum Tax (AMT) as well as additional tax cuts that President Obama proposes.

His budget would offset a portion of this cost with provisions that would raise $760 billion over a decade by limiting the benefits of itemized deductions for the wealthy, reforming the U.S. international tax system and enacting other reforms and loophole-closing measures.

The report concludes that the federal government should collect at least as much revenue as the President proposes in order to avoid larger budget deficits. There are two bare minimum requirements for Congress to achieve this. First, Congress must not extend any more of the Bush tax cuts than President Obama proposes to extend. Second, Congress must raise at least as much revenue as President Obama has proposed ($760 billion over ten years) through loophole-closers and new revenue measures.

Read the full report.