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.

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.

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.

At the start of World War II, the British government designed a poster with the words "Keep Calm and Carry On," to motivate the public during trying times. Perhaps they'd be getting this poster out again if a minority of their non-representational House of Lords found a way to halt any and all legislation during a health care crisis. Fortunately for the clear-thinking Brits, they decided long-ago that having a simple majority of elected legislators approve a bill was a sensible and democratic way to legislate.

On our side of the pond, Senate Republicans voted in lockstep against the health care bill approved by the chamber on Christmas Eve. It will be difficult to pass another health care bill in the Senate. Under the chamber's current rules, the Republicans only need 41 votes to filibuster a bill, and they appear to have obtained that 41st vote with the election of Scott Brown as the new U.S. Senator from Massachusetts.

The House, which had already passed a bill that most advocates find superior, may not have the votes to pass the Senate bill as it is, according to Speaker Nancy Pelosi. Of course, that's presumably because the Senate bill does not do as much to make health care affordable and because the Senate's main revenue-raiser is an excise tax on insurance companies offering high-cost benefit plans, which is less progressive than the high-income surcharge in the House bill.

There is a simple way around this logjam. The House and Senate seemed to be on the brink of agreeing to a final health care bill. Whatever changes would be needed to make the Senate bill look more like that final agreement can probably be passed through the "budget reconciliation" process.

That's the process that the Senate uses from time to time to pass legislation by majority vote (meaning 51 votes are needed instead of 60). One would think that all legislation would be passed this way. The reconciliation process was originally created in the 1970s to fast-track bills that would help balance the budget, but since then has been used for all sorts of legislation. (President Bush and the Republican-led Congress used it to cut taxes and increase the budget deficit.)

Reconciliation can only be used to pass legislation that has a quantifiable budgetary impact, and many parts of health care reform might not meet that standard. But Congress does not have to pass an entire health care bill using reconciliation. It could just use reconciliation to pass those changes that are needed to make the Senate bill look more like the final bill that the Democratic leadership has been negotiating. And these changes, according to our sources, would meet the standard of having a budgetary impact.

So, the Senate could pass a reconciliation bill to improve the original bill they passed on Christmas Eve, and then the House could pass the original Senate bill and the reconciliation bill almost simultaneously.

Some Senators have historically been hostile to reconciliation, claiming that it's unfair to change the rules to pass legislation. This argument is incoherent and bizarre. We are quite confident that passing a law with a majority vote in the House, a majority vote in the Senate, and the President's signature (that's approval from three separately elected institutions) is a sufficiently democratic process that no one should feel that their rights have been trampled.

The Senate Budget Committee chairman, Kent Conrad, a traditional foe of reconciliation, seems to agree with us now.

The path ahead is clear. Keep calm and carry on.

In May of last year, Citizens for Tax Justice proposed several progressive options to raise revenue to finance health care reform. Our favorite idea was to close a gap in the one big tax for health care that we already have, the Medicare payroll tax. 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, S corporation income or some other 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.

CTJ's Proposal to Reform the Medicare Tax

Our initial proposal was to make the individual portion of the Medicare tax (the 1.45 percent nominally paid by workers) apply to investment income as well as wages, and then introduce a second, higher rate for singles with income over $200,000 and couples with income over $250,000. In other words, the Medicare tax would become a health care tax that would apply to all income, and the portion paid by individuals would have two rates, 1.45 percent and 2.5 percent. Employers would still only pay 1.45 percent on earnings of their employees. And we also proposed an exemption of $50,000 for seniors ($100,000 for married seniors).

CTJ worked for several months 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. 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.

Lawmakers Seek Medicare Tax Reform

Some version of the Medicare tax reform proposal might end up in the final health care reform legislation.

As lawmakers became interested in different variations of this proposal, we analyzed several versions of it, one of which was included in an amendment filed by Senator Debbie Stabenow (D-MI) during a committee markup. The provision that eventually becomes law might be similar to our original proposal. The health care bill approved by the Senate on Christmas Eve included a provision to increase the individual portion of the Medicare payroll tax on earnings from 1.45 percent to 2.35 percent for those above the $200,000/$250,000 threshold. This was estimated to raise about $87 billion over the first ten years after enactment.

Now there is talk that the final bill might include that and also apply the individual portion of the Medicare tax (apparently at a rate of 2.35 percent) to investment income for those taxpayers above the $200,000/$250,000 threshold. The current incarnation entirely exempts all pension income and Social Security benefits.

One tax expert mistakenly told the LA Times that this proposal "could hit some of the elderly who are relying on savings to get by." If the expansion of the Medicare tax only applies (as seems likely) to incomes over $200,000 for singles and $250,000 for married couples, we would hardly call that a tax increase on people who are just "getting by." Only around 2.1 percent of all taxpayers will have adjusted gross income (AGI) above that threshold next year.

What Congress Might Do with the Revenue

The additional revenue that results from extending the Medicare tax to investment income could be used to address two complaints that many Democrats in the House have about the bill approved by the Senate. The first is that the Senate bill's subsidies are not sufficient to make health care affordable for low-income people, as explained in a recent report from the Center on Budget and Policy Priorities.

The second complaint against the Senate bill is that it relies too much on an excise tax on health insurance companies offering high-cost benefit plans. As explained in a report from CTJ, this excise tax is not particularly progressive. Health insurance plans are often high-cost just because a company's workforce is older, more female, or engaged in a riskier activity like mining.

The best case scenario is that many people, including a lot of middle-income people, who currently have high-cost plans will see a portion of those health benefits replaced by wages. That's not as good a deal as you might think, since wages are subject to both the income tax and the payroll tax, while health care benefits are currently tax-free.

And the usual criticism of tax deductions -- that they are worth more to a rich person in the 35 percent bracket than a middle-class person in the 25 percent bracket -- does not apply as much in this case. As the CTJ report explains, if tax-free compensation (like employer-provided health care) is turned into taxable income, rich folks get a break on one of the taxes that would otherwise apply. Taxable earnings are subject to the income tax, the Medicare payroll tax and the Social Security payroll tax, but for the last one there's a limit on how much wages are subject to it.

As of this writing, Congressional leaders are trying to finish up lengthy talks with the President at the White House, and there seems to be an agreement to limit the excise tax on high-cost health insurance plans.

The Faux-Populist CTJ Called "The False Messiah" in 1994

The Washington Post has been embroiled in a scandal concerning its publication on December 31 of a story written by the Fiscal Times, a news organization funded by Peter G. Peterson, the out-spoken and obscenely wealthy deficit-hawk. Peterson, of course, happens to favor a particular approach to deficit-reduction, including cuts to Social Security and Medicare and a commission that can make it easier for Congress to enact such cuts without much debate. Policy analysts and commentators have slammed the Washington Post and Peterson, who seems to favor tax cuts for investment income despite his obsession with budget deficits.

We cannot resist pointing out that CTJ complained about Peterson long before it became fashionable. Read CTJ director Robert McIntyre's take-down of Peterson, written in 1994, and the detailed back-and-forth between the two that follows.

Peterson, a cabinet secretary under President Nixon, has written books and given talks for years about taming budget deficits. His audience probably shrank during the fiscally responsible era at the end of the Clinton administration. But of course, deficits came back under President George W. Bush. And now, the man CTJ called a "false messiah" seems to be enjoying a second coming.

The Ill-Advised Budget Commission Idea

The headline of the Washington Post story in question is "Support Grows for Tackling Nation's Debt." The proposal described in the article was put forth by the chairman and ranking member of the Senate Budget Committee, Kent Conrad (D-ND) and Judd Gregg (R-NH), to create a commission that would make recommendations on how to tackle the budget deficit and put those recommendations on a fast-track to enactment with no committee hearings and no amendments.

Sources tell us that, contrary to the article's headline, there is little support in Congress for this particular commission proposal. And with good reason. One budget expert recently explained to a group of advocates that it only makes sense to create such a commission when Congress has made a decision but can't settle on the details. But it makes no sense to say a commission is needed to settle fundamental questions like how much money the government should spend and how revenue should be collected. Those are questions that elected lawmakers should be able to decide.

For example, when Congress decided it needed to close some military bases several years ago, it faced the obvious problem that no Senator wanted to recommend the closure of a base in his or her state. So Congress reasonably decided to create a commission to study the matter and draw up a list, and then the House and Senate would simply vote up or down, with no committee hearings or amendments.

But it's a far different situation when Congress has not decided some very fundamental issues and is trying to send the controversy to someone else. How much money should the government spend? What programs need to be cut to fit within a budget? Should Social Security and Medicare be cut? How? How much should we collect in taxes? What sorts of taxes should we have? These seem, quite frankly, like the sort of questions that lawmakers are elected to deal with.

The Washington Post Scandal

But none of this is what made the Washington Post story scandalous. The scandal is that the Post published the story as a piece of objective reporting even though it was written by an organization that almost certainly has an ideological bent on the subject matter. The article quotes the Concord Coalition without noting that it, too, receives funding from the foundation Peterson established in 2008 to spread his message. And it cites a report from the Peterson-Pew Commission on Budget Reform, which is partially named after the same Peter G. Peterson, although this is not noted.

The Post's Ombudsman, Andrew Alexander, laid out the evidence against his paper but concluded nonetheless that the Post was not publishing propaganda as news. But no matter how you look at it, the degree to which certain ideas make their way into the public dialogue seems to have a lot more to do with who has a fortune to spend than the soundness of the ideas themselves.

The U.S. House of Representatives adjourned for the year on Wednesday while the Senate hustles to finish legislation on health care. As of this writing, an array of major tax issues are still to be resolved in the next several days or when Congress returns in 2010:

Health Care Reform

On November 7, the House passed its health care bill, (H.R. 3962), which includes a public option. The largest revenue-raising provision in the House health bill is a surcharge of 5.4 percent on adjusted gross incomes over $1 million (or over $500,000 for unmarried individuals).

(See CTJ's previous analysis and state-by-state estimates of the surcharge in the House health care bill.)

The Senate is still working to pass a health care bill, and some reports claim that the chamber could be working on Christmas Eve to accomplish it. While there is a clear majority of Senators willing to support a public option, the rules allowing 41 Senators to filibuster legislation have encouraged a few conservative Democrats to join Republicans in blocking a public option.

While some details remain to be worked out, a majority of Senators seems to have settled on certain revenue-raising provisions to help pay for health care reform. The largest revenue-raiser in the still-developing Senate bill is an excise tax on high-cost health insurance plans. This excise tax is controversial because many analysts conclude that these plans are not particularly generous in the benefits they provide and they are not necessarily enjoyed by high-income workers. Rather, the high costs are often the result of insurers charging more to cover a work force that is older than average or that has high health risks.

(See CTJ's previous analysis concluding that the Senate's proposed excise tax on high-cost health insurance is less progressive than the surcharge in the House health care bill.)

One revenue-raiser in the Senate proposal that is progressive is an increase in the Medicare payroll tax rate on earnings over $250,000 (or over $200,000 for an unmarried individual).

While this tax increase would only affect those who can afford to pay more, an even better proposal would reform the Medicare tax so that it no longer exempts investment income. This idea was included in an amendment that was filed by Senator Debbie Stabenow during the Finance Committee markup, but was not acted on. Such an amendment may be offered when health care reform is debated on the Senate floor.

Job Creation

On December 8, President Obama announced several proposals to create jobs. His best ideas involve direct spending by the federal government (including extending aid to unemployed and low-income people and aid to state and local governments, among other things). His worst ideas involve tax cuts (including eliminating capital gains taxes on small business investment and providing a tax credit for payroll expansion).

(See CTJ's previous discussion of President Obama's job creation proposals and ways to stimulate the economy.)

The House approved a $154 billion jobs bill, as part of a regular appropriations bill (H.R. 2847), before adjourning this week, and thankfully, it focuses on direct spending. One of the few tax cuts included is a provision to remove the earnings requirement (currently set at $3,000) for the refundable portion of the Child Tax Credit, ensuring that low-income families with children can benefit from it. The Senate is not expected to take up jobs legislation until sometime next year.

Estate Tax

The tax cut legislation enacted by President Bush and his allies in Congress in 2001 set the estate tax to gradually shrink until disappearing altogether in 2010. But, like all the Bush tax cuts, this estate tax cut expires at the end of 2010, meaning the estate tax will reappear in 2011 at the pre-Bush levels if Congress simply does nothing.

Families who have several million dollars to leave to the next generation have benefited the most from the infrastructure, educated workforce, stability and other public goods that taxes make possible. So it's entirely reasonable that these families pay a tax on the transfer of their enormous estates from one generation to the next, particularly since the majority of the value in these estates is capital gains income that has never been taxed.

One might be tempted to think that allowing the estate tax to disappear would be fine if it reappears at the pre-Bush levels in 2010. Unfortunately, the one-year repeal of the estate tax could tempt some lawmakers to make that repeal permanent, or might tempt them to allow only a very scaled back version of the estate tax to reappear in 2011.

So the House of Representatives approved a compromise that would make permanent the estate tax rules in effect in 2009. This would partially preserve the Bush cut in the estate tax, but prevent the tax from disappearing in 2010.

(See CTJ's previous analysis of the estate tax legislation, along with state-by-state figures showing how few estates are actually subject to the tax.)

Key Democratic Senators indicated that they did not want to make permanent the 2009 rules because -- incredibly -- they were interested in reducing the estate tax even more. Democratic leaders in the Senate attempted but failed to get agreement in the chamber to pass a one-year extension of the 2009 rules, which would prevent the estate tax from disappearing in 2010 and allow Congress to debate a permanent solution as part of the broader tax debate that must happen before the Bush tax cuts expire at the end of next year.

Pathetically, the Senate failed last week to prevent the one-year repeal, which they had known was coming ever since the Bush cut in the estate tax was enacted back in 2001. Democratic leaders in the Senate say they will enact the one-year extension of the 2009 estate tax rules retroactively in 2010. While retroactive tax increases may not be the ideal way to do things, this approach should not cause any problems since tax planners have known for years that Congress was likely to act to prevent this one-year disappearance of the estate tax.

Corporate Tax Breaks (aka "Tax Extenders")

On December 9, the House approved H.R. 4213, which would extend a series of tax cuts (mostly breaks for business) but would offset the costs by closing the infamous "carried interest" loophole for buyout fund managers and by cracking down on offshore tax cheats.

The bill would also require the Joint Committee on Taxation (JCT) to issue reports evaluating these tax cuts before the end of next year, when Congress is likely to act on them again.

CTJ joined the AFL-CIO, SEIU, AFSCME and eight national non-profits in signing a letter in support of H.R. 4213 for these reasons.

The provisions extending the tax cuts (often called the "tax extenders") are enacted by Congress every year or so. CTJ and other analysts have often criticized the tax extenders as corporate pork routed through the tax code.

But H.R. 4213 is a major step in the right direction for the reasons spelled out in the letter to Congress.

(See our previous article on H.R. 4213 explaining the points made in the letter.)

Democratic leaders in the Senate want to pass the tax extenders retroactively early in 2010. One problem is that the chairman of the Senate tax-writing committee, Max Baucus (D-MT) believes that the carried interest issue is “best dealt with in the context of an overall tax reform,” according to a spokesman. As we've explained before, this is an all-purpose excuse for legislators who want to avoid closing even the most unfair and outrageous loopholes.

On Wednesday night, Senate Majority Leader Harry Reid (D-NV) released his health care bill, which is a combination of the health bills approved by the Senate Finance Committee and the Senate Health, Education Labor and Pensions (HELP) Committee. The excise tax on high-cost insurance plans is scaled back a bit from the version included in the Finance bill, probably because Senator Reid heard from health experts and unions who pointed out that plans have high costs sometimes simply because they serve an older workforce or a workforce with more health risks.

One revenue-raising provision that Reid included that had not been in any health bill so far is his proposal to increase the Medicare payroll tax rate (from 1.45 percent to 1.95 percent) for those earning over $200,000, or over $250,000 for married couples. This provision may be inspired by a proposal Citizens for Tax Justice made in May to reform the Medicare tax. CTJ joined forces over the summer with dozens of non-profits, faith-based groups, unions and other members of a coalition called Rebuild and Renew America Now (RRAN) to promote this and other progressive revenue options to help finance health care reform. 

But CTJ's proposal would reform the Medicare tax by raising the rate for those with adjusted gross income above $200,000/$250,000 and by expanding the tax so that it applies to investment income as well as wages. The second part of that proposal -- changing the Medicare tax so that it no longer exempts investment income -- is the more significant reform of the two, and we hope it will be added to the health bill as a floor amendment.

To understand why the Medicare tax should apply to investment income, it helps to remember that there are some Americans, most of whom are extremely wealthy, who live entirely off of their investments. A person who lives off his or her investments pays no Medicare taxes. But they can still be eligible for Medicare benefits as long as they worked about ten years (usually) and thus paid Medicare taxes during that time.

Almost all Americans have collected a paycheck for at least ten years before they retire, but some are lucky enough to drop out of the workforce before retirement and collect stock dividends, capital gains, interest and profits from businesses they own a stake in. It's likely that even Paris Hilton will do enough television work and other types of work to become eligible for Medicare -- but she could also spend a whole lot of years not working and not paying the Medicare tax.

Some economists have pointed out that increasing the Medicare tax on wages alone, as Senator Reid proposes, is a problematic idea because it encourages the wealthy to find ways to convert their work income into investment income. This fear may be a little overblown, since Reid's proposal is a mere 0.5 percent tax increase on wages. And the methods that can be used to convert wages into investment income are somewhat limited. (Compensation in the form of stock or stock options is already subject to the Medicare tax, for example.)

But it's true that Senator Reid's proposal does nothing to address the disadvantage our tax system creates for income from work relative to income from wealth. Income from wealth is not subject to the Medicare or Social Security payroll taxes and some income from wealth (like capital gains and stock dividends) is subject to special, low rates in the regular income tax that have no justification.

Expanding the part of the Medicare tax that is paid by individuals (which is currently the 1.45 percent payroll tax paid by employees) to investment income would reduce this unfairness while providing more revenue for health care. And it would do so by closing a gap in the one major health care tax we already have.