Congressman John Delaney, a Democrat from Maryland, has proposed to allow American corporations to bring a limited amount of offshore profits back to the U.S. (to “repatriate” these profits) without paying the U.S. corporate tax that would normally be due. This type of tax amnesty for repatriated offshore profits is euphemistically called a “repatriation holiday” by its supporters.
The Congressional Research Service has found that a similar proposal enacted in 2004 provided no benefit for the economy and that many of the corporations that participated actually reduced employment. Rep. Delaney seems to believe his bill (H.R. 2084) can avoid that unhappy result by allowing corporations to repatriate their offshore funds tax-free only if they also fund a bank that finances public infrastructure projects, which he believes would create jobs in America.
A new CTJ report explains why this is a strange and problematic way to fund infrastructure projects. Delaney’s bill will provide the greatest benefits to corporations that are engaging in accounting schemes to make their U.S. profits appear to be generated in offshore tax havens, further encouraging such tax avoidance and resulting in a revenue loss in the long-run. Incredibly, a super-majority of the infrastructure bank’s board of directors would, under Delaney’s bill, be chosen by the corporations that receive the most tax breaks.
Read the CTJ report on Rep. Delaney's proposal.
Economy & Job Creation News
Congressman John Delaney, a Democrat from Maryland, has proposed to allow American corporations to bring a limited amount of offshore profits back to the U.S. (to “repatriate” these profits) without paying the U.S. corporate tax that would normally be due. This type of tax amnesty for repatriated offshore profits is euphemistically called a “repatriation holiday” by its supporters.
On Tuesday, the non-partisan Congressional Budget Office (CBO) found that the immigration reform bill currently making its way through the US Senate will actually decrease the deficit by $197 billion between 2014-2023. The report’s findings are at odds with claims by the bills opponents that increased immigration would be fiscally harmful to the US. In fact, House Speaker John Boehner said today that if the CBO is right, those revenues could be a “real boon” for the US.
According to the CBO, the bill would generate $459 billion in additional revenue over the next decade. Allowing unauthorized immigrants to seek legal status would increase tax compliance, and also increase the wages and thus the taxes of those same immigrants. In addition, the CBO found that the increase in the immigrant population and the number of individuals working in the US as a result of the bill would also substantially increase revenue.
Conservative critics of the immigration bill have tried to argue that the bill will drain public resources as immigrants obtain government benefits. The reality, according to the CBO, is that the required increase in government outlays (primarily in the form of refundable tax credits, Medicaid, and health insurances subsidies) would amount to only $262 billion over the next decade, meaning that immigrants as a group would end up paying more than they receive. This would be even more true over the bill's second decade (from 2024-2033), during which the CBO estimates the federal deficit would be decreased by an additional $700 billion.
The bill’s positive fiscal impact could undermine efforts by lawmakers like Senators Marco Rubio, Orrin Hatch, and Jeff Sessions to add amendments to the bill that would create extra obstacles for immigrants in terms of taxes and government benefits.
The expiration of parts of the Bush-era income tax cuts under the fiscal cliff deal affects just under one percent of taxpayers this year, while the expiration of the payroll tax cut affects over three-fourths of taxpayers this year, according to a new CTJ report that includes state-by-state figures.
The fiscal cliff deal (the American Taxpayer Relief Act of 2012), which was approved by the House and Senate on New Year’s Day and signed into law by President Obama, extended most of the Bush-era income tax cuts but allowed all of the payroll tax cut in effect over the previous two years to expire.
The figures in the report show the percentage of taxpayers in each income group nationally and in each state who will pay higher income taxes or payroll taxes as a result in 2013.
Read the report
There have been a lot of contradictory statements coming from Washington these days about how employment levels would be affected by President Obama’s proposal to allow the expiration of the Bush-era income tax rate reductions for the top two income tax brackets (only affecting income in excess of $250,000 for couples and $200,000 for singles). Republican House Speaker John Boehner continues to cite a discredited report claiming that 700,000 jobs will be lost, while several media outlets have recently reported that the Congressional Budget Office (CBO) found 200,000 jobs would be lost. Neither is right.
This is one of the confusing aspects of the debate over the so-called “fiscal cliff,” the term sometimes used to describe the point at which the Bush tax cuts are scheduled to expire, and some spending cuts are scheduled to take effect, at the end of this year.
Boehner’s Bogus 700,000 Jobs Claim
Let’s start with the most outrageous claim — that of Speaker Boehner. Last week, we explained why his call to pursue tax reform along the model of the Tax Reform Act of 1986 was both disingenuous and not up to the task of addressing our current budget situation. During the same speech, Boehner mentioned an Ernst & Young report finding that “going over part of the ‘fiscal cliff’ and raising taxes on the top two rates would cost our economy more than 700,000 jobs.”
Citizens for Tax Justice explained, back in July, why the study Boehner cites (which was paid for by groups like the U.S. Chamber of Commerce and the National Federation of Independent Businesses) is bogus. To take just one example of the problems with the report, it assumes a labor supply response (the degree to which people work fewer hours in response to higher tax rates) that is nearly 10 times stronger than the non-partisan CBO assumes when it makes similar estimates on labor supply effects.
CBO’s Misunderstood 200,000 Jobs Figure
The most recent CBO estimates, which are claimed to show a potential loss of 200,000 jobs, are another story. One problem is that the CBO study examines the impact of delaying, for two years, the expiration of the Bush tax cuts (and some reductions in spending) which will occur under current law. One of CBO’s findings is that extending the income tax rate reductions for the top two tax brackets (the tax cuts for the rich that Obama would like to see expire) for two years will result in 200,000 more jobs than would exist if Congress allowed these tax cuts to expire.
But if Congress decides to delay the expiration of the Bush tax cuts for the rich for two years (or any amount of time), chances are extremely high that this delay will eventually become permanent rather than temporary. If President Obama caves to Republican demands to extend tax cuts for the rich now, when he seems to have a mandate from the voters to let them expire, why in the world would he do any better in the years to come?
And, permanently extending the Bush tax cuts for the rich, as Republican Congressional leaders ultimately want, would have negative long-term impacts because it would substantially increase the budget deficit and make it more difficult to make the investments that create jobs.
This is demonstrated by other CBO studies that examine the long-term impact of removing all the impacts of the so-called “fiscal cliff” permanently. A CBO report from August shows (in a table on page 37) that removing all the fiscal cliff impacts (by making the Bush tax cuts permanent and canceling the scheduled spending cuts) would reduce economic output (and thus jobs) by 2022. Gross domestic product would be down 0.4 percent and gross national product would be down 1.7 percent, compared to what would happen if Congress did nothing and simply allowed the fiscal cliff impacts to take effect. (And remember, two-thirds of the fiscal cliff’s impact on deficit reduction results from the expiration of tax cuts, rather than then spending cuts scheduled to take effect.)
Of course, the short-term does matter — we need to improve the economy right now! But even if we could be persuaded that extending the income tax cuts for income in excess of $250,000 could save 200,000 jobs in the short-term, we could think of many, many, more cost-effective ways to do this. The figures in the new CBO report show (in a table on page 7) that the cost difference between extending all the Bush tax cuts and extending all but the income tax cuts for the top two brackets would be $42 billion in 2013. Divided by 200,000, that comes to $210,000 per job saved.
In other words, CBO thinks we can save a job for every $210,000 that we give to people who make over $250,000 (or $200,000 for single taxpayers). We’re not sure how much it costs annually to help public schools hire back teachers laid off due to budget cuts, or to hire construction workers to build bridges, but we’re pretty sure it’s less than $210,000 each.
Actually, the same CBO report also shows that the cost of calling off the automatic cuts in defense and non-defense spending and the scheduled expiration of increased doctor payments from Medicare would be $64 billion by the end of 2013 and would make a difference of 800,000 jobs. Divide $64 billion by 800,000 and that comes to $80,000 per job saved. That sounds like a much better deal.
Enact Obama’s Proposal or Go Off the Fiscal Cliff
The biggest issue facing Congress right now is finding revenue to make the public investments that will help our economy and to reduce the deficit. Extending most of the Bush tax cuts, as President Obama proposes, is not a great way to achieve that, but it makes sense to enact Obama’s approach for one year to give lawmakers time to find better solutions. If anti-tax lawmakers block that approach and insist on enacting all the tax cuts, then Congress and the President should simply allow all the tax cuts to expire.
A new report from Citizens for Tax Justice shows that the Making Work Pay Credit, a tax credit that was in effect in 2009 and 2010, is better targeted towards low- and middle-income families than the payroll tax cut in effect today, at half the cost. It is dramatically more targeted to these families than the Bush tax cuts, at just over a sixth of the cost.
Prominent Washington figures and media outlets have suggested in recent days that either the payroll tax cut might be extended or the Making Work Pay Credit might be revived to help the economy.
Read the report.
A new survey of 250 economists in the business community by the National Association for Business Economics released on Monday revealed their strong support for increasing fiscal stimulus in the short term and taking a balanced approach to deficit reduction (including revenue increases as well as spending cuts) over the long term. This agreement among business economists stands in direct contrast to many conservative lawmakers in Washington, who increasingly favor spending cuts in the short term and actually decreasing taxes over the long term.
Of the economists surveyed, 67 percent favored maintaining or even increasing the current level of fiscal stimulus in 2013. Moving in the opposite direction, Congress actually enacted $984 billion in spending cuts (known as sequestration) last year, which go into effect starting in 2013; a full three quarters of the economists polled outright oppose allowing those sequestration cuts to take effect.
Although a majority of the business economists did favor extending tax cuts in 2013 to help stimulate the economy (although there was no majority for making all the tax cuts permanent), the reason more of them favor preserving government spending is likely explained by the fact that government spending typically has a much greater positive impact on economic growth than tax cuts.
Turning to the long haul, a full 90 percent of those surveyed believe that Congress should take a balanced approach to deficit reduction, meaning a combination of tax increases and spending cuts. And while there is near universal consensus among these economists for tax increases, neither the Democratic nor Republican party platforms support increasing tax revenue as part of a balanced approach to deficit reduction. Both parties instead call for reducing revenue by trillions of dollars (compared to what our tax system would collect if the tax cuts were all allowed to simply expire).
While the business community is often portrayed as being hindered by budget deficits and higher taxes, this survey reveals that they actually favor higher budget deficits in the short term and higher taxes over the long term. It’s time Congress begins listening to the actual business community rather than the anti-tax activists who pretend to speak for them.
“Unlike President Obama, I will not raise taxes on the middle class,” Republican presidential candidate Mitt Romney said during his acceptance speech. It was a startling statement because it describes one of the facts about Romney’s own tax plan and attributes it to the policies of his opponent, President Obama.
Romney’s Tax Plan: Breaks for the Rich No Matter How You Look at It, Leaving the Bill for Low- and Middle-Income Americans
A recent CTJ report shows that the basics of Romney’s tax plan would give out huge tax cuts to those who make between half a million and one million dollars and those who make over a million dollars, no matter how the missing details are filled in. Romney cannot possibly meet his goal of offsetting the costs of the tax cuts (besides the enormous Bush tax cuts, which he doesn’t think need to be paid for) without raising taxes on people farther down on the income ladder.
The CTJ report finds that Romney’s proposed tax cuts would reduce taxes by an average $80,000 for people who make between half a million and one million dollars and by an average $400,000 for people who make over a million dollars.
Now, Romney promises to offset the cost of these tax cuts (aside from the enormous Bush tax cuts, which he would make permanent) by reducing or eliminating “tax expenditures,” which are the credits, deductions, exclusions and loopholes that lower people’s tax bills. But even if Romney made the very rich give up all the tax expenditures that he has put on the table, they’d still be getting huge tax cuts — an average $48,000 for people who make between half a million and one million dollars, and an average $250,000 for people who make over a million dollars.
If Romney’s plan is going to be revenue-neutral (not counting the huge cost of the Bush tax cuts) as he claims, then someone is going to have to pay higher taxes than they do now so that the people who make over half a million dollars a year can pay less. The loss of tax expenditures for low- and middle-income people can be larger than the benefits they receive from Romney’s rate reductions and other proposed breaks, meaning they face a net tax increase. In fact, this must happen for Romney to keep his promise about not losing more revenue, as the Tax Policy Center has already pointed out.
Obama’s Problem Is that He’s Cut Taxes Too Much, Not that He Raised Taxes
Romney’s claim that Obama has raised taxes on the middle-class is initially hard to understand, given Obama’s two-year extension of all the Bush tax cuts and his call to again extend the Bush tax cuts entirely for 98 percent of Americans while letting them expire partially for the richest 2 percent of Americans. (In fact, we pointed out that many of the taxpayers within the richest 2 percent, like those with incomes just over $250,000, would only have to give up a tiny fraction of their tax cuts under Obama’s plan.)
Romney’s claim that Obama has raised taxes on the middle-class appears to refer to the new mandate to obtain health insurance, which the Chief Justice of the Supreme Court decided was actually a tax and therefore within the Constitutional powers of Congress.
As we pointed out at the time the Supreme Court ruled on the health care mandate, very few people would ever actually pay the “tax,” which is the fee that will be imposed on people who choose to go without health insurance. As we explained,
It’s a tax that hardly anyone will pay.
That’s because for the vast majority of Americans who don’t have employer health coverage, the government subsidies to buy insurance will be so large that it would be foolish not to buy insurance.
For starters, any family with income less than 133 percent of the poverty line (that means all families of four with incomes of $30,000 or less) will be eligible to sign up for free coverage under Medicaid.
Above that level of income, the government will provide cash subsidies to buy insurance, starting at almost 100 percent of the cost and gradually phasing down. But the subsidies won’t disappear for a family of four until its income exceeds about $90,000.
An Urban Institute study found that fewer than 3 percent of households would be subject to the fee.
Another point that Romney and his allies seem to forget is that the 2009 economic recovery act that they criticize so much actually cut taxes for 98 percent of working families. (See the national and state-by-state estimates from CTJ.)
If President Obama has made any mistakes on taxes, it’s that he has been entirely too willing to extend too many tax cuts for too many Americans at a time when we desperately need revenue.
 Notice we say that the $48,000 and $250,000 figures are the tax cuts these groups would get if they had to give up all the tax expenditures that Romney has put on the table. That’s because he has pledged to keep the tax expenditures that benefit the rich the most — breaks for investment, like the low rates for capital gains and stock dividends.
A new study by Ernst and Young is grabbing headlines by purporting to show that President Obama’s plan to end most of the Bush tax cuts for the richest 2% of Americans would cause job losses over the long term. This study is highly suspect however because it makes methodological assumptions that are out of line with other independent studies, which actually show that the expiration of the Bush tax cuts would lead to increased economic growth over the long term.
As the White House explains, the study assumes an entirely unrealistic drop in the labor supply by medium and high income earners due to higher tax rates. Their expected labor supply response is nearly 10 times higher than the non-partisan Congressional Budget Office (CBO) assumes when it makes similar estimates on labor supply effects.
In addition, the Ernst and Young study makes the bizarre assumption that all of the additional tax revenue will be used for additional spending, rather than for deficit reduction. While it does not explain any reason for this assumption, the effect of it is to eliminate the possibility that the additional revenue will increase private investment by reducing the deficit’s “crowding out” effect.
When the non-partisan CBO performed a study in January 2012 on the economic effects of allowing the Bush tax cuts to expire using its much more robust assumptions, it found that the extension of all of the Bush tax cuts and other expiring measures would reduce Gross Domestic Product (GDP) by as much as 2.1 percent in 2022 and would reduce Gross National Product (GNP) by as much as 3.7 percent in 2022.
Building on this, Citizens for Tax Justice’s Bob McIntyre notes that even President George W. Bush’s own Treasury Department, which was “managed by Bush appointees who profess a deep affection for Bush’s tax-cutting policies,” found that over the long term extending the Bush tax cuts would have “essentially no beneficial effect on the U.S. economy at all.”
Ernst and Young’s reliance on a radical methodology, putting it out-of-line with even the Bush Administration’s Treasury Department, is not be much of a surprise considering that the study was paid for by conservative anti-tax groups like the US Chamber of Commerce and the National Federation of Independent Business. Both these groups have proven in the past that they are willing to distort the facts in order to protect the wallets of the country’s wealthiest corporations and CEOs.
Photo of US Chamber Logo via Truth Out Creative Commons Attribution License 2.0
House Ways and Means chair Paul Ryan’s budget proposal drew plaudits from some observers who didn’t notice its fundamental weakness: its utter failure to specify which tax “loopholes” it would close to pay for deficit reduction. As we’ve noted in the past, Ryan has a good reason not to disclose details on the tax side of his plan: they don’t add up. CTJ has shown that the Ryan plan’s promised top income tax rate of 25 percent would be insufficient to pay for federal spending at Reagan-era levels, let alone the current decade.
Now, as details of Ryan’s plan emerge, it’s becoming clearer that its spending cuts are equally illusory, relying on alleged cost-saving measures that would likely cost more in the long term than they help right now. Case in point: Ryan’s plan to eviscerate the Census Bureau and eliminate its American Community Survey (ACS), an annual survey that provides a rapid-response supplement to the decennial Census.
As Businessweek notes, cuts to Census budgets in the past decade prevented Congress and the Obama administration from being able to quickly diagnose the scope of the financial sector’s collapse in 2007. One expert observed, “The government saved $8 million, but how many trillions were lost as a result of not being able to see the crisis coming?”
Ironically, as the New York Times explains, the ACS itself was actually created as a sensible cost-cutting strategy, designed to provide more timely data than the decennial Census could. Even the US Chamber of Commerce has vocally opposed further cuts to Census funding because it helps businesses large and small to inform their planning. Which is why top conservative policy think tanks support the ACS, too.
An adequately funded Census Bureau is the best vehicle we have for finding a path to sustained economic growth for all of us; there is widespread agreement that without its data, we will be flying blind.
On Wednesday, the House Ways and Means Committee approved a bill that House Majority Leader Eric Cantor (R-VA) introduced last week: the “Small Business Tax Cut Act.” As it stands right now, a lot of truly small businesses would not actually qualify for the deduction it offers, for 20 percent of “small business” income.
Think of a mom-and-pop mail-order business or the local shoe repair shop where you see the owners working hard every day, but no other employees. Because the bill caps the deduction at 50 percent of the wages paid to non-owners, many family businesses won’t qualify because their only employees are family members who are owners.
While the legislation caps the amount of the deduction (at half of non-employee payroll), there is no limitation on the type or amount of income that business can have. So highly profitable operations like Oprah Winfrey’s production company or the Trump Tower Sales & Leasing office would both qualify for the deduction simply because they have fewer than 500 employees on payroll.
Who else would qualify? Professional sports teams (including teams owned by Mitt Romney’s friends) with their multi-million-dollar salaries to non-owner players. So would private equity firms, hedge funds, and other “small businesses” with income in the millions, or even billions, of dollars, along with most of the top law and lobbying firms inside the Beltway and elsewhere.
The bill is currently projected to cost $45.9 billion in its first year – but its benefits are not at all clear. So far it seems that in Rep. Cantor’s dictionary, “small business” is defined as “my rich friends.”
President Obama's jobs council has released a report full of recommendations, including somewhat misguided points on the federal corporate income tax. The report rightly points out that the corporate income tax is full of loopholes that should be closed, but fails to call for a reform that actually raises revenue to support under-funded public services and investments. The report also perpetuates some misunderstandings about the effects of the U.S. corporate income tax on our economy and on working people.
Read CTJ's response.
Photo of Council on Jobs and Competitiveness via NCSU Web Creative Commons Attribution License 2.0
Just as President Obama caved at the end of last year to demands that he extend the Bush tax cuts for even the richest Americans, it looked like he was ready to end this year by caving on the debate over payroll tax cuts. Then, strangely, House Republicans refused to accept the surrender.
President Obama and Democratic leaders in Congress made a huge compromise before they even began negotiating with Republicans. Economists agree that the government measures most likely to boost job creation are spending measures (including things like food stamps, infrastructure, hiring teachers) but President Obama decided to focus on a tax cut in order to appeal to Republicans.
And he did not choose the tax cut most likely to boost consumer spending by putting money in the hands of low- and middle-income people. That would be the Making Work Pay Credit, which was allowed to expire at the end of 2010. Instead, he proposed extending and expanding the payroll tax cut that was enacted for 2010, and which was originally proposed by Republicans.
So President Obama and Democratic leaders in Congress proposed that this year’s payroll tax cut be extended into next year and expanded. They insisted that Congress not attach controversial policies like hurrying approval of the Keystone XL Pipeline extension, and they proposed that the cost be offset by taxing millionaires. The President and Democratic leaders eventually surrendered on all of this.
Citizens for Tax Justice estimated that the millionaire surcharge would only affect one-fifth of one percent of taxpayers and that those affected would see their overall taxes go up by an average 2.1 percent. But Congressional Republicans objected that this would burden “job creators,” so the Democrats agreed to drop the millionaire surcharge.
But Republicans in the Senate were still not happy. Senate GOP leader Mitch McConnell introduced a bill to extend the existing payroll tax cut and offset the costs with the types of cuts in public services that Republicans usually support. Strangely, a majority of Republicans voted against this bill, too.
Even the number two Republican in the Senate, Jon Kyl, opposed McConnell’s bill and said he would support extending the payroll tax cut only if it was paired with another extension of the Bush tax cuts. Our figures comparing different types of tax cuts illustrated how this was essentially a demand that the payroll tax cut can only be enacted along with much, much larger tax cuts for the rich (like the Bush tax cuts).
Senate Majority Leader Harry Reid said the Senate would not approve must-pass spending measures before the end of the year without extending the payroll tax cut through 2012. But Senator Reid backed down and made a deal with Senator McConnell. The payroll tax cut would be extended for just the first two months of next year, and it would not be expanded. It would be attached to a provision requiring a quicker approval of the controversial oil pipeline project. And, of course, there would be no tax on millionaires. This bill passed the Senate with 89 of the chamber’s 100 members voting in favor.
President Obama endorsed the deal. It would at least get Congress and the country through the holidays, after which lawmakers could take up this debate again and hash out whether the payroll tax cut should be extended for the rest of the year.
Then something strange happened. Republicans in House refused to approve the Senate bill. They voted along party lines to appoint a conference committee iron out differences between the Senate-passed bill and a bill passed earlier by the House. But the Senate had already left town.
The bill passed by the Republican majority in the House (H.R. 3630) would extend the existing payroll tax cut for a year, but because House Republicans consider this an enormous concession, the bill includes many policy provisions championed by conservatives. It would offset the cost of the payroll tax cut with cuts in public services, which is the opposite of what the economy needs right now. It includes cuts and restrictions on unemployment insurance, delays on environmental rules and, of course, a faster approval for the oil pipeline project.
It’s awfully tempting to tune out of national politics entirely right now and enjoy some eggnog, except for one thing: Millions of Americans are struggling to find decent work and the House of Representatives has done everything imaginable to block anything that might change that. If lumps of coal were environmentally friendly, we’d encourage everyone to send them by the truckload to the House members blocking progress.
The graph below compares the impacts of the Democrats’ proposed payroll tax holiday with a tax policy that is more progressive (reviving the Making Work Pay Credit) and a policy that is far more regressive (the Bush tax cuts, which are already in effect through 2012). Senator Jon Kyl, the second highest ranking Republican in the U.S. Senate, now says he would agree to extend the payroll tax cut only if Democrats agreed to extend the far more regressive policy, the Bush tax cuts.
These figures disturbed us because even the Democrats’ proposal is not really all that progressive. If the 6.2 percent Social Security payroll tax paid by workers is reduced to 3.1 percent as Democratic leaders propose, the richest fifth of taxpayers will receive $83 billion in 2012 while the poorest fifth of taxpayers will receive just $7 billion.
Apparently that’s not regressive enough for Jon Kyl. The blog Think Progress notes that on Monday, Senator Kyl said on the Senate floor that when the payroll tax cut was enacted for one year at the end of 2010, that “was part of an overall agreement in which we said we will extend all of the existing tax rates — the so-called Bush tax cuts… we would extend this temporary tax holiday from the payroll tax cut, we would extend all of those. And I supported that… Now if we can do that again, I’m all for it. I’ll support the extension of the payroll tax holiday.”
The graph shows that the Bush tax cuts in 2012 will provide the richest fifth of taxpayers with $231 billion and will provide the poorest fifth of taxpayers with just $3 billion. For more, read our short report on these figures.
CTJ Report: GOP's Tax Cuts Are FAR More Targeted to the Rich than Payroll Tax Cut, But Both Parties Ignore a Better Option
On Sunday, the second highest ranking Republican in the U.S. Senate, Jon Kyl, said, “The payroll tax holiday has not stimulated job creation. We don’t think that is a good way to do it.” Asked why he opposes letting the Bush tax cuts end for the rich or imposing a surcharge on millionaires while also opposing this particular measure to keep taxes low, he replied, “The best way to hurt economic growth is to impose more taxes on the people who do the hiring. As a result, the Republicans have said, ‘Don’t raise the existing tax rates on those who do the hiring.’”
In other words, keep taxes low for the rich. A new report from CTJ shows that the Bush tax cuts supported by Senator Kyl will provide $231 billion in benefits to the richest fifth of taxpayers in 2012 and just $3 billion to the poorest fifth of taxpayers during that same year.
The payroll tax cut proposed by President Obama and Senate Democrats is more evenly distributed but is not particularly progressive. The CTJ report shows that it would provide $83 billion to the richest fifth of taxpayers and $7 billion to the poorest fifth of taxpayers.
Most economists agree that government spending measures are the most effective way to put more money in the hands of consumers to spend and thereby reduce unemployment. But if lawmakers insist on using tax policy instead, they should enact tax cuts that are targeted to those low- and middle-income consumers who are likely to immediately spend any new money they receive.
The Senate Democrats’ payroll tax cut proposal, which would be offset by a surcharge on millionaires (see related story), won a majority of votes yesterday (50 Democrats and one Republican voted in favor) but was blocked by the remaining Senators. Republican leaders offered their own payroll tax cut that would be offset by cutting back federal government positions and pay, but this did not even receive support from a majority of Republicans in the chamber.
The CTJ report points out that a better option would be to revive the Making Work Pay Credit that expired at the end of last year, which has been discussed by some Senators but ignored by leaders of both parties.
The report finds that if the Making Work Pay Credit was in effect in 2012, the richest fifth of taxpayers would receive $11 billion while the poorest fifth of taxpayers would receive $7 billion, making it a less costly and more targeted tax cut.
CTJ Fact Sheet: Senate Couldn't Bear Richest One-Fifth of One Percent Paying 2.1 Percent of Income to Create Jobs
State-by-State Figures Included
The millionaire surcharge that would have offset the cost of Senate Democrats’ proposed payroll tax cut would have affected only one-tenth of one percent of taxpayers in the majority of states, and in no state would those affected pay more than an average of 2.5 percent of their income under the surcharge, as explained in a new fact sheet from CTJ.
Nationally, just 0.2 percent of taxpayers would be affected by the surcharge and those affected would pay 2.1 percent of their income, on average under the proposal.
The surcharge would be 3.25 percent of the portion of any taxpayer’s adjusted gross income (AGI) in excess of $1 million starting in 2013. This means that a taxpayer with AGI of $1.1 million in a given year would pay a surcharge equal to 3.25 percent of $100,000, which is $3,250 (less than one-third of one percent of the taxpayers’ AGI). Taxpayers with AGI below $1 million would be unaffected by the surcharge.
Of the 49 Senators who blocked the Democrats’ payroll tax proposal yesterday, the surcharge motivated many of them. Others blocked the proposal because they objected to the idea of a payroll tax cut in principle. Most Republican Senators actually voted against the version of the payroll tax brought to the floor by GOP leaders, which would have been offset with reductions in federal government jobs and compensation. (See related story about CTJ’s figures on the payroll tax cut.)
A report from Macroeconomic Advisers, one of the most respected economic forecasting firms, concludes that unemployment would rise from 9 percent to 18 percent in 2012 if Congress had to cut spending to comply with the type of constitutional balanced budget requirement that Republicans and some Democrats tried but failed to pass today.
Most mainstream economists agree that the last thing the federal government should do during a recession is cut spending. Reducing government jobs, or cutting government programs that maintain consumer spending in a way that indirectly creates jobs, is the last thing we need when the economy is already contracting. But that’s exactly what would happen under a balanced budget requirement.
Recessions often cause budget crunches because they reduce revenues (because fewer people and businesses are generating income and paying taxes) and increase government spending (because more people receive unemployment insurance and other benefits). These automatic reductions in taxes and increases in spending can stabilize the economy to an extent. But a balanced budget requirement would make it far more likely that Congress would respond to a recession-induced budget crunch by slashing unemployment insurance and other programs that help offset the economic contraction.
That’s why Macroeconomic Advisers found that if Congress had to cut spending to balance the budget in 2012, another 15 million people would become unemployed and economic growth would drop from an expected 2 percent to negative 17 percent.
Such a proposal would seem too outrageous to even be discussed seriously — except that a majority of the House of Representatives just voted for it. (The measure thankfully did not receive the two-thirds vote requires for approval of a constitutional amendment.)
The version considered today would not take effect for five years, but it’s important to remember that even the most conservative deficit-reduction plans discussed today would not result in a balanced budget for decades. And America will undoubtedly face recessions in the future when the balanced budget requirement would be in effect.
Citizens for Tax Justice has joined 275 other national organizations on a letter to members of Congress blasting the proposed balanced budget amendment as, to borrow the term used by Macroeconomic Advisers, “catastrophic.”
And just in case you were wondering, the balanced budget amendment considered today was the less extreme of the two versions that have been discussed lately. The version supported by anti-tax activist Grover Norquist would require approval by two-thirds of both chambers of Congress to pass any revenue increase, ensuring that efforts to balance the budget during recessions would definitely be done entirely through spending cuts and have the effects described above. Of course, the fact that a proposal is slightly less extreme than the one preferred by Grover Norquist is no indication that it’s a great idea.
Many lawmakers have apparently decided that they would address difficult fiscal problems with what seems like a simple answer. A rule making Congress balance the federal budget every year probably sounds reasonable to many people until they learn of the horrific consequences. Lawmakers have no such excuse, because they and their staffs are quite aware of mainstream economic research, which this recent report only reaffirms.
Make no mistake; those lawmakers who voted today for the balanced budget amendment have voted to destroy millions of jobs during a recession.
When House Speaker John Boehner said on Thursday that “tax increases destroy jobs” and are not a “viable option” for the Joint Select Committee tasked with reducing the budget deficit, he was probably unaware that a major business lobbyist and a high-profile conservative economist had admitted a day earlier that the last significant tax increases did not hurt the economy.
Bill Rys of the National Federation of Independent Businesses (NFIB) tried to explain to the Senate Finance Committee on Wednesday his view that tax increases today would hurt the economy even though the economy thrived after the 1993 tax hikes enacted under President Clinton.
“In the 1990s,” he said, “we had a dot.com boom, we had Y2K, a lot of money being spent there, so we had much stronger economic winds pushing, pushing, which we don’t have right now.”
The obvious circularity of the argument seemed to go unnoticed by members of the committee. Rys said, in essence, that the tax increases of the 1990s did not prevent economic growth because we had economic growth in the 1990s.
Stephen Entin of the conservative Institute for Research on the Economics of Taxation, made a similar comment to explain why the Clinton tax increases did not cause the economic stagnation that he predicts would result from tax increases today.
“The Clinton marginal tax rate increases were fairly modest and we were coming out of a downturn. The growth was going to look good anyway.”
Most of the tax increases proposed today, which Entin believes will lead to a reduction in GDP, actually would just allow some rates to revert to the Clinton-era rates, so it’s surprising that he calls the Clinton tax increases “fairly modest.”
Even more surprising is his comment that the Clinton tax increases were not damaging because “we were coming out of a downturn.” No one asked the obvious follow-up question: If tax increases did not prevent a recovery in the 1990s, why would they prevent a recovery today?
Entin went on to say that what also allowed the economy to grow in the 1990s was the capital gains cut signed into law by President Clinton in 1997, which reduced the top capital gains rate to 20 percent.
“Please remember that he did sign a capital gains tax reduction and a lot of the growth in that decade was due to that reduction in the cost of capital. It dwarfed the effect of raising the marginal rates.”
The capital gains cut did not go into effect until 1998 so it’s interesting that Entin thinks that accounted for “a lot of the growth in that decade,” meaning the 1990s.
It’s also noteworthy that allowing the Bush tax cuts to expire would allow the top capital gains tax rate to simply revert to 20 percent, the rate that Clinton enacted and which Entin seems to think was conducive to growth.
A close look at the numbers demonstrates that there is no policy basis for allowing capital gains income to be taxed at lower rates than ordinary income. Advocates of tax cuts for investment income have for years argued that the revenue collected from taxes on capital gains will actually rise in response to a capital gains tax cut, but the data does not bear this out. For example, capital gains tax revenue was lower in the years following Bush’s 2003 capital gains tax cut than during the Clinton years. This revenue fluctuates with the economy and does not seem correlated with tax rates.
Of course, we could give Rys and Entin the benefit of the doubt and assume they really mean that economic growth would have been even higher during the 1990s if President Clinton had not raised tax rates. But even that argument is entirely unsupported by the data. A 2008 report from the Center for American Progress and the Economic Policy Institute compares the economic recoveries following the major tax changes enacted during the administrations of Presidents Ronald Reagan, Bill Clinton, and George W. Bush. The report illustrates that the recovery under Clinton was far stronger, despite the tax increases that he enacted, than the recoveries during the other two administrations.
Rys and Entin have both long advocated for making permanent all of the Bush tax cuts and enacting additional tax reductions. In 2010 CTJ wrote a response to arguments made by Rys and NFIB concerning the impacts of taxes on small businesses. In 2009 CTJ wrote a response to a report from Entin claiming that elimination of the estate tax would actually increase revenue.
President Barack Obama nominated Alan Krueger to chair the White House Council of Economic Advisors on Monday and he will likely be easily confirmed. Although as a labor economist Krueger has earned many accolades for his robust work, including a seminal article defending the minimum wage, his record on tax policy is a little more mixed.
For example, in recent months Krueger voiced support for a jobs tax credit that would give companies $5,000 for every additional employee they hire. As Citizens for Tax Justice explained when President Obama proposed a similar plan, such tax credits are a poor way to encourage job creation because they inevitably go to companies who would have hired additional employees even without the credits. In fact, those companies that are struggling the most, those shrinking or unable to expand because of weak consumer demand, would receive no help from the credit.
The most controversial position Krueger has taken on tax policy was in a 2009 guest blog post arguing that a national consumption tax (specifically a 5% rate that would raise $500 billion) should be considered as one solution to the long run budget deficit. Many conservatives exaggerated the seriousness of this blog post, failing to mention Krueger’s caveat that this was “only as a suggestion for serious discussion,” and that he was “not sure it is the best way to go.”
In any case, a broad-based national consumption tax is the wrong policy because it would inevitably be severely regressive.
To be sure, Krueger has frequently stood up for good progressive tax policy. For instance, he has laid out the strong case for eliminating billions in tax subsides for oil and gas companies, opposed the ridiculous tax subsidies cities offer to sports teams and is a long time critic of the regressive Bush tax cuts.
As House lawmakers signal their intention to move forward with tax reform this fall, let’s hope we see Krueger in his new position focus on measures that will make our tax system more progressive and better for the overall economy.
Photo via Center for American Progress Creative Commons Attribution License 2.0
Republican House Majority Eric Cantor’s memo to his caucus laying out a new “jobs agenda” includes a tax break that would allow any “small business” to deduct 20 percent of its income for tax purposes. This idea is not new but was actually part of the House GOP’s proposal put forth during the debate over the economic recovery act in early 2009.
Here’s what CTJ said about this part of the House GOP plan in January 2009:
Provisions in the House GOP Plan to Help “Small Business”
The Republican plan proposes to allow a “small business” to take a tax deduction of 20 percent of its pretax income, whether the small business is a corporation or a sole proprietor. The plan defines a “small business” as one with 500 or fewer employees. It makes no distinction based on income. A “small business” making $100 million would get to deduct $20 million of its income right off the top. (Apparently, a company with slightly more than 500 employees would have an incentive to lay off staff to qualify for the tax break!)
The Republican leadership notes that “small businesses can pay up to 35% of their income in taxes to the federal government.” But for a sole proprietor to be in the 35% income tax bracket, she would need taxable income (after deducting all expenses) in excess of $372,950. And because of the graduated tax brackets, her effective rate would be much less. For a corporation to be in a 35% tax bracket, taxable income must exceed $10 million. The architects of this proposal have an expansive definition of the word “small” to say the very least.
The plan description also states that the United States corporate tax rate ranks the 29th highest (out of 30) among the major economies of the world. Corporations currently pay federal income taxes at a statutory rate of 35 percent. But the effective rate paid by corporations (the percentage of income paid in taxes after taking into account the deductions and credits and other breaks that lower their tax liability) is far lower than 35 percent. Comparing corporate taxes as a share of gross domestic product (as a share of the overall economy), the United States actually ranks low compared to other developed nations.
It’s also worth pointing out that a 20% deduction unnecessarily complicates the tax code. Congress could simply amend code sections that are already in the law (like the corporate or individual tax rates). Anti-tax lawmakers may be afraid that a simple corporate income tax rate cut might not go over too well with a public that believes large corporations got us into the current economic downturn.
Last, but not least, a business tax cut is just about the least effective stimulus measure Congress could possibly enact. The tax cuts put more money in the hands of business. But there is very little correlation between a corporation’s cash position and its plans for investment—whether expanding capacity or hiring new employees. Businesses invest in expansion when they believe there will be an increase in the demand for the goods and services they provide. If they don’t anticipate a sales increase, they won’t expand no matter how many tax breaks the federal government gives them.
Read CTJ’s full report on the 2009 House GOP economic plan here.
(Includes state-by-state figures)
A new report from CTJ finds that the compromise tax plan agreed to by President Obama and congressional Republicans would provide more than a quarter of its tax cuts to the best-off one percent of all Americans. That’s almost double the share of the tax cut that the President proposed to give the highest earners.
At the same time, the new tax plan would reduce taxes, and increase the budget deficit, by $424 billion in 2011 alone. That’s 40 percent more in tax cuts than the $301 billion tax cut the President had earlier proposed.
House Democrats voted in a closed-door caucus meeting on Thursday to not take up the compromise deal, which also includes a 13-month extension of expanded unemployment benefits, until changes are made to the tax provisions. Meanwhile, the Senate is debating the compromise today.
Under the compromise plan:
- The wealthiest one percent would get an average tax cut in 2011 of almost $77,000 compared to current law (under which all of the tax cuts enacted since 2001 are scheduled to expire). That’s almost triple the $29,000 tax cut that President Obama proposed to provide to the top one percent.
- Meanwhile, the lowest-income fifth of all taxpayers, those making less than $20,000 a year, would get a smaller tax cut than the President earlier proposed. This is because the GOP-inspired, 2 percent temporary reduction in the payroll tax in the compromise plan offers low-income workers a considerably smaller payroll tax reduction than the President’s proposal to extend his “Making Work Pay” payroll tax cut. The Making Work Pay payroll tax cut entirely eliminated the 6.2 percent worker payroll tax on the first $6,450 in earnings ($12,900 for couples).
The payroll tax cut agreed to by the President and GOP leaders would also provide considerably less economic stimulus “bang for the buck” than the President’s earlier proposal, because it is largest for high earners, who are less likely to spend their payroll tax savings. The compromise payroll tax cut would cost an estimated $112 billion in 2011, double the $57 billion dollar cost of the President’s earlier proposal. But we estimate that $112 billion in added borrowing would stimulate only an extra $18 billion in consumer spending compared to the President’s earlier payroll tax cut plan.
The tax bill passed by the House yesterday (H.R. 4853) would make permanent two provisions that were included in the economic recovery act and which would otherwise expire at the end of this year. One makes the child tax credit more accessible to low-income working parents. The other reduces the marriage penalty in the EITC.
The bill introduced by Senate Finance Chairman Max Baucus, which Democratic leaders plan to vote on Saturday, would make these changes permanent as well as a third change in the recovery act that expands the EITC for families with three or more children.
For more information, see CTJ's recent state-by-state figures showing how each of these provisions impacts families with children.
Republicans in Congress oppose extending the augmented unemployment insurance program for even three months — unless the $12.5 billion cost is offset with cuts in spending from the economic recovery act that was passed last year, which is keeping unemployment significantly lower than it would otherwise be.
Meanwhile, Congressional Republicans are demanding that the Bush tax cuts for the richest 2 percent of Americans be made permanent, at a cost of $700 billion over a decade — and they want this to be deficit-financed.
In other words, the party that will take over the House of Representatives next year believes that $12.5 billion for the unemployed is unaffordable but $700 billion for the richest two percent is absolutely vital.
The Congressional Budget Office has found that extending income tax cuts, particularly for the rich, is the least effective of all the economic recovery measures Congress has debated, while unemployment insurance is the most effective because it puts money in the hands of people who will spend it immediately.
Economists expect unemployment to remain high for a lot longer than 3 months, so Congress needs to extend the augmented UI program for a full year. Congress has always provided augmented UI during economic downturns, and has never cut off the extra help with unemployment as high as it is today.
There is reason for hope. Reports are trickling in that Democratic leaders will force a vote on a tax bill along the lines of what President Obama has proposed: Making permanent the Bush tax cuts for the first $250,000 of a married couple's income (the first $200,000 of a single person's income). The tax cuts for income over those amounts would expire, which means the richest two percent of taxpayers would continue to enjoy some, but not all, of the tax cuts enacted under President Bush.
This proposal hardly sounds like a progressive dream, but it's the best chance for the President and his allies in Congress to take a stand against continuing tax cuts that only benefit the very richest taxpayers. See CTJ's figures comparing the President's tax plan to the Republican plan (including state-by-state figures).
Hold the Vote!
Congress needs to vote on this tax plan. If lawmakers who support tax cuts for the very rich oppose this plan, then they need to go on record opposing tax cuts for 98 percent of Americans because they are trying to protect tax cuts for the richest two percent. When Americans see how their lawmakers vote on this bill and on unemployment insurance, they will finally have a clear idea of who is represented in Congress.
Putting lawmakers on the spot in this manner is one way — perhaps the only way — to get them to do the right thing.
President Reaffirms Commitment to Extend Tax Cuts for 98%; House GOP Leader Fights for the Richest 2%
Speaking in Cleveland on Wednesday, President Obama reaffirmed his commitment to making the Bush tax cuts permanent for 98 percent of taxpayers and allowing them to expire at the end of this year for the richest two percent. Responding to reports that Republicans will try to block his proposal, the President said,
"So let me be clear to Mr. Boehner and everyone else: we should not hold middle class tax cuts hostage any longer. We are ready, this week, to give tax cuts to every American making $250,000 or less."
This is an accurate description of the situation. Republicans are threatening to vote against a bill to extend tax cuts for 98 percent of taxpayers in order to secure tax cuts for the richest 2 percent. We would not call everyone among the bottom 98 percent of taxpayers "middle class," but we certainly agree that tax cuts should not be extended for any more people.
As CTJ has noted, the Bush tax cuts were disproportionately aimed at the richest taxpayers, who happen to be the only taxpayers whose income grew wildly over the past several years. Data from the non-partisan Congressional Budget Office indicates that nearly 39 percent of the income growth from 1979 to 2007 went to the richest one percent. That's more than went to the bottom 90 percent.
The Congressional Budget Office has also studied several different measures to create jobs and found that every measure it analyzed would create more jobs per dollar of cost than income tax cuts for the rich.
And yet, some members of Congress are determined to extend the tax cuts for the rich and will even block any bill that extends the tax cuts for everyone else.
The argument Republicans most often make is that many small business owners are among the richest two percent, and ending the tax cuts for these people will mean less job creation.
This argument is a red herring. Only 3 percent of taxpayers with business income (and only 5 percent of taxpayers who rely on business income for over half of their income) are rich enough to lose any of their income tax cuts under Obama's plan. These include many partners in law firms, accounting firms, hedge funds and other businesses we don't generally think of as "small" businesses. And even for those who do create jobs, there is no connection between income tax rates and hiring decisions. Businesses are not taxed on money they pay to their employees as wages, and small business owners are not taxed on income they reinvest in their businesses.
As President Obama pointed out, the only change that the richest taxpayers face is that income in the top two tax brackets will be taxed as it was at the end of the Clinton years.
"And for those who claim that this is bad for growth and bad for small businesses," the President said, "let me remind you that with those tax rates in place, this country created 22 million jobs, raised incomes, and had the largest surplus in history."
As a previous CTJ report (with state-by-state figures) explains, low- and middle-income taxpayers actually get a better deal on average under the President's proposal than under the Republican approach, because Obama would also make permanent the improvements in the Earned Income Tax Credit and Child Tax Credit that were part of the economic recovery act.
The President's speech Wednesday was partially a response to the one made in Cleveland two weeks earlier by House Republican Leader John Boehner, whose five-point "plan" to help the economy mainly consisted of continuing George W. Bush's tax and spending policies, not enacting any new reforms, and firing President Obama's economic advisers.
As CTJ previously reported, Boehner attacked loophole-closing provisions in the recently enacted $26 billion jobs bill (H.R. 1586) by describing them as exactly the opposite of what they really are. The provisions end abuses of the foreign tax credit. These abuses allow U.S. corporations to enjoy a negative tax rate on offshore investment income, which creates an obvious incentive to shift operations, jobs and profits offshore.
Boehner wrongly claimed that H.R. 1586 "is funded by a new tax hike that makes it more expensive to create jobs in the United States and less expensive to create jobs overseas."
On Wednesday, Boehner offered what some media outlets described as a "concession," which would be to freeze in place, for two years, all the Bush tax cuts and the spending levels in effect in 2008.
This would, of course, repeal several measures meant to address the economic crisis, including the economic recovery act enacted last year. The Congressional Budget Office recently concluded that the recovery act has created between 1.4 million and 3.3 million jobs, and increased the number of full-time-equivalent jobs by between 2.0 million and 4.8 million.
In one sense, Boehner's offer really is a concession, since the Republican position has until now been that the Bush tax cuts should be made permanent for all taxpayers, rather than extended temporarily. It's possible that Boehner made this move because he knows that his position on taxes is far more precarious than media reports suggest. Plenty of polls show that the majority of Americans want the tax cuts to expire for the richest two percent of taxpayers.
There's another problem for lawmakers who want to extend tax cuts for the rich. To get their way, they will have to vote against (or even filibuster, in the case of the Senate) a bill extending the tax cuts for 98 percent of taxpayers. President Obama was right when he described his opponents as holding tax cuts for most Americans "hostage" to protect tax cuts for the rich.
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.
As the Senate continues a seemingly endless debate over H.R. 4213, the jobs and "tax extenders" bill, business lobbyists, right-leaning economists and politicians have had more time to shape their arguments in defense of the tax loopholes that the bill would pare back.
To offset the costs of the tax breaks included in the bill, three types of loopholes would be restricted. They include the "carried interest" loophole that allows certain investment fund managers to treat their compensation as capital gains and thus enjoy a lower tax rate, the "John Edwards" loophole allowing people with "S corporations" to avoid payroll taxes, and abuses of the foreign tax credit by U.S.-based multinational corporations.
The debate over the "carried interest" loophole has received the most attention, and CTJ has responded to some of the outlandish arguments made in its defense.
More recently, Senator Olympia Snowe (R-ME) has voiced her opposition to the provisions regarding "S corporations," and filed an amendment to strip them from the bill. A recent report from CTJ explains that this amendment should be rejected because the loophole in question allows people to underestimate the extent to which their income is wages, meaning they avoid payroll taxes.
The report also explains that the main effect of the provisions in H.R. 4213 regarding S corporations would probably be on Medicare taxes. The new health care reform law actually applies Medicare taxes to most non-retirement income, but there is a bizarre exception left for certain non-wage income from S corporations. H.R. 4213 would not even eliminate this exception entirely but would merely target those taxpayers who are most obviously manipulating the tax rules to avoid paying the Medicare tax. This seems like the least Congress could do.
The provisions in H.R. 4213 that prevent abuses of the foreign tax credit have also received more attention lately. A new report from CTJ responds to criticisms of these provisions made by the Peterson Institute's Gary Hufbauer and Theodore Moran.
The purpose of the foreign tax credit is to ensure that American individuals and corporations are not double-taxed on income that they earn in other countries. Hufbauer and Moran seem to acknowledge — and endorse — the common practice of corporations using credits in excess of what is necessary to avoid double-taxation. In these instances, corporations are really using the credit to lower their U.S. taxes on their U.S. income. Or, put another way, it means the credit is being used to subsidize foreign countries by helping U.S. corporations pay their foreign taxes.
Surely, everyone should agree that this is not the purpose of the foreign tax credit. But without the reforms included in H.R. 4213, these practices will continue, and we will have missed an important opportunity to make our tax system fairer and more rational.
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.
Will Senate Dems Allow Aid to Unemployed, Jobs and Medicare Funds to Expire in Order to Save Loophole for Millionaire Investment Fund Managers?
Call your Senators and tell them to stop putting multi-millionaire investment fund managers ahead of struggling families.
Call the Capitol switchboard at 202-224-3121 and ask to be connected to the Senators for your state.
Democrats in Congress are rushing to pass the jobs and "extenders" bill before the end of the week. This bill includes extensions of badly needed unemployment insurance and COBRA health benefits, TANF jobs and emergency funding, Medicaid funding for states and several other important measures. These are the type of measures that many economists, like Mark Zandi of Moody's Economy.com, believe will help stimulate the economy and speed up the recovery. The bill may be passed in the House this week.
Even if the bill passes the House, there may be a serious roadblock in the Senate. Some Democrats in the Senate may oppose or slow down this bill because it includes a provision to clamp down on a loophole allowing investment fund managers to earn hundreds of millions of dollars each year and yet pay taxes at a lower rate than their secretaries.
In other words, some Senate Democrats (and all or most Republicans) would allow unemployment and health benefits to expire for out-of-work families, and would allow jobs funding and Medicaid funding to expire, all to protect a loophole that allows multi-millionaires to pay taxes at lower rates than middle-income people. With every (or nearly every) Republican Senator guaranteed to vote against the bill, the Democrats are struggling to remain unified.
(See CTJ's recent report about the tax loophole-closers in the bill.)
If there was ever a time to call your Senators and give them hell, this is it.
The bill in question is H.R. 4213, the jobs and "extenders" bill. The loophole in question is the infamous "carried interest" loophole that allows wealthy fund managers to pretend that some of the compensation they receive in return for managing other people's money is capital gains. (See CTJ's recent report about carried interest.)
Compensation for work is almost always taxed at ordinary rates as high as 35 percent and subject to payroll taxes of around 15 percent. But this loophole allows the investment fund managers (who can earn hundreds of millions of dollars a year) to pretend that some of their compensation is capital gains, which is subject to an income tax rate of just 15 percent and is not subject to payroll taxes at all.
After the Bush tax cuts expire at the end of this year, the top tax rate for "ordinary" income (meaning income subject to ordinary income tax rates) will go from 35 percent to 39.6 percent and the top rate for capital gains will go from 15 percent to 20 percent. That means that if this loophole is not closed, investment fund managers will be able to cut their income taxes roughly in half from what they should be paying, and will still avoid payroll taxes.
Democratic leaders have already compromised on this issue. Instead of treating all carried interest as "ordinary" income (i.e. not capital gains) as previous House-passed bills would do, the current proposal would treat 75 percent of it as ordinary income.
Incredibly, this has not been enough for some Senators who want to further weaken the provision.
Keep in mind that this has nothing to do with changing the taxation of anything that can honestly be called investment income. The idea behind the tax preference for capital gains is that it encourages people to invest. This is nonsense for reasons we'll get into on another day, but it is the accepted wisdom among many lawmakers who don't have much time to think about economics. But even if we accept this premise, it does nothing to explain why this tax preference should be enjoyed by people who are not investing their own money but merely managing other people's money. That's what the carried interest loophole currently allows.
Five Senators (Scott Brown, Jeanne Shaheen, Bob Casey, Patty Murray, Mark Warner) signed a letter to Finance Committee Chairman Max Baucus asking to amend the provision to allow venture capital fund managers to continue to enjoy the loophole.
The basic idea is that venture capital firms create innovation and jobs, unlike some of the other types of investment managers (like hedge fund and buyout fund managers) and this type of investment needs to be encouraged. The letter does not explain why this calls for tax breaks allowing the people who manage the money (not the people putting up their own money) to pay taxes at lower rates than middle-income people.
It has also been rumored that the venture capital industry has put a great deal of effort into persuading the Senators from California, Barbara Boxer and Dianne Feinstein to resist the provision.
Senators Maria Cantwell, John Kerry and Robert Menendez have also voiced concerns. Kerry and Menendez have called for some sort of "compromise" so that investment fund managers do not have to entirely pay at ordinary rates on their carried interest. This could involve taxing a smaller portion of carried interest as ordinary income (taxing less than 75 percent of it as ordinary income).
Another idea being floated would allow for investment managers to continue to enjoy a loophole to the extent that the investments they manage are held for a certain number of years. The idea seems to be to reward "patient" capital rather than those trying to make a quick buck. But of course, this really has nothing to do with rewarding patient capital since it would benefit the people managing the money, not the people actually investing it. Even more alarmingly, it could actually delay certain investments if fund managers are encouraged to hold onto assets for a longer period of time than would otherwise make sense just to enjoy the tax break. Certain deals would be delayed, meaning this provision could actually slow down economic development and job creation.
Staffers for several other Democratic Senators also expressed concerns about the carried interest provision, which seems to mean that ALL Senators need to hear from their constituents on this issue.
No one has explained why making the people who manage investments pay taxes at the same rate as everyone else will discourage investment. The argument that is occasionally trotted out by the industry is that the people managing the money and investments will have to charge more for their services in response to a tax increase. This is simply not true. If they could charge more, they would already being doing that right now. And it's worth remembering that investment fund managers did not decide to charge less when their tax rates were reduced (in 1997 and 2003 when the capital gains rates were cut) so it's illogical to believe that they will charge more in response to a tax increase.
The only explanation for the Senate's resistance that readily comes to mind involves the campaign contributions that investment fund managers make. Senate Democrats are, frankly, in danger of creating an extremely unflattering impression of themselves as beholden to their wealthiest contributors.
Many who have been following this bill are extremely concerned that the Senate may not pass the bill this week, or may pass the bill after amending it to reduce the impact of the carried interest provision. An amended bill could be disastrous in that it might make it impossible for the two chambers to come to agreement and send a bill to the President before the Memorial Day recess.
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.
New CTJ Report: Extending Bush Tax Cuts for High-Income "Small Business" Owners Would Further Enrich the Wealthiest Taxpayers While Doing Nothing to Create Jobs
As Congress prepares to take up legislation to boost small business job creation in the following weeks, some lawmakers argue that the legislation must extend parts of the Bush tax cuts that benefit the very rich.
Two ideas along these lines are being discussed. One is to extend income tax reductions for the very rich, at least for taxpayers who can be somehow classified as “small business” taxpayers. The second is to eliminate most of the federal tax on the estates of millionaires. As the new CTJ report explains, both of these proposals would allow the rich to continue to enjoy most of the tax cuts they received under President Bush while doing nothing to create or protect jobs.
Extending income tax cuts for small business owners is unlikely to boost job creation because:
— President Obama has already pledged to extend the Bush income tax cuts for 98 percent of taxpayers. Only 3 to 5 percent of small business owners are wealthy enough to lose some of their tax cuts under President Obama’s proposal.
— Hiring decisions are generally not based on federal income taxes, but are based on whether or not there is demand for the goods or services that a business provides.
— Economists and analysts, including those at the non-partisan Congressional Budget Office, have concluded that extending income tax cuts would be the least effective of several policy options to create jobs.
— Enacting a “carve-out” or special break for “small businesses” would simply encourage all rich taxpayers to disguise their income as “small business” income.
Cutting the estate tax is also unlikely to boost job creation because:
— An even smaller percentage of small businesses would be affected by the federal estate tax under President Obama’s proposal.
— Those few small businesses affected by the estate tax already enjoy special breaks that make it more manageable for closely held businesses and farms.
— It is very unlikely that the estate tax causes millionaires (the only people affected by it) to work less or invest less and therefore create fewer jobs. If anything, the estate tax could have the opposite effect.
Read the report.
On Tuesday, the Senate Finance Committee completed a series of hearings on the President's proposal to raise $90 billion with a fee on risky assets held by the 50 biggest financial institutions to ensure repayment of bailout funds. One of the best explanations of why Congress should impose such a fee was provided by Douglas Elliott, a Brookings Institution scholar and a former investment banker.
Some opponents of the fee have argued that it will be ultimately paid by all taxpayers because banks will pass it on to customers. Elliott responds that even if the fee is partially passed on, the taxpayers who pay the most (those who do the most business with banks) would be the taxpayers who benefit the most from the bailout. (The cost of borrowing for these taxpayers would be much greater if the government had allowed the financial system to collapse.) Elliott also points out that the fee would be equal to just two percent of the banks' income plus compensation, and would equal just 0.1 percent of assets.
Other opponents have questioned why such a fee should be imposed on some banks that have already paid back their bailout funds or those who received no funds. As for those who have paid back their funds, Elliott points out that the benefits they received are much greater than the exact dollar amount that was given to them directly.
"The aid that was provided was generally priced well below what the private market would have charged for the same risk," he explained, adding that "merely paying off the aid under the terms required does not come close to fully compensating taxpayers for the risks they successfully took to restore the economy."
And really all financial institutions benefited regardless of what they received directly. "[T]rillions of dollars of value had been destroyed on securities and loans, much of it in the hands of the institutions which would be paying this fee," Elliott explained.
"Failure of the government to act in the extraordinary manner that it did would have allowed a further meltdown that would have destroyed trillions of dollars more in value. The industry should be extremely grateful for this aid, instead of minimizing the nature of the help in order to avoid a relatively trivial fee."
Over the past several weeks, Democratic leaders in the House and Senate have pursued a strategy of enacting several small pieces of legislation to address joblessness. While lawmakers might find this strategy easier than passing one great big bill, it does make it a bit difficult for those of us who are trying to keep track of which tax provisions Congress has passed and which provisions are still being debated. A new report from CTJ simplifies this task by summarizing recent activity on jobs bills and describing each bill and the tax provisions included.
Read the report.
The Senate approved a bill Wednesday that includes an extension of unemployment benefits and COBRA health benefits for unemployed workers through the end of the year, and a short-term extension of Medicaid funding for states and a Medicare "doc fix" (maintaining payments to doctors under Medicare).
The cost of this spending was not offset since it is considered emergency spending to stimulate the economy. But the costs of other provisions in the bill — extensions for $30 billion worth of business tax breaks often called the "tax extenders" — were offset. The biggest revenue-raiser used to offset this costs is a provision to close the "black liquor" loophole. This loophole allows paper-making companies using a carbon-rich by-product as fuel to use a tax credit that is supposed to encourage the use of environmentally-friendly alternative fuels.
But the "black liquor" provision may be used instead in the final health care reform bill. The health care reform bill approved by the House on November 7 of last year (H.R. 3962) included this revenue provision, and the President's recent proposal to bridge the differences between the House and Senate health bills also includes it.
There is another perfectly good revenue-raising provision that the Senate can use to offset most of the cost of the "tax extenders." The version of the tax extenders bill approved by the House on December 9 was supported by CTJ and several other progressive organizations because it included several good provisions, including one to close the infamous "carried interest" loophole. U.S. PIRG and CTJ issued a joint press release yesterday stating their disappointment that the Senate has not done the same.
The carried interest loophole allows billionaires managing hedge funds and buyout funds to pay taxes at a lower rate than middle-income workers. The House has passed legislation three separate times to close the carried interest loophole (including the recent House-passed extenders bill), and both of President Obama’s budget plans have proposed to close it. Senator Chuck Schumer (D-NY) was quoted in Congress Daily recently saying that closing the carried interest loophole is "on the table."
Until this loophole is closed, the compensation of these fund managers will continue to be taxed at a rate of 15 percent, the preferential rate for capital gains that is supposed to benefit people who invest their own money, not the people who manage it.
Senate Republicans blocked action on aid for millions of unemployed Americans this week, and threatened to continue to do so unless Congress acts on a completely unrelated matter: the federal tax on the estates of millionaires.
The Need for Help for the Unemployed
Congress has an opportunity to help families hardest hit by the recession while at the same time increasing consumer demand, which in turn will increase the number of businesses that are hiring. The Congressional Budget Office has found that extending unemployment benefits is one of the most effective ways to increase consumer demand (i.e., create jobs), making it attractive from the standpoint of economic policy as well as compassion for struggling Americans. (There are 6 job-seekers for every open position right now.)
By the end of February, 1.1 million people are scheduled to lose their UI benefits, and another 2.7 million are scheduled to lose them by the end of March. Senate Democrats hoped to move by unanimous consent to extend UI benefits and COBRA health care benefits for out-of-work Americans for 30 days, to tide them over until a longer-term extension can make its way through Congress.
Help for the Unemployed Held Hostage for Tax Cuts for Millionaires
Senate Republicans denied the unanimous consent request to pass an extension of UI and COBRA. The objection was raised by Senator Jim Bunning (R-KY) over the source of funding. But the measure is apparently also being held hostage by Senators wanting to give multi-millionaires a break on the estate tax.
The tax law passed under President Bush in 2001 gradually repealed the estate tax over several years until making it completely disappear this year. But, since the Bush tax cuts expire at the end of 2010, the estate tax will return in 2011 in its pre-Bush form (with the tax exempting the first $1 million in assets, per spouse, and a top estate tax rate of 55 percent).
House Democrats decided last year that a million dollars just isn't what it used to be, and passed a bill that would permanently increase the exemption and lower the rate, but not let the estate tax disappear in 2010. (Technically, they passed a permanent extension of the estate tax rules in effect in 2009, with a $3.5 million per-spouse exemption and a top rate of 45 percent.) But the Senate failed to act on the measure.
Under the proposal approved by the House, fewer than one percent of deaths would result in estate tax liability. Apparently that's too many for Senators Jon Kyl (R-AZ) and Senator Chuck Grassley (R-Iowa), who have wanted to repeal the estate tax for years and now hope that they can at least reduce it much further than the Democrats want. They have indicated that, until a deal is reached on the estate tax, they will block passage of the UI and COBRA extension. On Feb 24, Kyl, a long-time leader against the estate tax, said that Republicans will block consideration of the legislation unless they get "a path forward fairly soon" to voting on a measure to permanently weaken the estate tax.
Bizarrely, Senator Bunning blocked the unanimous consent motion for the $10.3 billion, 30-day UI and COBRA extension, saying he wanted the costs somehow offset, even while his Republican colleagues press for an estate tax measure that will cost hundreds of billions of dollars, with no hope of being offset.
Kyl and Grassley tried to cut a deal earlier this month with Senate Finance Committee Chairman Max Baucus (D-MT) to get a fast track for the estate tax vote in exchange for votes on a jobs bill, but Majority Leader Harry Reid (D-NV) rejected the package and put together a jobs bill of his own. That pared-down bill passed the Senate on Wednesday, including $16 billion in tax cuts for employers who hire new workers.
Another wrinkle is that Grassley and Kyl have reportedly been in discussions with Senator Maria Cantwell (D-WA) who has proposed to allow multi-millionaires to prepay their estate tax at a lower rate. This is clearly a accounting gimmick designed to mask the true cost of the estate tax change. It would bring some money into the Treasury during the 10-year budget window that Congress focuses on, but lose huge amounts of revenue in years after that. United for a Fair Economy has objected to the proposal in a letter to Senator Cantwell. Washington residents are urged to sign on to the letter.
Coalition Calls for More Robust Estate Tax than Approved by House Democrats
Congress needs to move in a different direction on the estate tax. Americans for a Fair Estate Tax, a coalition of organizations including Citizens for Tax Justice, has issued a call for an estate tax that exempts no more than $2 million in assets per spouse, and taxes the taxable portion of estates at a rate of at least 45 percent, with an additional 10 percent on assets in excess of $10 million. Only about 0.7 percent of deaths resulted in estate tax liability in recent years when the per-spouse exemption was set at $2 million.
Cutting the estate tax any more than this — particularly when Congress seems to have so much trouble helping the Americans who are struggling the most — would prove that Congress really does have its priorities completely backwards.
New CTJ Report on President Obama's FY2011 Budget Proposal: The Federal Government Should Collect at Least as Much Revenue as Obama Proposes
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.
President's State of the Union Address Acknowledges - Partially - the Problems with the Bush Tax Cuts
"From some on the right, I expect we'll hear a different argument -– that if we just make fewer investments in our people, extend tax cuts including those for the wealthier Americans, eliminate more regulations, maintain the status quo on health care, our deficits will go away. The problem is that's what we did for eight years." (Applause.) "That's what helped us into this crisis. It's what helped lead to these deficits. We can't do it again."
President Obama spoke these words in his State of the Union address on Wednesday night, after pledging to enact an agenda that will create jobs and tackle our long-term budget deficit. He did a good job of explaining that the budget deficits that exist today are the result of deficit-financed tax cuts, two deficit-financed wars, and a major recession all occurring before he entered the White House.
But one has to wonder if President Obama is gently bearing left at a time when any sensible directions would call for a sharp left turn.
The Bush Tax Cuts
He remains committed to extending the Bush income tax cuts for the 98 percent of taxpayers who have adjusted gross income (AGI) below $250,000 (or below $200,000 for an unmarried taxpayer). The budget document released by the administration last year showed, in a convoluted way, that this would cost $1.88 trillion between now and 2019. His proposal to partially extend the Bush cut in the estate tax (making permanent the estate tax rules in effect in 2009) would cost another $576 billion over the same period, for a total of about $2.45 trillion.
The estimated costs of these proposals may be different in the budget to be released next week (since all the projections change at least somewhat in response to developments in the economy). But make no mistake, the cost of extending most of the Bush tax cuts far exceeds the savings the President hopes to achieve with his proposed spending freeze (which will actually cut spending if one accounts for inflation and other factors).
Cutting Non-Security Discretionary Programs
The administration is reported to believe $250 billion can be saved from the spending freeze, which would last three years but would not apply to national security, Medicare, Medicaid, or Social Security. The first problem is that these exempt categories of spending, along with interest payments on the national debt that cannot be avoided, make up 70 percent of the federal budget. Americans love to complain about wasteful government spending, but few realize that, once you eliminate those categories of spending that are very popular with the public, there's not a whole lot left to cut. The non-security discretionary spending that is left has come under increasing pressure in recent years since it's the only part of the budget lawmakers feel comfortable attacking.
The second problem is that cutting back spending when the economy may still be weak could prolong our downturn. Progressive observers have warned that the Roosevelt administration's decision to stop stimulating the economy and focus on deficit-reduction plunged the country back into a deeper depression in 1937.
For their part, administration officials have explained that they are not proposing an across-the-board freeze. Rather, they will identify particular types of spending that represent wasteful giveaways to special interests rather than public services that people depend upon.
Even if that's true (and the jury is still out on that), it's still peculiar that taxes aren't getting more attention. This is the third problem with the President's approach. The need for higher taxes is like an 800 pound elephant in the room that everyone is trying to ignore, even if they vaguely acknowledge that Bush's tax cuts got us into this mess. Does a family with an income of $190,000 really need every cent of their Bush tax cuts? Do families with $7 million in assets really need to be fully exempt from the estate tax? The President's tax proposals would have us believe so.
Steps in the Right Direction
The President certainly wants to move in the right direction, as was evident in various parts of his speech. He reiterated his proposal to charge a fee on risk-taking by the largest banks, which would raise $90 billion over a decade according to the administration. We've argued before that this is entirely reasonable. The institutions affected know they have an implicit guarantee from the government and are prone to put the entire economy at risk as a result. It makes sense to demand that they pay up in proportion to their risk-taking.
The President also reaffirmed his desire to do something about offshore profit-shifting by corporations. The proposals he made last year along these lines would raise $200 billion over a decade and would be extremely important, as we have explained in detail, in preventing U.S. corporations from shifting their profits to other countries.
Sometimes this shifting means companies actually move jobs and operations offshore, but other times it involves accounting gimmicks and transactions that exist only on paper. Either way, Americans lose tax revenue for no good reason other than that Congress is afraid to take on the lobbying power of multinational corporations.
America has a budget problem that is long-term in nature. The money we spend this year or next year to stimulate the economy has little impact on the long-term deficit. Reforming our tax system permanently, however, is an important part of the long-term solution.
President Obama has proposed a fee of 0.15 percent on the riskier assets held by the roughly 50 financial institutions that have more than $50 billion in holdings. The fee would be in place for at least ten years and the Administration estimates that it would collect around $90 billion over a decade. If the $700 billion distributed through the financial bailout (the Troubled Asset Relief Program, or TARP) is not entirely paid back by that time, then the fee would continue to be in effect for additional years.
The proposal might kill a whole flock of birds with one stone. Excessive risk-taking by the financial industry as a whole lead to a systemic meltdown. As a result, the banking system as a whole was failing, meaning businesses were unable to obtain credit, making it impossible for them to function. The bailout propped the banking system back up to avoid a deeper recession, but the distasteful side-effect is that the largest banks know full well that they are now considered "too big to fail."
So now the biggest banks have little incentive to avoid the sort of risk-taking that lead to the collapse. The implicit government guarantee gives them a special advantage that smaller banks don't have. The proposed fee would seem to address these problems at least to some extent, by reducing the incentive for risk-taking as well as the advantage that the largest banks have over smaller banks.
The bailout legislation (which was signed into law by George W. Bush, in case anyone forgot) includes a provision requiring the President to offer a proposal by 2013 for recouping any losses from the program.
Of course, Washington would not be Washington if special interests weren't ready to oppose any new tax or regulation. Jamie Dimon, chief executive of J.P. Morgan Chase said, "Using tax policy to punish people is a bad idea." He added, "All businesses tend to pass their costs on to customers."
Would banks really pass this fee on to their customers? Wouldn't they be constrained by the fact that customers could just go to a smaller bank that is not subject to the fee? And even if that happened, the worst imaginable result would be that the financial industry would be less dominated by institutions that are "too big to fail." What would be so terrible about that?
More to the point, the fee looks more like a regulation than a punishment. From this perspective, the only problem is that it's temporary. Why not permanently charge a fee on risk-taking by the large institutions that now seem to have an implicit guarantee that they'll be bailed out by the government if need be? From this perspective, it also becomes clear that the haggling over which banks have paid back their TARP funds is largely beside the point. The entire industry traded in explosives that blew up the economy when they stopped being careful.
At the end of the day, it's hard to imagine that this fee would hurt banks at all. As one writer for the Wall Street Journal put it, "Paying out $10 billion a year is no sweat for an industry that, according to Goldman Sachs, made $250 billion in earnings before taxes and loan-loss provisions last year."
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.
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.
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.
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.
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.
In a move that helps the banking giant Citigroup, the IRS issued a notice last Friday granting TARP recipients an exception to the restrictions on using losses of acquired companies to reduce future taxes.
The limitations (known as Sec. 382 limitations) are meant to restrict a company from using the Net Operating Losses (NOLs) of companies it buys to reduce its own taxable income in the future. Sec. 382 was clearly never meant to apply to a situation in which the government acquires and then sells stock in a company, but rather was meant to prevent taxpayers from buying companies purely as tax shelters.
Sec. 382 generally limits the use of NOLs when there is a more-than-50% change in the ownership of a company. The IRS issued a ruling last May that any ownership by the government would not count towards an ownership change. Last Friday's notice expanded that exception to include any shares sold to the public by the government.
This notice particularly helps Citigroup since Treasury is planning to sell its stake in Citigroup to the public. This exception will allow Citigroup to avoid the Sec. 382 limitations and be able to use its NOLs against future taxable income.
Some commentators have noted that this will increase the cost of the federal bailout for TARP recipients, taking additional money out of the pockets of ordinary taxpayers. But if the government's bailout has, as most economists believe, avoided a much more serious recession, most Americans are probably still better off.
Unlike the previous administration's infamous "Wells Fargo ruling," the IRS has the authority to issue this notice under the provisions of the 2008 Emergency Economic Stability Act and the 2009 American Recovery and Reinvestment Act. One of lawmakers' objections to the Wells Fargo ruling was that it applied only to a specific industry, but this new notice applies to all TARP recipients.
On Tuesday, President Obama put forth ideas, some good and some not as good, to create jobs. The more misguided proposals involve using the tax code to reward businesses, while the best ideas involve direct spending.
For example, he proposed the elimination of capital gains taxes for small business investment and an extension of the break that lets small businesses immediately deduct (expense) a larger amount of their capital investments.
The capital gains break is particularly problematic. If this provision works as existing similar capital gains breaks work, it would mean that anyone who buys an interest in a company that qualifies as a "small business" within a certain time period can hold onto that interest for as long as they like -- say, 20 years or longer -- and then sell it without paying any tax on the gain.
Of course, no investor knows whether or not a small company will grow and last that long. The company could go out of business in a couple years. Or the company could be Microsoft.
But, more to the point, it's not obvious that this would help a small business today to create jobs. Investors don't want to put their money in a venture unless they think there is some demand for the goods or services that would be produced. So, what's needed now to create jobs is a boost in demand for goods and services. Investors would respond by creating or expanding business, meaning they would hire more people to work more hours. Business owners only expand like this if they can profit, and that resulting profit is what causes stocks to become more valuable, which is what causes shareholders to have capital gains.
The President's capital gains proposal gets this all backwards by aiming a tax cut at the very end of that process, at the capital gains, and assuming that demand will materialize on its own as long as a tax cut encourages an increase in the supply of capital. At risk of drawing an alarming comparison, the proposal is, well, supply-side in its logic.
The President also says he wants to work with Congress to "create a tax incentive to encourage small businesses to add and keep employees." This could be a mediocre idea or a bad idea, depending on exactly what he's thinking.
If he's thinking of a payroll tax holiday, this could, in theory, produce some increase in demand if it means that workers who pay less in payroll taxes will spend the increase in their take-home pay. But to the extent that they save the extra money, it doesn't produce the boost in demand that is needed right now.
If the "tax incentive" the President is thinking about is a tax credit that goes to businesses for creating jobs, that could be even more problematic. There has been a lot of talk about giving businesses a credit for the amount by which they expand their payroll, and even making the credit refundable so that companies that are not currently profitable can benefit from it. Like the capital gains tax break, this proposal would do little to boost demand. But that's only the beginning of the problems.
Another problem is that it raises the question of how to treat new companies. Would they get the credit, and how would it be calculated since all their jobs are new? If they get the credit, what's to stop someone from liquidating their existing company and starting a new company that is different in name only? Perhaps more alarming is the fact that a lot of companies will create more jobs anyway, so a lot of the revenue would be a reward to firms for doing something they would have done even without the tax break.
A proposal that has been recently promoted by the Economic Policy Institute argues that even if one takes these problems into account, a well-designed tax credit can create jobs in a cost-effective way. Even if only a fraction of the jobs created are the result of the credit, the authors figure that five million jobs could be created over two years, at a total cost of about $5,400 per full-time job (or full-time job equivalent) created as a result of the credit.
Given the many questionable assumptions needed to come to this conclusion, we think a much surer bet for job creation would be plain old government spending. Thankfully, direct spending by the government was also included in the proposals the President discussed.
For example, he mentioned extending aid to unemployed and low-income people as well aid to states. This type of government spending would result in increased consumption (and therefore increased demand for goods and services) almost immediately.
As a recent report from the Center on Budget and Policy Priorities explains, aid to states is particularly important right now, because state governments are already planning their budgets for fiscal year 2011, when most of the aid they received in the recovery act is supposed to end. There's usually a lag between an economic recovery and state governments' recovery of their revenue streams, so a lot of states will be cutting services and staff even if the economy is expected to improve in 2011.
Federal aid to state and local governments that allows them to save jobs that they are about the eliminate provides an immediate and clear benefit. It maintains the income that the otherwise eliminated state and local government employees will spend, which boosts demand for goods and services above where it would be if the federal government did not provide this aid.
The President is right that Congress cannot improve our economy by focusing single-mindedly on the budget deficit. The federal government needs to provide the conditions for job creation. Let's hope that this effort doesn't get diverted into a tax-cutting spree that makes good sound bites without addressing our underlying economic problems.
The National Association of Realtors Has Taken Plenty of Regressive Positions on Taxes -- But Do They Oppose Extending the Bush Tax Cuts for the Rich?
The National Association of Realtors (NAR) and other groups representing the real estate industry have been a case study in special interest politics for some time. A quick glance a the Congressional Joint Committee on Taxation's tax expenditure report reveals that tax breaks related to housing cost over $100 billion a year, but that's not enough to satisfy NAR and its followers.
The Battles Over the "Carried Interest" Loophole
Two years ago, the Real Estate Roundtable (of which NAR is a member) hired Douglas Holtz-Eakin to defend the "carried interest" loophole, which basically allows those investing other people's money to pretend that they put up their own money, thus entitling them to pay taxes at the low capital gains rate of 15 percent rather than the regular rate of 35 percent that other highly compensated workers pay. (CTJ released a fact sheet debunking Holtz-Eakin's arguments.) The Obama administration continues to support closing the carried interest loophole.
The Homebuyer's Credit
In the last year of the Bush administration, the real estate industry managed to get Congress to adopt, as part of the economic stimulus law enacted in 2008, a $7,500 homebuyer credit that taxpayers would have to pay back to the IRS. This, year, they persuaded Congress to upgrade that to a $8,000 homebuyer credit that does not have to be paid back and that is available to taxpayers under certain income limits if they purchase a home before the end of November of this year.
The homebuyer tax credit was estimated at the time of enactment to have a cost of $6.6 billion, but is actually on track to cost more than twice that.
Since the economic crisis was caused by inflated home prices, it is not at all clear how subsidies provided through the tax code to boost home prices could possibly be good policy.
Ted Gayer at the Brookings Institution has written that:
"The tax credit is very poorly targeted. Approximately 1.9 million buyers are expected to receive the credit, but more than 85 percent of these would have bought a home without the credit. This suggests a price tag of about $15 billion – which is twice what Congress intended – for approximately 350,000 additional home sales. At $43,000 per new home sale, this is a very expensive subsidy."
Perhaps most alarming is the possibility that the homebuyer credit could become another "tax extender," the term used by Congressional staff and lobbyists to describe tax breaks that are ostensibly in effect for only a year or two, but which everyone believes Congress will extend again and again. NAR is, of course, pushing for Congress to extend the homebuyer credit.
Perhaps the worst example of special interests fighting to block the common good is the real estate industry's interference in Congress's attempts to reform health care. Early this year, the Obama administration proposed to limit the value of itemized deductions for wealthy taxpayers to 28 percent as a way to raise revenue that would partially fund health care reform. CTJ found that this would affect only the richest 1.3 percent of taxpayers and would merely reduce some of the unfairness that occurs when Congress subsidizes certain activities (like home ownership and charitable giving) through the tax code. NAR, naturally, would have none of it, since this proposal would curtail the savings received by high-income taxpayers when they claim the itemized deduction for home mortgage interest.
In fact, NAR recently has come out against a much more scaled back version of this proposal, which would merely cap itemized deductions at 35 percent.
Currently, the top income tax rate is 35 percent, so the richest Americans can save, at most, 35 cents for each dollar of itemized deductions they claim. But the Bush tax cuts, which lowered the top income tax rate from 39.6 percent to 35 percent, will expire at the end of 2010. That means that in 2011, under current law, each dollar of itemized deductions claimed by a very wealthy person could result in almost 40 cents of savings. Capping itemized deductions at 35 percent would therefore merely freeze in place their current value after the Bush tax cuts expire and rates go back up.
NAR recently issued a statement saying that it opposes even this scaled back proposal to limit itemized deductions and that it "rejects in the strongest possible terms any proposal that would limit the deductions for mortgage interest and real property taxes." NAR is unabashed in its defense of subsidies provided through the tax code for families in the top income tax bracket.
Do the Realtors Oppose the Bush Tax Cuts?
But if the realtors believe that the very rich should receive 39.6 cents for each dollar of itemized deductions they claim, that seems to imply that they think the top income tax rate should revert back to the pre-Bush level of 39.6 percent. Their position seems to be that it is unacceptable for the richest Americans to only save 35 cents for each dollar they claim in itemized deductions. The only way for that number to go back up from 35 to 39.6 is for President Bush's reduction in the top rate to expire. Surprisingly, NAR and CTJ seem to have one position in common, albeit for vastly different reasons.
Against Advice of Economics Experts and Intent of Congress, Some States Use Stimulus Money for Corporate Tax Breaks
As the current recession pulls revenues down in states across the country, legislatures find themselves between a rock and a hard place, or at least that's how the situation is often presented. Sometimes budget crises are portrayed as a choice between several horrific alternatives. (Cut healthcare for low income children or programs for the elderly?)
So you would think that every state facing such cuts would use federal stimulus funds to avoid them, right? Wrong. Federal stimulus aid to states is explicitly intended to protect essential services such as health care and education, but a recent article in Business Week explains that some states are using this money to indirectly finance tax incentives for businesses. In some cases it has been suggested that tax cuts for corporations may actually threaten states' eligibility for these funds!
In an interview for the article, Greg LeRoy of Good Jobs First notes that, "When a cash-strapped state is giving out an enormous tax package and also getting federal money, the left hand, in this case the incentives, is connected to the right."
Economic research has shown that if tax incentives to businesses are financed by cuts in spending on essential services and infrastructure, the costs may far outweigh the benefits. Corporate tax breaks (like this one in North Carolina, worth almost $70 million) don't produce anywhere near enough economic benefits to offset their costs. Even worse, most are simply handouts to companies who would have invested anyway.
These giveaways are expensive and clearly contribute to declining revenues. On the other hand, research suggests that the benefits of public services are likely more important than tax costs as determinants of business location. Instead of lining the pockets of large corporations, states should be engaging in pro-growth policies that ensure low- and middle-income families don't bear the full brunt of the current economic storm.
For more on costly corporate subsidies, check out Good Jobs First.
The Treasury Department has recently issued rulings that to allow a newly bailed out General Motors to avoid part of the 1986 tax reform that is supposed to prevent abusive tax shelters.
Many years ago, Congress enacted rules to keep companies from trafficking in net operating losses (NOLs). Profitable companies were buying companies with NOLs and using the NOLs to offset their income, reducing or completely eliminating their tax liability. In many cases ability to use the NOLs was the only valuable asset the loss company owned. So Congress added Internal Revenue Code Section 382 to limit the amount of NOL "carryforwards" that companies can use when there is a change in ownership of more than 50 percent.
Under the General Motors restructuring, the federal government will own about 60 percent of the stock of the new GM. Generally that would mean that the ability to use the NOLs would be strictly limited (a small portion would be allowable each year). But the Treasury Department has issued a series of rulings that will allow GM to use the NOLs. The rulings basically treat the U.S. government as never having been a shareholder. So if things start looking up for the troubled automaker and the government is able to share some of its stake in the company, the GM stock will be significantly more valuable to a potential investor because of the NOLs that will save GM taxes in the future. Net operating losses can be carried forward 20 years to offset taxable income. They can also be carried back two years, but GM has not posted a profit since 2004.
House GOP's Alternative Budget: Poor Pay More, Rich Pay Less, Stimulus Repealed and Government Shrinks
When anti-tax activists and lawmakers complain that Congress and the President are pursuing policies that will cause taxes to be too high, the first question anyone should ask is: Compared to what? What exactly is the alternative to allowing the Bush tax cuts to end (at least for the rich) and finding new ways to raise revenue?
This week the House GOP showed us what the alternative is and it's frightening. On Wednesday, the ranking Republican on the U.S. House of Representatives' Budget Committee, Congressman Paul Ryan (R-Wisc.), released a budget plan which he argues is a more fiscally responsible alternative to the budget outline proposed by President Obama and the similar budget resolutions approved by both chambers last night. His proposal is apparently an update of the plan that House GOP leaders introduced last week and is different in some key respects.
The revised House GOP budget plan would move towards cutting and privatizing Medicare, convert Medicaid into limited block grants to states, and even cut Social Security benefits for some retirees. The plan would deeply cut the relatively small amount of government spending devoted to non-military, non-mandatory programs by refusing to adjust the budgets of these programs for inflation and population growth for five years. The House GOP plan would repeal the recently enacted economic stimulus law (the American Recovery and Reinvestment Act of 2009, or ARRA) a year before its expiration at the end of 2010.
A report from Citizens for Tax Justice compares the income tax proposals in the House GOP plan to the income tax proposals in the House Democratic plan in 2010, and finds that:
- Over a third of taxpayers, mostly low- and middle-income families, would pay more in taxes under the House GOP plan than they would under the House Democratic plan in 2010.
- The richest one percent of taxpayers would pay $75,000 less, on average, in income taxes under the House GOP plan than they would under the Democratic plan in 2010.
- The income tax proposals in the House GOP plan, which is presented as a fiscally responsible alternative to the Democratic plan, would cost over $225 billion more than the Democratic plan's income tax policies in 2010 alone.
Yesterday, the ranking Republican on the U.S. House of Representatives' Budget Committee, Congressman Paul Ryan (R-Wisc.), released a budget plan which he argues is a more fiscally responsible alternative to the budget outline proposed by President Obama and the similar budget resolutions working their way through the House and Senate right now. His proposal is apparently an update on the plan that House GOP leaders introduced last week and is different in some key respects.
A new report from Citizens for Tax Justice compares the income tax proposals in the House GOP plan to the income tax proposals in the House Democratic plan in 2010, and finds that:
- Over a third of taxpayers, mostly low- and middle-income families, would pay more in taxes under the House GOP plan than they would under the House Democratic plan in 2010.
- The richest one percent of taxpayers would pay $75,000 less, on average, in income taxes under the House GOP plan than they would under the Democratic plan in 2010.
- The income tax proposals in the House GOP plan, which is presented as a fiscally responsible alternative to the Democratic plan, would cost over $225 billion more than the Democratic plan's income tax policies in 2010 alone.
Americans are not very permissive when it comes to folks who are on the dole. Poor families receiving welfare in the United States are subject to a long list of work requirements and time limits and they can be sanctioned (that is, they can have their tiny benefit checks cut off) for failure to comply with the rules.
So it is not remotely surprising that taxpayers also want to establish some strict rules for large institutions that are on the dole. The taxpayers have handed over spectacular sums to bail out financial institutions, which amounts to corporate welfare on an epic scale. They obviously want to know that their money is being put to the use intended (i.e., saving us from another Great Depression) rather than just funding a third or fourth vacation home for a bank executive.
The delicate little problem for Congress is that lawmakers have a tendency to be awfully lax on the recipients of corporate welfare -- until their permissiveness is brought to light in some scandalous display. That's pretty much what happened recently as reports surfaced that American International Group (AIG) had paid out $165 million in bonuses after receiving $170 billion in federal TARP funds.
In the hurried butt-covering that followed, the House of Representatives grabbed the nearest tool (the U.S. tax code) and tried to use it to hammer a defect out of their bailout program to make it more acceptable to the newly attentive public. On March 19, they approved a bill that we are not exactly impressed with.
The House bill would impose a 90% tax on bonuses paid to employees of Troubled Asset Relief Program (TARP) recipients, as well as the mortgage giants Freddie Mac and Fannie Mae. The tax would apply to bonuses paid to employees of companies who have received $5 billion or more in government aid since the beginning of 2008. The tax would no longer apply when bailout-fund recipients have paid back enough to the federal government to fall below the $5 billion mark. The tax would only be imposed on employees whose adjusted gross income exceeds $250,000.
Much of the AIG bonus money was reportedly paid to the financial services group that got the firm in so much trouble with credit default swaps. Besides AIG, the bill would affect bonuses paid by eight other companies, including Goldman Sachs, J.P. Morgan, and Citigroup because the tax would apply to all bonuses paid after December 31, 2008.
As appalling as the AIG bonuses are, it's important to remember that the tax code exists to raise revenue to fund public services. Tax policy should be thoughtfully designed and carefully implemented to raise sufficient funds for services in a fair and equitable manner. Just as tax subsidies for business unnecessarily complicate the tax code, tax penalties that correct mistakes Congress made in crafting programs unrelated to tax policy are ill-advised.
Finally, taxpayers (even the least deserving) should be able to predict in advance the tax effects of their transactions. Changing tax rules or the rules of any program mid-stream seems unfair. After all, even the poor families who get the meager welfare benefits provided in most states are told about the program's rules before they receive their benefits.
A Securities Transaction Tax Could Raise Revenue -- But Why Not Simply Remove the Loopholes for Investors in the Existing Income Tax?
On February 13, Rep. Peter DeFazio (D-OR) and seven co-sponsors introduced a bill that would impose a tax on securities transactions. The 0.25 percent tax would be imposed on the value of the securities traded. Rep. DeFazio proposes the measure as a way to pay for the various Wall Street bailouts.
This proposal would, in theory, raise revenue from the folks who benefitted from the bailouts. But there's another proposal we like better. Congress should simply eliminate the loophole in the income tax for long-term capital gains and corporate stock dividends, which subjects these forms of income to a top rate of just 15 percent.
People who earn wages must pay income taxes at progressive rates as high as 35 percent, and the first $102,000 a person earns in a year is, in addition, subject to payroll taxes of around 15 percent. So allowing people who live off their investments to pay a tax rate of only 15 percent is grossly unfair. As Warren Buffet recently pointed out, he pays a lower tax rate that his secretary, thanks largely to the loophole in the federal income tax for capital gains and dividends.
And it truly is the wealthy who primarily benefit. A report issued by CTJ in May of last year found that 70 percent of the benefits of President Bush's tax cut for capital gains and dividends goes to the richest one percent of taxpayers. The report also cited IRS data showing that in 2005, this loophole cost the Treasury $91.7 billion.
So getting back to Congressman DeFazio's proposal, we find several advantages of a higher capital gain rate over a securities transaction tax:
- Taxing capital gains at a higher rate would tax only those transactions that resulted in a gain, while a securities transaction tax would be imposed on every trade, whether or not there was a profit.
- A higher capital gains tax rate would be imposed on all capital gain transactions, not just those that arise from exchange-traded securities transactions. (Many derivative transactions are not traded on an exchange.)
- Taxing capital gains at ordinary tax rates would make the tax system much more fair and progressive. Taxpayers in the lower rate brackets would pay a lower rate on their capital gains while taxpayers in the higher brackets would pay a higher rate.
- Taxing capital gains at the same rate as ordinary income would eliminate the many, many tax avoidance schemes that taxpayers use to convert ordinary income to capital gains.
- Taxpayers would make decisions based on economics -- not on the tax treatment of different investments -- eliminating a lot of market distortion.
Unfortunately, many lawmakers feel a strong urge to expand the most egregious loophole in the federal income tax rather than repeal it. On the same day that the DeFazio proposal was introduced, Rep. Walter Jones (R-NC) introduced a bill to raise the capital loss limitation from the current $3,000 per year to $10,000 per year. This would provide another tax break for the wealthy. Generally, taxpayers can use capital losses to offset capital gains, and if they have net capital losses, they can deduct $3,000 of that against ordinary income. The rest is carried over to future years. If there were no limit, investors could choose to sell only assets that have a loss and offset other types of income, even though they might have unrealized gains in other capital assets. An October, 2008 CTJ report analyzed a similar proposal made by Senator John McCain (R-AZ) during his presidential campaign and criticized the idea for the same reason.
Congress seems set to approve, before their Presidents' Day recess, a final economic stimulus bill that marks a victory for progressives and economists who argue that federal government spending and aid for working class families can kickstart the economy far more effectively than tax cuts for businesses or the investor class.
The agreement hammered out this week by a House-Senate conference, which is presumably the final bill, will cost about $787 billion. Around 40 percent of that will go to tax cuts, most of which will be in effect for two years. Almost half of these tax cuts are progressive breaks for families, including the refundable Making Work Pay Credit, an important expansion of the refundable part of the Child Tax Credit for low-income families, a modest expansion of the EITC, and a new partially refundable education credit (the American Opportunity Tax Credit).
According to the official cost projections from the Congressional Joint Committee on Taxation (JCT), the tax provisions categorized as "business" tax cuts (which does not count several provisions that do benefit businesses, like energy incentives and provisions relating to tax-exempt bonds) will only make up 1 percent of the total cost of the bill. Even if we define business tax cuts as including the energy incentives and other provisions that do benefit businesses, these only make up around 7 percent of the total cost of the stimulus bill.
Some lawmakers felt a political need to keep the total cost of the bill below $800 billion. It is unfortunate that some of that was filled up with a $70 billion reduction in the Alternative Minimum Tax (AMT), which is not likely to stimulate the economy (as explained in the following article).
But overall, the bill marks a bold and effective step by the federal government without funneling very much of the benefits towards corporate tax breaks. While the bill is not perfect, it's hard to complain about it.
For more on the stimulus package, see the following Tax Justice Digest articles:
Non-Stimulative Tax Cuts: A Big One Is Kept in the Final Package, But Many Others Were Significantly Scaled Back
Even a Pinch of Tax Reform: Stimulus Package Includes Provision to Rescind the Bush Treasury's "Wells Fargo Ruling"
Non-Stimulative Tax Cuts: A Big One Is Kept in the Final Package, But Many Others Were Significantly Scaled Back
On January 28, the House of Representatives approved an economic stimulus bill with an official cost of $819 billion, and $275 billion of that went to tax cuts. One alternative stimulus bill that received quite a lot of support from the House Republicans consisted entirely of tax cuts and included provisions that would clearly not provide an immediate boost to the economy (like making permanent the Bush tax cuts for capital gains and dividends, which do not even expire until the end of 2010). CTJ released state-by-state figures showing that the poorest 60% of taxpayers would receive over half of the benefits of the key tax cuts under the House Democrats' plan and less than 5% of the benefits of the House GOP plan.
House Republicans put forth another plan, this one with strong backing from their leadership, that would reduce the bottom two income tax rates from 10% and 15% to 5% and 10%, and provide more tax cuts for businesses. CTJ released state-by-state figures showing that less than a quarter of the benefits of the individual tax cuts in this House GOP plan would go to the poorest 60% of taxpayers.
The House Democrats' plan was passed without a single Republican vote. Progressives found that the House-passed bill did contain some tax cuts that were basically giveaways for business (as CTJ also argued in its reports). But overall the House-passed bill promised to be an effective boost for the economy.
The Senate took up its bill the following week and managed to lard it up with several ineffective tax cuts. Fortunately, the House-Senate conference that met to work out the differences between the two chambers significantly scaled back many -- but not all -- of the ineffective tax cuts.
Amnesty for Offshore Tax Avoidance: Rejected on Senate Floor
As the stimulus package was being debated on the Senate floor, progressives did score several defensive victories. For example, the body rejected an amendment offered by Senator Barbara Boxer (D-CA) that would provide a tax amnesty for corporations that had moved profits offshore (often only on paper to avoid taxes). Profits that were "repatriated" to the United States would be subject to an almost non-existent 5.25 percent tax rate instead of the usual 35 percent tax rate. As explained in a CTJ report on "repatriation," this idea was tried five years ago and did not lead to any of the job creation that was promised. Worse, repeating this debacle would only encourage companies to move profits offshore, since they would figure that if they waited a few years, Congress would once again be in the mood to enact a tax amnesty. Fortunately, a solid majority of senators saw that this was terrible tax policy and rejected this amendment.
The Senate's Senseless Six
But plenty of ill-advised tax cuts did make their way into the Senate-passed bill, some as provisions included in the bill reported out of the Finance Committee, and others adopted as amendments on the Senate floor. Earlier this week, CTJ ranked several tax cuts included only in the Senate bill (or taking a larger form in the Senate bill) as the "Six Worst Tax Cuts in the Senate Stimulus Bill." (Read the full report here or the two-page summary here.) The largest of those six tax cuts is included in the final package, but several others have been excluded (or mostly excluded) from the deal.
1. One-year AMT "patch": included in conference agreement.
This one-year reduction in the Alternative Minimum Tax will provide essentially no benefit to the poorest 60 percent of Americans -- and unfortunately was included in the final stimulus package. For more details, as well as state-by-state figures showing how taxpayers would be affected, see CTJ's new report on the AMT "patch."
2. Homebuyer tax credit: dramatically scaled back in conference agreement.
The House-passed bill had a version of this provision that waived the repayment requirement for the limited $7,500 first-time homebuyer credit that Congress enacted in its housing bill last year. The Senate adopted an amendment by Senator Johnny Isakson (R-GA) (who voted against the bill itself) to provide a $15,000, non-refundable tax credit with no income limits for any home purchase (not just for first-time home purchases). The Senate version would cost $35 billion more than the House version. Fortunately, this provision is scaled down in the conference agreement to something closer to the House version, with an increase in the maximum credit to $8,000, at a cost of $6.6 billion.
3. Deduction for automobile purchases: dramatically scaled back in conference agreement.
This $11 billion provision was added to the Senate bill as an amendment offered by Senator Barbara Mikulski (D-MD) as an above-the-line deduction for interest payments on an automobile purchase as well as the state and local sales taxes paid on that purchase. Apparently, members of the House-Senate conference decided that subsidizing consumer debt is not such a great idea. This provision has been reduced to a $1.7 billion provision allowing a deduction for just the sales taxes paid, but not the interest, on an automobile purchase.
4. Suspension of taxes on UI benefits: included in conference agreement.
The Senate included in its bill this provision to eliminate federal income taxes on the first $2,400 of unemployment insurance benefits in tax year 2009. The best way to target aid to those who could use some help is to target aid by income level. This provision would target aid to those whose income takes a particular form rather than those whose income is below a particular level, meaning a person whose spouse earns $300,000 a year would still get this tax break if they have unemployment benefits. This provision is included in the conference agreement.
5. Five-year carryback of net operating losses (NOLs): dramatically scaled back in conference agreement.
This provision would put money in the hands of business owners but do nothing to change their incentives to invest or create jobs. The version of this tax cut included in the House-passed bill would cost $15 billion while the Senate version would cost $19.5 billion. Fortunately, the version of this tax cut in the conference agreement is smaller than either of these, with a cost of only $1 billion (officially). The conference agreement would allow this tax cut only for companies with gross receipts under $15 million.
6. Delayed recognition of certain cancellation of debt income: included in conference agreement.
Under current law, any debt forgiveness that you enjoy is considered income subject to the federal income tax. (If it was not, then we would all want our employers to issue us loans and then forgive the debt, rather than paying us salaries.) This provision, which was included in the Senate bill and also in the conference agreement, weakens this essential rule. It allows companies that have debt cancellation income to defer taxes on that income for five years and then pay the tax in increments over the following five years.
CTJ has long argued that some tax cuts could have a chance of effectively stimulating the economy -- if they are extremely targeted to poor and working class families. Several tax credits meeting this criterion were included in the House and Senate stimulus bills, although the details differed. CTJ released state-by-state fact sheets showing how families with children would be impacted by these tax cuts, and in many states families would gain between $800 and $1,000 in 2009 alone. The conference agreement does include these provisions, although some of them are scaled back somewhat.
1. Making Work Pay Credit (MWPC)
This was originally proposed by Barack Obama during his presidential campaign as a refundable tax credit of $500 for working people, or $1,000 for couples. Technically, the credit would be capped at 6.2% of earnings up to $8,100 (or twice that for married couples), meaning this credit would be the equivalent of a refund on Social Security taxes paid on that amount of earnings. The House and Senate bills both included this and only differed on the income limits and some other details. The conference agreement, however, limits the MWPC to $400 for singles and $800 for married couples. The credit will also be dribbled out over time through a reduction in withholdings, since some policymakers have decided that simply issuing checks (as was done with the rebate checks sent to households last year) results in families saving the money, which will not stimulate the economy immediately.
2. Expansion in the Earned Income Tax Credit (EITC)
Currently, low-income workers with no children can sometimes receive a very small EITC equal to a maximum of 7.65 percent of eligible earnings, while the maximum EITC for families with children is 34 percent for those with one child and 40 percent for those with two or more children. Under the House and Senate bills, families with three or more children could receive a benefit equal to a maximum of 45 percent of eligible earnings. The maximum benefit under current law is phased out at an income level that is higher for married couples than for singles. The bills would increase that difference, further reducing the "marriage penalty" in the EITC. These changes are included in the conference agreement. The total cost of these changes to the EITC is about $4.7 billion, which is much less than the cost of other provisions and this probably accounts for their survival in the final agreement.
3. Making the Refundable Portion of the Child Tax Credit (CTC) More Readily Available for Poor Families
Currently a parent who earns less than $12,550 in 2009 is too poor to benefit from the $1,000 per-child credit. People who pay federal payroll taxes but earn too little to pay federal income taxes do not benefit from a tax credit unless it is refundable. Currently the refundable portion of the CTC is limited to 15 percent of earnings above $12,550 in 2009 (this threshold is indexed for inflation). The House-passed bill would have removed this earnings threshold so that the refundable portion of the CTC would be equal to 15 percent of any earnings (the maximum credit would remain unchanged at $1,000 per child). The Senate-passed bill settled on a less generous provision retaining the earnings threshold but lowering it to $8,100.
Citizens for Tax Justice released a one-page fact sheet on Tuesday night showing how families in each state would be affected by the House and Senate provisions and how many more children would be helped by the House version compared to the Senate version. The conference agreement steers a little closer to the House version, setting the earnings threshold at $3,000.
Even a Pinch of Tax Reform: Stimulus Package Includes Provision to Rescind the Bush Treasury's "Wells Fargo Ruling"
Congress has, perhaps with good reason, temporarily set aside concerns about balancing the federal budget. Stimulating the economy and stopping the downward spiral of reduced demand and layoffs has become a higher priority than raising enough tax revenue to pay for public services. But one provision in the stimulus bill would raise revenue (albeit a mere $7 billion, officially). This provision would rescind IRS Notice 2008-83, also called the "Wells Fargo ruling" after its largest beneficiary.
In October, the IRS issued this two-page notice declaring, with no authorization from Congress, that banks could ignore a section of the tax code enacted under President Reagan to prevent abusive tax shelters. In December, over a hundred organizations signed a letter to the House and Senate asking them to rescind the Wells Fargo ruling.
An online six-minute video from the American News Project (click here if you need the YouTube version) explains how Treasury officials under former President George W. Bush issued the Wells Fargo ruling with no legal authority and gave banks a hand-out beyond their lobbyists' wildest dreams.
A provision rescinding the ruling was included in both the House-passed bill and the Senate-passed bill and is included in the conference agreement.
The economic stimulus bill that the Senate approved today includes several tax cuts that are not in the stimulus bill approved by the House of Representatives two weeks ago and which should be excluded from the final bill that goes to the President.
The bill approved by the House of Representatives two weeks ago has a total cost of about $819 billion, while the cost of the Senate bill had grown last week to about $940 billion. A group of self-styled centrist Senators then put forth a compromise that took exactly the wrong approach to cutting down the costs: They mostly removed government spending that economists believe will stimulate the economy -- like aid to state governments, school construction, food stamps -- while they left in most of the regressive tax cuts that Senators have added to the bill.
A new report from Citizens for Tax Justice lists the six most regressive and ineffective tax cuts included in the Senate stimulus bill that are not in the House bill (or, in some cases, are much more limited in the House bill).
Legislation to kickstart the economy is badly needed. Lawmakers who are sincere in their desire to stimulate the economy in the most cost-effective manner should seek to exclude from the final bill these tax cuts, which economists believe will do little to boost consumer demand. They add $124 billion (according to official projections) to the cost of the Senate's stimulus bill compared to the House stimulus bill. The real cost of these provisions is considerably more.
Here are CTJ's worst six tax cuts in the Senate stimulus bill:
1. One-year AMT "patch"
2. Home buyers' tax credit
3. Deduction for automobile purchases
4. Suspension of taxes on UI benefits
5. Five-year carryback of net operating losses (NOLs)
6. Delayed recognition of certain cancellation of debt income
The report also explains that some tax cuts could actually be effective in stimuluating the economy -- if they are extremely targeted to poor and working class families. The Making Work Pay Credit and the EITC expansion that appear in both the House and Senate bills accomplish this. So do the provisions in each bill to make the Child Tax Credit more available to poor families, but the report explains that the House provision does a much better job of this than the Senate provision.
A House-Senate conference will now attempt to work out the differences between the House and Senate bills and settle on a final bill, which President Obama wants to sign by the end of this week.
New State Fact Sheets from Citizens for Tax Justice Show that Families with Children in Most States Would Gain Around $900 to $1,000 in Tax Cuts from the Stimulus Bills
Senators Who Vote Against the Stimulus Are Opposing Significant Tax Cuts for Families with Children
New state facts sheets from Citizens for Tax Justice show that the economic stimulus proposals being considered by Congress include several tax cuts that could significantly benefit working class families with children in every state. The stimulus bill approved by the House of Representatives last week costs a little over $800 billion and about $275 billion of that would go towards tax cuts.
About half of the tax cut portion of the bill consists of a refundable "Making Work Pay Credit" (MWPC) worth up to $500 for most working people (or $1,000 for married couples). The House bill also includes an expansion in the Earned Income Tax Credit (EITC) and a provision making the Child Tax Credit (CTC) more accessible to low-income families. All three of these provisions would create or expand refundable income tax credits, which are the only type of income tax cut that can benefit parents who work and pay federal payroll taxes but do not earn enough to owe federal income taxes.
Refundable credits can allow a family of modest means to have negative income tax liability, meaning the IRS actually sends them a check instead of taking a tax payment from them. This check can be thought of as a way to offset the federal payroll taxes and other types of taxes that working families pay.
The stimulus bill that the Senate is considering this week also includes the MWPC and EITC provisions. It also includes a provision that will make the CTC more accessible to low-income families, but which will not reach as many families as the CTC change in the House bill.
In many states, families with children would receive about $900 to $1,000 in tax cuts from the stimulus proposals.
Senators should support the stimulus bill they are considering this week because, overall, it would provide the boost that the economy needs right now. If the Senate does pass its bill, then a House-Senate conference will likely spend next week working out the differences between the House and Senate versions, and there will hopefully be opportunities to ask conferees to make wise choices. For example, if the Senate version of the bill still includes the less generous expansion of the Child Tax Credit, hopefully conferees will choose to include in the final bill the more generous CTC change approved by the House.
Progressive organizations are distributing the following information to help constituents contact their Senators and urge them to support the stimulus bill being considered in the Senate this week.
The following toll-free number can be used right now to reach the U.S. Capitol, where an operator will connect you to your Senators:
Progressive organizations have suggested the following message to Senators: Please vote for the economic recovery bill and oppose delaying tactics. Our state needs the jobs that will be saved; our people need its protections against hunger, sickness and unemployment. We need to rebuild our schools and roads. Vote for the American Recovery and Reinvestment Act of 2009!
Senate Should Reject "Repatriation" Proposal that Will Be Offered as an Amendment to the Stimulus
In 2004, Congress did something that, it claimed, it would never do again. It allowed corporations that had shifted their profits offshore to "repatriate" those profits -- that is, bring them back into the United States -- and pay corporate income taxes on those profits at an almost nominal 5.25% rate instead of the normal 35% rate for corporate income.
In 2004, it was obvious to all that if we provided this sort of tax amnesty more than once, corporations would actually have an incentive to move their profits out of the United States. They would know to simply wait for the next amnesty, when they could bring those profits back and pay almost no taxes on them. So, lawmakers insisted that this wouldn't happen again, no matter how much corporate lobbyists begged.
Well, the corporate lobbyists are back. They argue that repeating the tax amnesty -- which would surely encourage corporations to shift even more profits into offshore tax havens -- will be an effective stimulus for the U.S. economy! When the Senate takes up its economic stimulus bill this week, some members will offer an amendment to include this second amnesty. A new report from Citizens for Tax Justice explains what exactly is meant by "repatriation" and why it's exactly the wrong policy for America right now.
New CTJ Report Compares Most Recent House GOP Stimulus Proposal to House Democratic Stimulus Bill Up for Vote Today -- Includes Updated State-by-State Estimates
On Friday, January 23, House Republican Leader John Boehner (OH) and Republican Whip Eric Cantor (VA) presented their "Economic Recovery Plan" to President Obama. The Republican plan is based on income tax cuts for relatively well-off families and business tax cuts. As a brand new report from Citizens for Tax Justice explains, it is unlikely to provide the needed boost to consumption that economists believe can come from either direct government spending or putting money in the hands of working class people who are likely to spend it quickly.
Less Than a Quarter of the House GOP's Tax Rate Reduction Proposal Would Go to the Poorest 60 Percent of Taxpayers
The House GOP plan proposes to reduce the two lowest individual income tax rates from 15% to 10% and from 10% to 5%. To get the maximum tax cut of about $3,400 from this rate reduction, taxpayers would have to have enough taxable income to reach the start of the third income tax bracket. For example, a married couple with two children would typically need to earn more than $100,000. That's considerably more than most people earn. In fact, only one in five of all taxpayers has enough income to reach the third income tax bracket and receive the full benefit of the proposed tax rate reduction.
On the other hand, the plan proposed by Democrats in the House of Representatives (which is scheduled to come to a floor vote today), delivers tax cuts to working families who don't pay federal income tax but pay a lot in payroll taxes. For example, the "Making Work Pay Credit" would give married couples with $8,100 or more in wages the full $1,000 credit provided in the bill. In order to have an equivalent benefit from the Republican rate reduction, a married couple (with two children) would have to have $46,000 of gross income. The House Democrats' plan would also expand the Child Tax Credit (CTC) and the Earned Income Tax Credit (EITC) which are smaller tax breaks in terms of revenue but are even more targeted to working families.
Another provision in the package would rescind IRS Notice 2008-83, also called the "Wells Fargo ruling" after its largest beneficiary. In October, the IRS issued this two-page notice declaring, with no authorization from Congress, that banks could ignore a section of the tax code enacted under President Reagan to prevent abusive tax shelters. In December, over a hundred organizations signed a letter to the House and Senate asking them to rescind the Wells Fargo ruling.
An online six-minute video from the American News Project (click here if you need the YouTube version) explains how Treasury officials under former President George W. Bush issued the Wells Fargo ruling with no legal authority and gave banks a hand-out beyond their lobbyists' wildest dreams. The video features interviews with CTJ director Robert McIntyre and Senator Bernie Sanders, the sponsor of the Senate bill to rescind the Wells Fargo ruling, and gives props to the organizations that signed the letter urging Congress to enact his legislation.
Towards the end of the video Senator Sanders questions whether or not the ruling Democratic party will be courageous enough to stand up to the lobbyists for powerful financial interests. Well, that question will be answered soon, because the House stimulus bill to be voted on today includes the proposal that was introduced in the House last year to rescind the Wells Fargo ruling -- and this is one more reason to support the stimulus bill. The Senate version has also recently been amended in the Finance Committee to include a provision rescinding the Wells Fargo ruling. Senator Sanders has been willing to stand up against unjust giveaways like this even when doing so is not popular on either side of the aisle. Tax fairness advocates need to work to make sure his courage and hard work pays off by supporting this reform.
Deadline Extended for Organizations to Join Sign-On Letter to Congress Urging Expansion of Child Tax Credit for Low-Income Families
The deadline for organizations to join the letter being distributed by the Coalition on Human Needs urging Congress to make the Child Tax Credit (CTC) fully accessible to low-income working families has been extended to Monday, February 2. If you are authorized to sign on behalf of an organization, click here. If you are not authorized to sign on behalf on an organization but you still want to support this change, click here to send an email to your members of Congress asking for their support.
The House stimulus bill would make the existing $1,000 Child Tax Credit (CTC) more accessible to low-income families by making the refundable portion of the credit equal to 15 percent of a family's earnings (up to the existing maximum credit of $1,000 per child). Under current law, the refundable portion is limited to 15 percent of earnings above $12,550 in 2009 (this threshold is indexed for inflation). That means someone with income below $12,550 is actually too poor to benefit from the CTC. The Senate version would improve the CTC, but not nearly as much because it would lower the earnings threshold to $6,000.
Families who work and pay federal payroll taxes but do not earn enough to owe federal income taxes usually do not benefit from an income tax cut unless it takes the form of a refundable credit. The limitation on refundability of the CTC has resulted in many of the poorest families being excluded from its benefits. Equally important is the fact that expanding refundable tax credits is more likely to be effective economic stimulus than many other tax cuts that are being proposed according to Mark Zandi of Moody's Economy.com and other economists. This is because it puts money in the hands of people who are likely to spend it quickly, giving our economy the boost in demand for goods and services that economists believe will mitigate the recession.
A new report from Citizens for Tax Justice compares the tax cuts proposed as economic stimulus by the House Democrats to the tax cuts proposed by their Republican counterparts. The report includes both national and state-by-state figures showing the average tax cut and the share of total tax cuts that would be received by taxpayers in various income groups under the different proposals.
The report finds that the Democrats' proposal (H.R. 598) includes some tax cuts that are far more targeted to low- and middle-income people than any of the tax cuts included in the Republican alternatives. This is largely because H.R. 598 includes a new refundable credit (the Making Work Pay Credit) and expands two others (the Earned Income Tax Credit and the Child Tax Credit) while the Republican alternatives do not. Working people who pay federal payroll taxes but do not earn enough to owe federal income taxes will only benefit from an income tax cut if it takes the form of a refundable credit. Many economists have argued that any effective stimulus policy would have to boost demand for goods and services by causing immediate spending -- and one way to do that is to put money in the hands of low- and middle-income people who are more likely than wealthy taxpayers to spend it quickly.
The House of Representatives is expected to vote this week on the Democratic proposal, H.R. 598. Many of the provisions of this bill have wide support from progressive advocates. The Coalition on Human Needs is distributing a sign-on letter for organizations in support of the expansion in the Child Tax Credit. If you are authorized to sign on behalf on an organization in support of this provision, click here for more information.
House Democrats' Tax Proposal Makes Some Improvements on Obama Plan While Retaining Some Ill-Advised Tax Cuts for Business
On Thursday, House Ways and Means Committee Chairman Charlie Rangel (D-NY) released the outlines of a $275 billion tax cut package to be included with a larger stimulus bill that Democratic leaders hope to enact by President's Day. In many ways it is an improvement over the proposal initially floated by the Obama transition team, but it also keeps many of Obama's ill-advised tax cuts for business that will have little or no stimulative effect on the economy.
Most economists believe that the current economic downturn is largely the result of a collapse in demand for goods and services, and that direct government spending can boost demand and prevent the recession from becoming more severe and destructive. Tax cuts are less effective because it's difficult to ensure that they will result in the sort of immediate spending needed to boost demand quickly. But if tax cuts can at least be targeted to those people who are likely to spend the extra money right away (like low-income families), then they could have a decent chance of accomplishing the goal of stimulating the economy.
More Progressive Tax Cuts for Families
Last week, Citizens for Tax Justice released a report that showed how some of Obama's proposed tax cuts would be targeted to those who would likely spend the money right away (thus immediately pumping the money into the economy) while others were more likely to be ineffective giveaways to business. Obama's proposed Making Work Pay Credit would reach people at lower income levels, but it would not be particularly targeted towards the bottom half of the income ladder. (The poorest 60 percent of taxpayers would only get 48 percent of the benefits while the richest 20 percent would get 25 percent of the benefits.) A proposal to increase the availability of the refundable portion of the $1,000 Child Tax Credit looked more promising because nearly all of the benefits would go to the poorest 60 percent.
The Ways and Means Committee proposal improves on Obama's tax cuts for individuals. For example, the improvement in the Child Tax Credit (CTC) would be even more progressive. Under current law, some working families who pay federal payroll taxes but who do not earn enough to owe federal income taxes are actually too poor to benefit from the CTC. That's because people with no income tax liability do not benefit from a tax credit unless it is refundable, and the refundable portion of the CTC is limited to 15 percent of earnings above $12,550 in 2009. The Ways and Means Committee proposal would remove that earnings threshold so that the refundable portion of the CTC is equal to 15 percent of all earnings (with the maximum credit limit unchanged at $1,000 per child).
The refundable Making Work Pay Credit, which Obama proposed during his campaign and which would generally offer working people $500 (or $1,000 for a couple if both spouses work), is also included. A new addition to the package is an improvement in the Earned Income Tax Credit (EITC). It is unclear at this time how extensive the change in the EITC will be. (It may be similar to the EITC expansion Obama proposed during his campaign.) But it's quite clear that expanding the EITC is a promising way to put money in the hands of families who have probably cut back on purchasing all sorts of needed goods and services and who will therefore spend that money quickly.
Tax Cuts for Business: One Bad Idea Dropped, Several Others Included
The Ways and Means proposal does not include Obama's proposed refundable $3,000 tax credit for businesses that create jobs, which was roundly criticized as unworkable. Democrats in the House and Senate are said to have been doubtful that the credit could possibly be implemented in a way that did not result in a huge tax giveaway for companies that were merely hiring people they would hire anyway.
Unfortunately, many other business tax cuts in Obama's proposal that CTJ and others criticized are included in the Ways and Means package. Earlier attempts at using bonus depreciation to boost the economy have proven to be ineffective, but lawmakers apparently insist on this giveaway to business-owners. A 2006 Federal Reserve study reached a similar conclusion to our own findings, finding that previous versions of this tax break had "only a very limited impact... on investment spending, if any." Worse, the proposal would allow businesses to use their losses to reduce taxes they already paid going back five years (the current limit is two years). As Dean Baker explains, this tax cut must have even less stimulative effect than other business tax cuts because it does nothing to change the incentives of business-owners or investors going forward. The net operating loss carryback provision simply hands money to businesses without requiring any sort of investment (or anything) in return.
House Democratic Proposal Would Rescind the Infamous "Wells Fargo Ruling"
Another provision in the package would reverse IRS Notice 2008-83, also called the "Wells Fargo ruling" after its largest beneficiary. In October, the IRS issued this two-page notice declaring, with no authorization from Congress, that banks could ignore a section of the tax code enacted under President Reagan to prevent abusive tax shelters. In December, over a hundred organizations signed a letter to the House and Senate asking them to rescind the Wells Fargo ruling. That call is now being answered.
The Ways and Means package contains provisions addressing many other needs, including a partially refundable credit for higher education, increased availability of bonds for state and local government, energy tax incentives, child support funding and many others.
New CTJ Report: Preliminary Analysis of Obama's Stimulus Tax Cuts: Could Be Worse, Could Be a Lot Better
President-elect Obama and Congressional leaders are discussing plans for economic stimulus legislation to be enacted in the coming weeks or months. The two-year package being discussed is said to cost around $775 billion and a surprisingly large $300 billion of that would go towards tax cuts.
A new report from Citizens for Tax Justice examines some of the major tax cuts that are being discussed as possible components of the stimulus proposal. Tax cuts are generally less effective in stimulating demand than direct government outlays. But tax cuts targeted to the people who are most likely to immediately spend any money they receive, namely low- and middle-income people, are more effective than upper-income tax reductions.
The report explains that Obama's "Making Work Pay Credit," (a refundable $500 credit for each working spouse) could be sufficiently targeted if improved from its current form. The report also finds that improving access to the Child Tax Credit for poor families, which has also been discussed as a possible component of the stimulus package, would be much more effectively targeted.
The report also discusses why business tax breaks that are being considered as part of the package are unlikely to help stimulate the economy and mitigate the current recession.
New CTJ Report: Senator McConnell's Proposed "Middle-Class Stimulus" Is Neither Middle-Class Nor Stimulative
Senate Minority Leader Mitch McConnell (R-KY) has recently said that he does not believe that the stimulus proposal put forward by President-elect Barack Obama is sufficiently focused on tax cuts. While Obama's proposal reportedly does include as much as $300 billion in tax cuts, Senator McConnell argues that we need even more tax cuts, in particular for what he calls "the middle class." In pursuit of this alleged goal, McConnell proposes temporarily cutting the 25 percent income tax rate to 15 percent.
A new report from Citizens for Tax Justice explains that there are at least three severe problems with this plan:
1. By any reasonable measure, McConnell's proposed tax cut is not targeted to middle-income people. Instead, three-quarters of the tax cut would go to the best-off fifth of all taxpayers.
2. It is very likely that McConnell will initially try to cover up the true cost of his proposal, and then later insist that Congress spend vastly more money because his tax cut would otherwise expand the Alternative Minimum Tax (AMT).
3. The McConnell plan would function poorly as an economic stimulus.
When Congress convenes in January, lawmakers will immediately begin to debate what action they can take to best stimulate the economy. Economists and experts have generally found that tax cuts cannot provide the sort of quick boost that the economy needs to mitigate a recession, and that direct government spending in programs that can immediately spur economic activity are more effective. But that is not stopping anti-tax lawmakers and their supporters from making the case that our prosperity can only be ensured by another round of tax cuts. The next two articles look at some of the good and bad ideas being discussed to address the economic downturn.
Most economists believe that recessions are caused largely by slackening demand for the goods and services that firms provide, which leads to layoffs, which in turn lead to more slackening demand. If the downward spiral is not stopped, it can do real damage that takes a long time to reverse. But most analysts believe that the process can be mitigated with a short-term infusion of government money into the economy to boost consumption so that the recession never reaches a severe level.
Many analysts say this sort of government spending should not be offset with tax increases that would simply take the money back out of the economy. As we've argued before, it seems doubtful that tax increases on the wealthy would undo the stimulative effect, but so long as any deficit-spending is only temporary, there is little downside to this approach.
The short-term government spending therefore needs to be the type that will result in an immediate boost in consumption. Increasing Food Stamps for needy families or extending unemployment insurance benefits fall into this category, since they go to people who have probably been cutting back on necessities and will immediately spend the new cash (or vouchers).
Many experts have also argued that aid to state governments can be stimulative if it goes towards "shovel ready"/"ready-to-go" projects or simply prevents the states from cutting needed services and laying off staff. Either way, the money would immediately put income in the pockets of people working on the funded projects, or would prevent a decrease in income for the state government workers who will otherwise fall victim to budget cuts.
Tax cuts that benefit the wealthy are not likely to stimulate the economy because wealthier families tend to save and invest more of their income. Tax cuts for investment (like new cuts in income taxes for capital gains) are likewise not very stimulative. They mostly benefit the wealthy, and besides that, investment decisions take a while to plan and might not be made until after a recession has passed.
President-elect Barack Obama has proposed to stimulate the economy partly by quickly providing federal funds for the type of "shovel ready" infrastructure projects that can make the country more productive in the long-run, in addition to boosting consumption in the short-run. Suggested projects include building roads and bridges, modernization of school buildings, expanding broadband internet access and making buildings more energy efficient.
Obama's economic recovery plan does include some tax proposals that he made during the campaign and which received a lukewarm response from Citizens for Tax Justice and many tax analysts. Hopefully the economic recovery plan that Congress passes early next year will focus little, if at all, on tax cuts.
What About Tax Cuts Targeted Towards Low- and Middle-Income Families?
In theory, certain types of tax cuts, like the refundable rebates sent to almost all households below certain income levels this year, can also have a stimulative effect because they are targeted to the income groups most likely to spend any new money they receive.
But the evidence shows that only a very modest, short-term increase in consumption resulted from the rebates. Martin Feldstein (the former top economic adviser to President Reagan) pointed out in an op-ed that the federal government spent $78 billion on the tax rebates but consumption only increased by $12 billion in response, meaning most of the money was saved or used to pay down debt.
Different parties draw vastly different conclusions from this. Feldstein and anti-tax pundits argue that tax cuts are not effective in stimulating the economy unless they are permanent, because people are reluctant to change their their spending in response to a change in income that they know is only temporary.
But this is the sort of logic that simply leads back to making the Bush tax cuts permanent. Considering how the economy has performed after eight years of lower taxes under President Bush, it's incredible that anyone still focuses on permanent tax cuts as a solution. (This is particularly true since calls for permanent tax cuts are often made by lawmakers who have no desire to replace the lost revenue, which means that increased government debt will require future tax increases or cuts in public services.)
The more sensible conclusion from the limited effects of the rebates is that any government spending or tax cuts need to be more focused on the people who are most likely to immediately spend any new cash or vouchers they receive, or focused on the sort of programs or projects that will immediately result in economic activity in the short-run (and if possible, enhance our infrastructure and productivity in the long-run).
Obama has argued that the refundable Making Work Pay tax credit he proposed during his campaign as part of his overall tax plan could be enacted quickly as a stimulative measure. The credit would be up to $500 for working adults ($1,000 for a married couple if both spouses work) which is the equivalent of refunding Social Security taxes on the first $8,100 of earnings. The credit would be limited for households above certain income levels.
It's not immediately obvious that this will be more effective than the rebates sent to households this year. However, if this tax rebate is sufficiently targeted to low- and middle-income people, it will be far more effective than some of the more radical tax cut proposals put forward by conservative lawmakers (as described in the following article).
It can never be repeated enough that President Bush and his allies in Congress enacted major tax cuts in 2001, 2002, 2003, 2004 and 2006. A blinding monomania is leading some conservatives to argue that our economic problems stem from the fact that we have not sufficiently cut taxes.
Taking a Break from Taxes?
In late November, Congressman Louie Gohmert (R-TX) proposed the startling idea of having a year-long holiday from the federal income tax for 2008. He has more recently modified his proposal to be a holiday from federal income and payroll taxes for the first two months of 2009. Congressman Mike Pence (R-IN), who will be the House Republican Conference Chairman starting next year, has recently indicated that he supports this proposal.
Arguably, the people who are suffering most in this economic crisis (and the people who would be most likely to increase their consumption in response to a change in income) are the unemployed, who do not pay much in taxes. It's true that unemployment benefits are taxable but Obama has already proposed to make them tax-free, and Congress is likely to oblige.
Meanwhile, a huge proportion of the benefits of the tax holiday would go to the very rich. According to a recent report from the Congressional Joint Committee on Taxation (page 19 for those interested) households with total incomes above $200,000 will only make up 3 percent of households in America in 2009. They will receive 31 percent of the income, so it's not unfair that they will pay 39.5 percent of federal taxes (including federal income and payroll taxes and an insignificant amount of excise taxes). This means that if Congress enacts a holiday from federal income and payroll taxes, over a third of the benefits would likely go to the richest 3 percent of Americans, who receive just under a third of the nation's total income.
Throwing Money at Companies with No Strings Attached: Hatch's NOL Carryback Proposal
Another type of tax cut has been proposed that is equally ill-advised. Senator Orrin Hatch (R-UT) has proposed allowing companies to use their losses to get refunds of taxes they've paid over the past 15 years. He also proposes to make this change permanent.
Here's a little background. As a general rule, a company operating at a loss in a given year will not have to pay taxes for that year, because its deductions will wipe out its taxable income. Under current law, if a company has excess deductions for net operating losses (NOLs) beyond its taxable income for the year, it can apply those excess deductions not only against earnings in later years, but also against income taxed in the previous two years. That allows it to get previously paid taxes refunded.
Senator Hatch's proposal would allow a company to apply those excess deduction against income paid in the previous 15 years.
There is no reason to think this change would lead to the creation or retention of jobs. Allowing a company to use it's current year losses to get a refund of taxes paid in the past does not lower the cost of doing business or make it easier to profit. It would simply hand cash to business-owners who are not profiting currently. Smart business people will expand their business only if they can profit by doing so, regardless of how much cash they have on hand. A business owner is likely to lay off workers if she cannot earn enough to cover expenses and enjoy a profit. Simply giving the business some cash with no strings attached will not change that.
Some Senators wanted to include a similar provision to the housing bill in the spring, but that proposal would have only allowed NOLs to be used to offset income taxes paid in the past four years. Lawmakers eventually rejected that idea, and hopefully they will reject Hatch's even more radical proposal to allow NOLs to be used to offset taxes paid in the past 15 years.
Corporations Get Subsidies Through the Tax Code in the Good Times, Then Ask for Bailout Funds in the Bad Times
Insurance companies and financial institutions have lobbied long and hard for all sorts of loopholes in the federal tax code, and the insurance industry alone has spent almost $1 billion over the past decade lobbying on tax issues. Some folks might say that these corporations are providing important services to help the free market function and that the government should infringe on them as little as possible. Well, here's why they're wrong: The very corporations that have persuaded Congress to grant them numerous loopholes reducing their effective tax rate to negligible levels are now lining up for a handout from the federal Troubled Asset Relief Program, or TARP.
Insurance companies have not received any bailout funds yet, but a recent Wall Street Journal article explains that many are now requesting aid, including several insurers that pay only a fraction of the statutory tax rate on corporate income. The statutory tax rate on corporate income is 35 percent, and many states impose a tax of around 4 or 5 percent as well. But insurance companies have mastered the use of loopholes to reduce their effective tax rate to much less. For example, Prudential Financial, which announced last week that it is seeking aid, received profits of about $25 billion over the past decade but its total effective tax rate was just around 5 percent over that period. Hartford Financial Services, which also seems to think it's eligible for TARP funds, received profits of $18 billion over the past decade and paid taxes at an effective rate of less than 8 percent over that period.
It would almost be a relief if it turned out that the insurance companies had done something illegal to reduce their tax liability in this way. However, the real scandal is that they are mostly using the loopholes that Congress enacted. For example, insurance companies get to immediately deduct the full costs of signing up new policy holders, but in their reports to shareholders they count these costs as being stretched across several years.
Financial institutions do not get to use quite as many loopholes as insurance companies, but they do know how to play the game. Goldman Sachs, which received $10 billion in bailout funds, expects to pay taxes of just 1 percent on its 2008 profits.
Conservatives have been grousing for a while that the corporate income tax rate is high compared to those of other countries, but these companies illustrate that the effective tax rate can be much lower than the statutory tax rate.
The corporate income tax funds many of the services that make corporate profits possible, like roads that make shipping possible, public safety that makes property valuable, even the research that lead to the internet and all of the commerce it facilitates. Now that these corporations are receiving TARP funds, it's more obvious than ever that corporations have a stake in our government and have good reason to help pay for it.
The debate over taxes has become somewhat confused since the recession reared its head. Discussions of how Congress should go about matching federal revenues to federal spending have been replaced with arguments over how much and how quickly to increase the budget deficit. Most economists agree that now is not the time for Congress to focus entirely on balancing the federal budget, but what exactly does that mean? Is any increase in the federal budget deficit a good thing right now? And if increasing the budget deficit is acceptable, should we stop worrying about whether anyone is paying their fair share of taxes?
Of course not. As a new paper from Citizens for Tax Justice explains, revenues should usually be raised to cover (at least roughly) government spending, and it should be raised in a progressive way. There are some exceptions for the unusual circumstances we face today, but they are limited.
For example, using deficit-financed government spending to boost the incomes of low-income families can lead to an immediate boost in consumption that helps businesses get through this downturn without being forced to lay off staff or shut down. This can help reduce the severity of a recession. This benefit could outweigh the costs of increasing the national debt, so long as any deficit-financed spending is temporary.
But if Congress turns to deficit-financed measures that mainly increase the incomes of the wealthy -- like reducing capital gains taxes -- the effects on the economy will be very minimal and will not justify the resulting increase in the federal budget deficit and national debt.
In the long-term, taxes must be raised to a level sufficient to pay for federal government services. That must mean repealing most of the Bush tax cuts (or perhaps allowing them to expire at the end of 2010).
There are some lawmakers who seem to think that repealing the Bush tax cuts would be detrimental to the economy. But this simply makes no sense. The economy thrived at the end of the Clinton years, when taxes were higher, and sank severely at the end of the Bush years, after 8 years of lower taxes. This should tell us that lower taxes, overall, are not the answer to saving the economy.
New IRS Ruling on Bank Acquisitions Imposes Major Federal Corporate Tax Cuts -- And Will Hurt States Too
In late September, while the major presidential candidates debated solutions for reforming the federal corporate income tax, a little-noticed ruling by the Internal Revenue Service (IRS) opened the door for widespread corporate tax avoidance by a few of the biggest, most profitable financial institutions in the country. The IRS ruling, which took Congressional tax writers by surprise, will almost certainly push the federal government -- and many states -- further into the red at a time when they can least afford it.
On Friday, President Bush signed into law the financial rescue plan that had been approved by the House of Representatives just hours earlier. The House had rejected a similar financial rescue bill on Monday, but on Wednesday the Senate passed a version that was loaded with tax breaks in order to woo more votes in the House. The Senate bill combined the financial rescue plan with legislation to extend several temporary tax breaks (often called tax "extenders") as well as a measure to keep the Alternative Minimum Tax (AMT) from expanding to reach more taxpayers. The sweeteners added by the Senate were apparently enough to win over a majority of members in the House, who approved the bill on Friday and sent it on to the White House for Bush's signature.
The political dynamic was somewhat confusing throughout the debate over the bill. The financial rescue plan and the tax legislation were both bills that were opposed by the House, largely because of their costs. Counter-intuitively, the compromise was to pass both as one bill.
It almost sounded like a joke: What is bipartisanship? It's what happens when some lawmakers want new spending we cannot afford while other lawmakers want new tax cuts we cannot afford, and in the end Congress compromises by doing both and paying for none of it.
The Financial Rescue Plan
In all fairness, there are conservatives and progressives who supported and opposed the bailout legislation. Some argue that it is truly necessary to keep lines of credit open, and that its cost will be less than the widely-cited $700 billion figure. And there are surely some provisions among the tax cuts that we would all support. (One that comes to mind would make the child tax credit more accessible for low-income families.)
In theory, the government will eventually sell the assets it buys from financial institutions and recoup much of the costs (and it's possible, though unlikely, that the taxpayers could actually profit). And if the costs are not recouped after five years, the President is to propose legislation to Congress to recoup the money from the financial sector. (What shape this would take is unclear, but House Speaker Nancy Pelosi and others had earlier discussed a fee on financial institutions after the five-year period.) As discussed in last week's Digest article, Congressional leaders did win some concessions that improved the President's initial proposal. One involves limiting the deductibility of compensation to highly paid executives in the entities participating in the bailout. (However, some astute observers have pointed out that serious loopholes in that rule remain, including the fact that stock options are apparently not covered).
The tax cut package has had a long and tortuous history. Generally speaking, the Democrats in the House have opposed passage of any type of tax cut legislation that will result in an increase in the budget deficit. This is entirely reasonable, especially given the massive deficits racked up throughout the Bush years, and in practice this means that any tax cuts must be accompanied by revenue-raising provisions or cuts in spending. In the Senate however, a minority of Republican Senators can block any legislation that has any sort of revenue-raising provision, and the result has been a long feud between the two chambers over whether to pay for AMT relief and other tax breaks.
The AMT is a backstop tax designed to ensure that well-off people pay some minimum tax no matter how proficient they are at finding loopholes to reduce or wipe out their tax liability. Tax liability is calculated under the regular rules and the AMT rules, and you only have to pay the AMT if your AMT liability exceeds your regular income tax liability.
For most middle-class taxpayers, this is usually not an issue. But the Bush administration chose to lower the regular income tax without making any permanent change to the AMT, so of course that means that more people are going have to pay the AMT. Another problem, albeit a less important one, is that inflation is eating away at the value of the exemptions that keep most of us from paying the AMT. The Clinton administration increased these exemptions, but no permanent increase in those exemptions has been made during the Bush years.
The adjustment in the AMT that was included in the bill will increase these exemptions so that most of us will continue to be unaffected by the AMT.
Earlier this year, the House approved AMT relief and the tax exenders, but included provisions in each that would offset the cost by closing tax loopholes. Republicans in the Senate objected to the offsets and vowed to block these bills.
More recently, the House actually relented somewhat and passed a bill that would provide AMT relief without paying for it, increasing the deficit by over $60 billion. Unfortunately, this was not enough for the Senate, which insisted on increasing the deficit even more by including the tax extenders without offsetting all of their costs.
The Senate had been insisting on the passage of a bill combining the AMT relief with the "tax extenders." The extenders include all sorts of handouts that either subsidize businesses that don't need subsidies (like the research credit), cut taxes in ways that are not particularly progressive (like the deduction for state sales taxes and the deduction for tuition which really only benefits fairly well-off families), or just offer very trivial benefits (like the provision allowing teachers to deduct $250 in classroom expenses, which yields a benefit of about $60 for teachers lucky enough to be in the 25 percent bracket).
The legislation includes one very wise provision to offset $25 billion of the cost by shutting down offshore tax schemes that help the already highly compensated avoid taxes on their deferred compensation. Generally, when a company pays into a deferred compensation plan for an employee, if that plan is "non-qualified" (meaning it exceeds certain limits that the super-compensated don't want to deal with) the company cannot take a tax deduction for the payment until it is actually received as income in later years by the employee. But some have figured out how to have their deferred compensation routed through an offshore entity in some tax haven so that there is no tax paid to the U.S. government or any other government, so not being able to deduct the payment is not an issue. This provision would make the deferred compensation in this situation immediately taxable to the individual, so that there would no longer be an incentive to use this scheme.
The passage of this reform is a positive development, but this still leaves a total $110 billion increase in the deficit as a result of the tax cuts.
As Isaiah Poole at the Campaign for America's Future observed this week,
"Whatever the merits of these tax measures -- and you can be sure that the merits of many of these provisions are highly questionable and exist only at the behest of lobbyists or lawmakers pandering for votes -- they certainly make a mockery of all the protestations of not turning the economic rescue effort into a "Christmas tree" of special-interest provisions. As it turns out, the "Christmas tree" concern only applies to provisions that would, for example, fund community organizations that have a track record of helping homeowners avoid foreclosure. You know, things that would help ordinary people directly affected by the financial crisis."
CTJ Report Calls on Congress to Close the Tax Loopholes for Capital Gains and Dividends
A new report from Citizens for Tax Justice argues that since Wall Street needed a government bailout that taxpayers have no interest in paying for, this seems like a good time to close the biggest subsidy currently enjoyed by Wall Street: The tax loopholes for capital gains and dividends. These loopholes subsidize people whose income results from investments rather than wages, as well as the Wall Street brokers who rely on their business.
President Bush and his allies in Congress significantly expanded a loophole for capital gains (which was previously taxed at a top rate of 20 percent and is now taxed at only 15 percent) and created a new one for corporate stock dividends (which used to be taxed just like any other income but are now also subject to a top rate of 15 percent). As the report explains, the result is that someone living off their wealth can pay taxes at a lower rate than someone who works for wages and has a lower income.
The report also refutes some misconceptions about these tax subsidies, including the "supply-side" idea that they somehow pay for themselves.
Closing these loopholes is not a particularly radical idea. President Reagan signed a tax reform law in 1986 that applied the same tax rates to all income, regardless of whether it took the form of wages or investment income.
Many economists believe that tax cuts are not as effective as certain types of public spending in stimulating the economy, and we share that view. One thing that is even less effective as economic stimulus is tax cuts that are not received by the low-income people who are most likely to pump the money back into the economy by spending it immediately.
Unfortunately, it appears that millions of taxpayers who could most benefit from the stimulus have actually not received their checks. The deadline, October 15, is fast approaching for individuals to file their taxes so that they can receive their tax rebate checks. Here's a quick reminder of what's at stake: Taxpayers who filed their 2007 federal income taxes and had incomes of less than $75,000 ($150,000 for married couples) probably already received a rebate equal to income tax liability up to a maximum of $600 ($1,200 for married couples) or a minimum rebate of $300 ($600 for married couples). But those who did not file income taxes for 2007 are at risk of missing out if they still have not filed.
Last week the Center on Budget and Policy Priorities issued state fact sheets describing the number of rebates by city and county that are currently left unclaimed. Many of those folks who haven't claimed their rebate are those who could most utilize the checks -- low-income seniors and disabled veterans. Over 100,000 people in Michigan have yet to file and receive their checks. While there is some debate about whether or not the rebate checks have stimulated the economy, it's clear that no one benefits if the rebates go unclaimed by those who need them the most
Plan Includes Steps to Rein in Executive Compensation for Entities Rescued by the Taxpayers
On Monday afternoon, the U.S. House of Representatives voted down the multi-billion dollar financial rescue plan (H.R. 3997), that the White House and Congressional leaders negotiated over the weekend. It was expected that the House would pass the plan on Monday, followed by the Senate on Wednesday. As of this writing, it is unclear what next steps lawmakers will take. House leaders of both parties supported the plan. They could hold a vote on a modified version of the bill in the hopes of picking up some supporters, as the vote was relatively close (205-228).
The plan the House rejected would allow for the Treasury Department to purchase bad debts or "toxic assets," particularly mortgage-backed securities, from the banks and other parties that currently hold them. The goal is to allow lenders to stay afloat and ensure that credit remains available -- which facilitates everything from home mortgages to loans for business. These assets could later be sold by the government when the market has stabilized. The end result for the taxpayers might be a profit or a loss, meaning that the long-term price is uncertain but will ultimately be less than the widely cited $700 billion figure.
Limits on Executive Compensation
As part of the plan, there would be limits placed on the compensation paid to top executives at the entities selling assets to the government. Currently, companies cannot deduct more than $1 million for compensation paid to an individual in a given year, but for entities participating in this program the limit would be lowered to $500,000. The current limit is often circumvented by companies that make "performance-based" payments and other types of payments, but some of these loopholes would be closed for companies participating in this program.
Severance packages (the often derided "golden parachutes") for executives departing from such an entity would be banned. For those entities whose assets are directly purchased by the government, this applies to any golden parachute payments and the entities would also have a "claw back" of any bonuses paid based on financial statements that later turn out to be incorrect. For those entities whose assets are obtained through an auction, the ban on golden parachutes would apply to any new agreements but not existing agreements.
These steps were considered reasonable by Democrats and even many Republicans who usually chafe at the idea of any government interference in how companies pay their employees. The difference between this situation and all the others is that the companies in question now are being propped up directly with taxpayer dollars, making any argument that the free market must be allowed to determine the optimal pay for executives sound ludicrous. Meanwhile, many lawmakers fear the fall-out from voters, whose basic sense of fairness might be offended by the idea that taxpayers are paying or partially paying compensation packages of millions of dollars for those managing the entities that seem responsible for much of the economic crisis.
Other Provisions Won by Congressional Leaders
Congressional leaders won several other concessions from the White House. Among them are the following:
First, several provisions are geared towards preventing a loss to taxpayers. The government would acquire warrants to obtain non-voting shares of stock of the entities whose assets are purchased, so that taxpayers can share in profits if they become profitable. If the deal results in a loss for the taxpayers after five years, the President must propose to Congress legislation to recoup the money from the financial sector. What shape this would take exactly is unclear, but House Speaker Nancy Pelosi and others had, over the weekend, discussed a fee on financial institutions after the five-year period.
Second, Congress will be able to conduct oversight and stop the flow of money to the program if necessary. Only $350 billion would be provided initially, and the rest would come in another installment in the future that Congress could block if they did not like how the program was being run. Congress would be able to exercise oversight by requiring accounting reports of the assets purchased, the formation of an oversight board, and the appointment of an inspector general for the program.
Third, for mortgages purchased by the Treasury, steps must be taken to prevent foreclosures by renegotiating monthly payments in cases when it will not cause too much loss to taxpayers, although what this means exactly is unclear. For mortgage-backed securities purchased by Treasury, the Treasury must lean on the servicers to do so. The Treasury can use loan guarantees, credit enhancements, and the Hope for Homeowners program for these purposes. Some advocates are displeased that another provision was not included which would allow judges in bankruptcy proceedings to alter the terms of mortgage loans.
The bailout represents a spectacular failure of free-market ideology, which has apparently caused many conservative lawmakers to oppose it. Some progressive lawmakers may have also been offended by the idea of using taxpayer money to pay for the mistakes of wealthy investors and banking industry executives. Members of the House had initially planned on adjourning on Monday, but it is unclear as of this writing whether that will happen.
The long-sought housing bill is likely to become law by next week. President Bush dropped his veto threat this week and the House passed a revised version of the bill by a vote of 272-152. On Friday, the Senate voted 80-13 for cloture on the bill and a final vote is expected on Saturday.
The bill will temporarily allow the Treasury Department to prop up the government-sponsored mortgage funding companies Fannie Mae and Freddie Mac and will also create a federal regulator to oversee them. It will also allow the Federal Housing Authority (FHA), to guarantee refinanced mortgages for homeowners in danger of foreclosure, and will provide communities with additional Community Development Block Grant funds to buy foreclosed or abandoned properties.
The bill includes about $15 billion in tax provisions that are presented as help for homeowners and people in the home-building industry. One provision will create a refundable $7,500 credit for first-time homebuyers that must be paid back in equal installments over the next 15 years. This is the equivalent of an interest-free loan. Eligibility is phased out beginning with taxpayers with incomes of $75,000 (or married couples with incomes of $150,000). It's not clear how helpful this could be, partly because it would not make any money available at the time a down payment is made but would be claimed afterwards.
Another provision will create a deduction for property taxes for non-itemizers, which is capped at $500 per spouse. Most people with a home mortgage do itemize in order to take advantage of the home mortgage interest deduction, so many struggling homeownders may not be helped by this.
The bill also includes provisions to expand the Low Income Housing Tax Credit and to increase the use of bonds by state and local government to address housing needs.
The cost of the tax breaks are offset by revenue-raising provisions. About $9.5 will be raised by requiring banks to report to the IRS credit card transactions for most businesses and $1.4 billion will be raised by limiting the provision of the tax code that currently allows someone who sells a home to exclude the resulting gains from taxable income.
Another 7.6 billion will be raised by delaying the implementation of a tax break for multinational corporations that should never have been enacted in the first place. The soon-to-take-effect law (the new "worldwide interest allocation" rules) is designed to make it easier for multinational corporations to take U.S. tax deductions for interest payments that are really expenses of earning foreign profits and therefore should not be deductible. Implementation of this tax break will be delayed two years, until 2011.
The U.S. Senate is now expected to wait until after the July 4 recess to vote on a bill (H.R. 3221) that reforms the government-sponsored mortgage funding companies Fannie Mae and Freddie Mac, modernizes the Federal Housing Authority (FHA), allows the FHA to guarantee refinanced mortgages for homeowners in danger of foreclosure, and provides communities with additional Community Development Block Grant funds to buy foreclosed or abandoned properties.
The bill also includes over $14 billion in tax cuts aimed at housing. A provision costing $4.3 billion over ten years creates a refundable $8,000 credit for first-time homebuyers that must be paid back in equal installments over the next 15 years. This is the equivalent of an interest-free loan. Eligibility is phased out beginning with taxpayers with incomes of $75,000 (or married couples with incomes of $150,000). It's not clear how helpful this could be, partly because it would not make any money available at the time a down payment is made but would be claimed afterwards.
Another provision costing $1.5 billion over ten years creates a deduction for property taxes for non-itemizers, which is capped at $500 per spouse. Because of the home mortgage interest deduction that is currently available for itemizers, most people with a mortgage already itemize their deductions. That means that the main beneficiaries of this provision will likely be homeowners who don't have mortgages -- even though this is a bill that is supposed to address a mortgage foreclosure crisis.
The bill also includes provisions to expand the Low Income Housing Tax Credit and to increase the use of bonds by state and local government to address housing needs.
Limitation Interferes with State and Local Property Tax Decisions
Disturbingly, the new non-itemizer deduction for property taxes will be denied to people living in a jurisdiction that recently raised its property taxes, discouraging local governments from raising revenue needed to deal with growing fiscal problems. State and local governments hardly need an extra reason to avoid raising property taxes, given the unpopularity of that particular form of taxation at this time despite massive budget shortfalls in the states. The Center on Budget and Policy Priorities points out that this limitation interferes with state and local prerogatives and would create an administrative headache for the IRS.
Most Unjustified Tax Break Left Out of New Version in the Senate
Fortunately, the very worst provision of the previous Senate bill has been dropped from this version. That is the "net operating loss carryback" provision (or NOL carryback) that would have allowed companies taking losses this year and next year to deduct them against taxes they paid in the previous four years (instead of the previous two years, as currently allowed). This would basically be a tax break with no strings attached for any company (not just home builders). Citizens for Tax Justice and several other groups had issued harsh criticisms of the previous Senate bill because of this and other provisions.
Senate Bill Includes Revenue-Raising Provisions But Is Not Quite Deficit-Neutral
The bill replaces $9.8 billion of the revenue by requiring banks to report to the IRS credit card transactions for most businesses. It replaces another $1.4 billion by limiting the provision that currently allows someone who sells a home to exclude the resulting gains from taxable income. Some more revenue is replaced by increases in various penalties, but the bill still leaves about $2.5 billion of the $14 cost unpaid for, a shortcoming that Democrats in the House of Representatives will likely attempt to rectify when they receive the bill.
Bill Faces Amendment Dispute, Veto Threats
This week Senator John Ensign (R-NV) demanded that a $8 billion amendment to extend tax breaks for renewable energy -- without any revenue-raising provisions to offset the costs -- be attached to the housing bill. He has promised to use procedural mechanisms to slow the consideration of the bill if this amendment is not adopted. This forced Senate leaders to push consideration of the bill off into the week after the July 4 recess.
Even after the Senate approves the bill, the House may approve another version that improves upon the revenue-raising provisions or other parts of the bill, which would require another Senate vote of approval. Then it faces a veto threat from the White House, partly because it feels the credit for first-time homebuyers is a waste of resources.
On Thursday, the House of Representatives passed two bills that are part of a housing stimulus package promoted by House Democratic leaders. The first is the Neighborhood Stabilization Act (H.R. 5818), which would make available $15 billion in grants for state and local governments and non-profits to buy up and rehabilitate foreclosed homes, in order to prevent neighborhoods from being adversely affected by vacancies. The second, larger bill is the American Housing Rescue and Foreclosure Prevention Act. This consists of several separate pieces of legislation offered as amendments to replace the language in the housing bill passed in the Senate, H.R. 3221. It includes language that reforms the government-sponsored mortgage funding companies Fannie Mae and Freddie Mac, modernizes the Federal Housing Authority (FHA) and allows the FHA to guarantee refinanced mortgages for homeowners in danger of foreclosure.
Housing Tax Provisions in the House Package
Another piece of legislation included in the larger bill is the $11 billion tax bill approved by the House Ways and Means Committee a month ago. It includes a refundable $7,500 credit for first-time homebuyers that must be paid back in equal installments over the next 15 years, which is the equivalent of an interest-free loan. Eligibility is phased out beginning with taxpayers with incomes of $70,000 (or married couples with incomes of $140,000). It's not clear how helpful this could be, partly because it would not make any money available at the time a downpayment is made but would be claimed afterwards.
The House bill also has a deduction for property taxes for non-itemizers, which is capped at $350 per spouse. Because of the home mortgage interest deduction that is currently available for itemizers, most people with a mortgage currently do itemize their deductions. That means that the main beneficiaries of this provision will likely be homeowners who don't have mortgages -- even though this is a bill that is supposed to address a mortgage foreclosure crisis.
The bill also includes provisions to expand the Low Income Housing Tax Credit and to increase the use of bonds by state and local government to address housing needs.
Senate Bill Widely Panned
A month ago, the Senate passed a housing bill that was widely panned by housing advocates, policy experts, and labor, partly because of its inclusion of a "net operating loss carryback" provision (or NOL carryback). This provision would allow companies taking losses this year and next year to deduct them against taxes they paid in the previous four years (instead of the previous two years, as currently allowed). This would basically amount to a tax break with no strings attached for any company (not just home builders).
It's highly unlikely that this will prevent layoffs of employees as its proponents claim. Companies will always have an incentive to lay off workers if no one is seeking to buy whatever the company produces. Handing the companies a tax break with no strings attached does nothing to change that. Contrary to the claims of backers of the tax break, labor groups have argued that this provision could actually encourage construction companies to dump their excess housing inventory on the market more quickly since the tax break would cushion the losses that result from selling at lower prices.
The Senate bill also includes a $500 per-spouse deduction of property taxes for homeowners who do not itemize their deductions, which is larger than the similar deduction in the house legislation but will still save most families only $150 at the most. This deduction will be denied to people living in a jurisdiction that recently raised its property taxes, discouraging local governments from raising revenue needed to deal with growing fiscal problems.
Also included in the Senate bill is a $7,000 non-refundable credit for the purchase of a foreclosed home, which will do little to make housing more affordable and might actually encourage foreclosure. Unlike the credit in the House version, the Senate bill would not require the credit to be paid back over time, but it would be non-refundable, meaning fewer families could benefit from it. The Senate bill also includes provisions expanding the use of bonds by state and local government, like the House bill.
Unlike the tax provisions approved by the House, the Senate's tax cuts would not be paid for.
Veto Threats from the White House
President Bush opposes all of these bills, arguing that in many cases they reward lenders or homebuyers who acted irresponsibly. The President has threatened to veto the two House bills. White House Press Secretary Dana Perino even attacked the Senate bill, saying it "will likely do more harm than good by bailing out lenders and speculators and passing on costs to other Americans who play by the rules and honor their mortgage debt obligations." The differing provisions of the House and Senate bills and the opposition from the President make it very unclear what legislation -- if any -- will be enacted to address the housing situation.
Several organizations came together on tax day to call on the House of Representatives to pass legislation dealing with the housing crisis -- and to criticize the Senate for passing a bill that mainly gives tax breaks to businesses. (Click here to view coverage by Lou Dobbs). At the press event organized by the Laborers' International Union of North America (LiUNA), the union's president Terence O'Sullivan and others blasted the Senate bill, which CTJ criticized earlier this month. "To call it pigs at the trough would give a bad name to pigs," O'Sullivan said. Representatives from the Economic Policy Institute, the Center for American Progress, ACORN, the Service Employees International Union (SEIU), as well as a woman facing foreclosure on her home all called for action by Congress, and several noted that most of the action needed would be outside the tax code. CTJ director Robert McIntyre said, "If we gave this issue to the agriculture committees, they'd probably give us farm subsidies, so if we give this problem to the tax-writing committees they give us tax breaks because that's what they do. I'm pretty sure we have committees in Congress to deal with housing."
In the House, that committee is the Financial Services Committee chaired by Barney Frank, who wants to allow the Federal Housing Administration to guarantee refinanced home mortgages. Another provision that many advocates want would allow a judge in some situations to rewrite the terms of a home mortgage, but Democratic leaders in the House have cast doubt about whether this can be passed.
The Ways and Means Committee (the tax-writing committee in the House) approved a package of tax provisions that was an improvement over those passed by the Senate and which may be attached to a broader bill. The Ways and Means bill does not include the very worst provision in the Senate bill, the "net operating loss carryback" provision (or NOL carryback). This provision would allow companies taking losses this year and next year to deduct them against taxes they paid in the previous four years (instead of the previous two years, as currently allowed) even though it is highly unlikely that this will prevent layoffs of employees or do anything for home builders other than encourage them to dump their inventory.
Unlike the Senate legislation, the Ways and Means Committee bill includes revenue-raising provisions to offset the costs of the tax breaks. One would require that brokers of publicly traded securities report the basis of a given security in a transaction to ensure that capital gains taxes are paid properly. Another offset would delay and limit an unnecessary tax break for corporations, "worldwide interest allocation," which hasn't even gone into effect yet. (For more on these offsets, see last week's article on the House legislation.)
Both bills include a deduction for state and local property taxes available to people who don't itemize deductions (currently this is only allowed for itemizers). At Tuesday's event McIntyre pointed out that most people with mortgages are itemizers, so the people most likely to benefit from this are homeowners without mortgages, making it difficult to see how the provision has anything to do with a mortgage foreclosure crisis. Both bills also include a credit for buying a home, but in neither case would the credit be available for a down payment. It would not be received until after after a homebuyer files taxes after the home is purchased.
In the House version, this is a refundable credit of $7,500 of first-time home-buyers, but it must be paid back over 15 years. In the Senate version, it's a non-refundable $7,000 credit for the purchase of foreclosed homes, which actually might encourage foreclosure. The credit in the Senate bill is disallowed to taxpayers in jurisdictions that raise property taxes, which would hamstring state and local governments struggling with fiscal problems from raising revenue to avoid cuts in public services.
House leaders are hoping to have a full bill ready for a floor vote in early May.
On Thursday, the Senate approved the Foreclosure Prevention Act, an $18 billion package of tax breaks and spending that proponents argue will ameliorate the housing crisis, by a vote of 84 to 12. The bill consists of the tax breaks criticized here last week and costing about $10.8 billion over ten years, around $4 billion to be spent through the Community Development Block Grant for local governments to buy or redevelop abandoned and foreclosed homes, and other amendments approved before passage that raised the cost by around $3 billion.
The tax breaks include one provision that would allow companies taking losses this year and next year to deduct them against taxes they paid in the previous four years (instead of the previous two years, as currently allowed) even though it is highly unlikely that this will prevent layoffs of employees or do anything for home builders other than encourage them to dump their inventory.
Another break included is a $500 per-spouse deduction of property taxes for homeowners who do not itemize their deductions, which will probably save families $150 at the most. It will be denied to people living in a jurisdiction that recently raised its property taxes, discouraging local governments from raising revenue needed to deal with growing state fiscal problems. Also included is a $7,000 non-refundable credit for the purchase of a foreclosed home which will do little to make housing more affordable and might actually encourage foreclosure.
The House Moves in a Different Direction
Democratic leaders in the House have indicated that they plan to move in a different direction. On Wednesday the House Ways and Means Committee approved an $11 billion package that does not include the loss carryback provision. It includes a refundable $7,500 credit for first-time homebuyers (of any homes, not just foreclosed homes) that must be paid back in equal installments over the next 15 years, which is the equivalent of an interest-free loan. Eligibility is phased out beginning with taxpayers with incomes of $70,000 (or married couples with incomes of $140,000). The House bill also has a deduction for property taxes for non-itemizers, but ,capped at $350 per spouse, it is even smaller than the one in the Senate version.
Whether these provisions will help many people obtain or keep a home seems questionable. Offering people a small interest-free loan and a tiny cut in property taxes doesn't seem useful for those who are facing foreclosure or for communities that want to preserve their neighborhoods. But at least the House bill does not include the Senate's giveaway to business, the loss carryback provision.
Other changes in the House bill include modifications to the Low-Income Housing Tax Credit and other provisions. Both the House version and the Senate version have provisions to allow increased use of tax-exempt housing bonds by states and localities.
The House bill also has provisions to offset the costs of the bill, and these are provisions that should be passed regardless of Congress's search for revenue. One would require that brokers of publicly traded securities report the basis of a given security in a transaction to ensure that capital gains taxes are paid properly. Very generally, a capital gain is the difference between the price a person pays for property and the price the person sells it for later. The "basis" is the initial purchase price, and if it is not reported correctly, this can lead to an underpayment in capital gains taxes.
Another offset would delay and limit an unnecessary tax break for corporations, "worldwide interest allocation," which hasn't even gone into effect yet. Tax rules already let multinationals take U.S. tax deductions for some of their interest expenses that are really foreign. In 2004, Congress actually expanded this loophole with worldwide interest allocation, a change that is scheduled to take effect starting in 2009.
The final outcome for this legislation is unclear given the disagreements between the House and the Senate and given that the White House has signaled that it has misgivings about the Senate bill.
The Foreclosure Prevention Act introduced in the Senate this week includes several measures that lawmakers argue will address the home mortgage foreclosure crisis and the problems plaguing the home construction industry. Judging from the information we have so far, it appears that the tax provisions in the bill are likely to help large corporate homebuilders and yet do little for ordinary Americans who are either struggling to keep their homes or who are hurt by the downturn in the home construction industry.
These tax provisions include:
Net Operating Loss Carryback
Cost: $6 billion ($25.5 billion over 2 years, $6 billion over 10 years)
As a general rule, a company operating at a loss in a given year will not have to pay taxes for that year, because its deductions will wipe out its taxable income. Under current law, if a company has excess deductions beyond its taxable income for the year, it can apply those excess deductions not only against earnings in later years, but also against income taxed in the previous two years. That allows it to get previously paid taxes refunded. The Senate bill would expand this benefit by allowing companies to apply losses in 2008 or 2009 to taxes paid in the previous four years.
This benefit would be available for all companies, but proponents in the Senate have argued that this will particularly ease the pain felt by home-construction companies. Proponents say the loss carryback provision will make it less likely that construction companies will need to lay off workers, and that it will somehow reduce the pressure on them to quickly sell their excess inventory at a loss.
But there is no reason to think that this tax break will have these positive effects. Companies will always have an incentive to lay off workers if no one is seeking to buy whatever the company produces. Handing the companies a tax break with no strings attached does nothing to change that. Contrary to the claims of backers of the tax break, labor groups have persuasively argued that this provision could actually encourage construction companies to dump their excess housing inventory on the market more quickly since the tax break would cushion the losses that result from selling at lower prices.
In terms of its effects on the housing industry, the main effect of this corporate giveaway will be to reward large corporate home-builders who helped perpetrate the sub-prime lending debacle. Other major beneficiaries will be large corporations who use the "bonus depreciation" tax break enacted earlier this year to reduce their taxable incomes below zero, and who will enjoy outright negative tax rates if this NOL carryback provision is enacted.
Non-Itemizer Tax Deduction for State and Local Property Taxes
Cost: $1.5 billion
Currently, homeowners are allowed to take an itemized deduction for state and local property taxes. But less than a third of taxpayers bother to itemize their deductions, because most find it more beneficial to use the standard deduction. The Senate bill would offer non-itemizers a deduction for property taxes on top of the standard deduction this year. The new deduction would be limited to $500 for single taxpayers and $1,000 for married couples.
Proponents of this provision apparently fail to understand the purposes of the standard deduction: (a) to make the tax code fairer and (b) to make tax filing simpler for most people by giving them a simple deduction that is bigger than what they'd get from itemizing.
Right now, the only homeowners who do not itemize their property taxes are those for whom the standard deduction ($10,900 for couples) is bigger than their total expenses for state and local taxes, interest, donations, etc. In effect, non-itemizing homeowners already get to write off more than their total property taxes.
Adding an additional property tax deduction on top of the generous one already implicitly allowed to non-itemizers would make tax filing more complicated and tax enforcement more difficult.
The new deduction would provide little help to those who take advantage of it. Families who have no taxable income already would not be helped at all. For couples with two children, that includes those making less than $25,000. For couples with two children making more than $25,000 but less than $41,000, the maximum tax saving would be only $100. From $41,000 to $90,000 the maximum tax saving would be only $150. And above that level, the vast majority of homeowners already itemize deductions, and would thus get no benefit.
To illustrate how little thought went into the design of this foolish tax break, the new non-itemizer property tax deduction would be denied to taxpayers if their locality raised its property tax rate this year or next. The apparent goal of this strange rule is to punish taxpayers whose state or local governments have mitigated revenue losses caused by declining home values and the economic downturn. The Senate apparently hopes to encourage local government to deal with falling revenues by cutting back on public services such as education instead.
Foreclosed Home Purchase Tax Credit
Cost: $1.6 billion
The bill also includes a $7,000 non-refundable tax credit that can be claimed over two years by people who purchase foreclosed homes during the next 12 months. It seems unlikely that this provision would make foreclosed homes more affordable for buyers who earn enough to take advantage of this subsidy (more than $57,000 for couples with two children). Instead, it will probably lead to higher prices for the foreclosed homes. Indeed, supporters of this provision admit as much. "The $7,000 tax credit for those who buy foreclosed properties should stimulate demand for them and prevent their prices from falling further, said Sen. Johnny Isakson (R-Ga.)," according to the Washington Post (Apr. 5, 2008, p. D1).
WSJ, Citing CTJ, Explains that Business Tax Breaks in Stimulus Bill Will Cost Over Three Times Official Estimate
The Wall Street Journal's Jesse Drucker explains today using an analysis from Citizens for Tax Justice that the cost of the business tax cuts in the stimulus package passed by Congress last week is over $22 billion over ten years, roughly three times the official estimate of $7.5 billion over ten years.
The official "score," or cost estimate, from the Congressional Joint Committee on Taxation for the entire stimulus package is $124.5 billion over ten years. The cost in 2008 alone is higher -- $151.7 billion -- but part of that cost is recouped later.
That's because the business tax breaks cost $44.8 billion in 2008 but their ten-year cost is officially estimated to be only $7.5 billion, since they consist of moving forward existing deductions for investments (accelerated depreciation and expensing, or immediate depreciation, for certain small business investments). In a technical sense, firms are not getting any new deductions but are just able to take certain deductions earlier.
But Drucker explains, these estimates fail to account for what economists call the "time value of money." Basically, money in your hand today is worth a lot more than the same nominal amount of money in your hand ten years from now, because inflation erodes the value of money over time and because money can be invested at a profit over several years. Of course, business people are perfectly aware of this, which is why they lobbied for this form of tax break in the first place.
The additional cost of the business tax cuts in the stimulus bill can be explained another way: Since the tax cuts are all deficit-financed, they always add to the national debt, resulting in larger interest payments by the federal government (i.e. by the taxpayers). If a deduction is taken now rather than a few years from now, that means we have additional interest we're paying on the national debt over those few years. The table below shows the calculations CTJ made to identify the added interest costs of the business tax breaks in the stimulus bill.
You might ask why the Joint Committee on Taxation doesn't take this extra cost into account. The reason is that the staff of the Joint Committee doesn't take into account any added interest payments that result from tax cuts. All of the provisions of the stimulus bill actually increase interest payments on the national debt since the entire bill is deficit-financed.
Conservative analysts like to ignore the effect of additional interest payments that result from tax cuts, because they generally want the costs of tax cuts to appear smaller. This might be more easily ignored in other situations, but in the case of the business tax breaks that are part of the stimulus package, the additional interest actually triples the costs.
This situation shows that leaving the added interest out of cost estimates for tax breaks can lead to misleading conclusions. Really we should consider the added interest that results from any tax cut proposal as we contemplate its costs. When estimating the costs of a tax cut, Citizens for Tax Justice generally calculates the additional interest payments that result from increasing the national debt and shows how this increases the overall cost of the tax cut. For example, we have calculated that if the Bush tax cuts are made permanent and the costs are not offset (which generally seems to be Republican policy) then the total costs would be just over $5 trillion over the 2011-2020 period, with $954 billion of that in the form of additional interest that results.
The U.S. Senate voted on Thursday to pass a stimulus bill similar to the one the House of Representatives passed earlier and that resulted from negotiations between House Speaker Nancy Pelosi, House Minority Leader John Boehner, and Treasury Secretary Henry Paulson. The final bill, which was quickly approved afterwards by the House and will now be signed by President Bush, is a bit broader than the original House bill because it extends eligibility for rebates to people who have income from Social Security or veterans' disability benefits but little or no earnings.
This came after Republicans in the Senate succeeded Wednesday night in maintaining a filibuster -- by just one vote -- of the stimulus plan that had been passed out of the Senate Finance Committee last week. The Senate Finance bill was broader, most notably because it would have extended regular unemployment insurance benefits from 13 weeks to 26 weeks.
The filibuster seems to be driven by the conservative ideological principle that tax cuts are always good while public spending is usually bad. Republican Senators and the President could agree with Democrats on the need to provide tax rebates, but could not accept extended unemployment benefits. But the entire point of a stimulus bill is to stimulate the economy. Analysts have found that extending unemployment benefits is actually one of the most effective ways to stimulate the economy because it gives money to people who are most likely to immediately spend it. The tax rebates are likely to be helpful in stimulating the economy, but not quite as effective as extended unemployment insurance benefits. In some cases the rebates will not be spent immediately, meaning they will provide somewhat less of a boost to the economy.
The bill approved Thursday provides a rebate equal to income tax liability up to a maximum of $600 ($1,200 for married couples) and provides a minimum rebate of $300 ($600 for married couples). The bill also provides an additional $300 per dependent child. Eligibility begins to phase out for taxpayers with incomes of $75,000 ($150,000 for married couples).
The original House bill would have made the rebates available only for taxpayers with earnings of at least $3,000, while the bill passed on Thursday includes the Senate Finance Committee's provision that makes the rebates available for taxpayers whose combined earnings, Social Security benefits and veterans' disability or survivor benefits equal at least $3,000.
Final Bill Narrower than the Bill Republicans Filibustered
Several provisions from the Senate Finance Committee's bill that Republicans filibustered were not adopted in the final version. The Senate Finance bill would have provided $500 rebates to all taxpayers ($1,000 for married couples) under the income limits, whereas the final bill gives taxpayers at the lowest income levels rebates that are only half as high ($300, or $600 for couples) as the full rebate. The Finance Committee bill also included the extension of unemployment insurance, which was a bone of contention between Senate Democrats, who all supported the extension, and Republicans, who mostly opposed it.
The final bill does not include the additional business and energy tax cuts that the Finance Committee added but does include the two business tax breaks in the original House version. The first is so-called bonus depreciation (allowing businesses to immediately write off 50 percent of equipment and other capital) and the second doubles the amount of certain investments that small businesses can immediately expense from $125,000 to $250,000. Since investment usually requires some time for planning and implementation, these are unlikely to provide the sort of immediate boost that is needed to forestall or counteract a recession. The business tax cuts make up less than a third of the total costs of the bill, however, with the rebate provisions making up the rest.
On Monday, February 4, the Senate is expected to vote on an economic stimulus package that was approved by the Senate Finance Committee earlier this week and which includes tax rebate checks mailed out to households as early as May. The more limited House stimulus bill passed on Tuesday reflects a compromise made between House Speaker Nancy Pelosi, House Minority Leader John Boehner and the Bush administration. Democratic leaders in the Senate say enough Republicans will vote for the more generous version to overcome the 60 vote hurdle to approve legislation in their chamber. Failing that, the Senate would likely approve the House-passed version.
Senate Version Sends More Money to People Who Will Use It to Stimulate the Economy
While both versions of the bill include tax incentives for business that have questionable value as a stimulus, over two thirds of the revenues spent in each bill go towards tax rebates for households.
The rebates in the House version would be lower for working people who pay federal payroll taxes but who do not earn enough to pay federal income taxes. Anyone with at least $3,000 in earnings would get a rebate of at least $300 ($600 for couples). Anyone who has tax liability above $300 ($600 for couples) would get a rebate equal to that tax liability, up to a maximum of $600 ($1,200 for couples). The Senate version would simply give all of these taxpayers a $500 rebate ($1,000 for couples). This is probably better as a matter of both fairness and as an effective stimulus, since people at the lower end of the income ladder are more likely to immediately spend any money given to them, pumping it immediately into the economy, boosting demand. Both bills also provide an additional $300 for each child.
The Senate version also takes two other steps that target more money towards the people most likely to spend it right away. First, the $3,000 income threshold for eligibility in the Senate version can be met with both earnings and Social Security, meaning many elderly people and people with disabilities who live on fixed incomes will receive rebates who would not under the House version. Second, unlike the House bill, the Senate version extends the maximum length of unemployment insurance benefits from 13 weeks to 26 weeks, providing a benefit for those who both need it the most and are more likely to spend it quickly.
Senate Majority Leader Nearly Gags
When Senate Finance Committee Chairman Max Baucus (D-MT) first introduced his proposal, most Democrats in the Senate and, reportedly a number of Republicans, were pleased because it looked like a more comprehensive and effective way to ward off a recession. However, in a move that did not please many Democrats, Baucus did away with the provisions to cap eligibility for high-income people, which is included in the version worked out between House leaders and the Bush administration. Senate Majority Leader Harry Reid (D-NV) said this provision "causes me to want to gag," a sentiment that was largely reflected in comments from other Democratic Senators as well.
During the markup of the bill in the Finance Committee, Senator Baucus added provisions that phase out the rebate for taxpayers with incomes above $150,000 ($300,000 for couples). The income limits in the House version are only half as high. But as the Center on Budget and Policy Priorities argues, the Senate bill is still far more progressive overall because of its other provisions.
Negotiations between House Speaker Nancy Pelosi, Minority Leader John Boehner and Treasury Secretary Henry Paulson resulted yesterday in an agreement to spend about $146 billion to jumpstart the economy. About two thirds of that would go towards tax rebates for households, and a third would go towards tax breaks for businesses. The tax rebates would be targeted toward middle-income taxpayers, including working people who pay federal payroll taxes but who do not have enough income to owe federal income taxes. However, the rebates would provide no help for people who do not have earnings (including the unemployed and many Social Security and welfare recipients) even though these people are arguably the most likely to spend any money given to them, thereby pumping the money immediately into the economy.
Some Democrats in the Senate, like Finance Committee Chairman Max Baucus (D-MT) have expressed an interest in adding increased unemployment benefits or food stamps to any stimulus package to reach these people. It appears that Speaker Pelosi felt forced to give up demands for increasing these benefits in order to get the Bush administration to agree to making the tax rebates available for more lower-income people.
The Tax Measures
The rebates would be a maximum of $600 for singles and $1,200 for married couples. For people whose tax liability is below $600 (or $1,200 for couples), the rebate would be equal to tax liability, and a minimum benefit of $300 for singles and $600 for married couples would be available so long as they have at least $3,000 in earnings. Finally, an additional $300 for each child would be available to anyone with any earnings.
The rebates would begin to phase out for singles with incomes of $75,000 and married couples with incomes of $150,000. As a result, they would be more targeted towards the middle-class than any tax bill we've seen during the Bush years.
The tax rebates would be advances on a one-year reduction of the 10 percent income tax rate to 0 percent for the first $6,000 of income for singles or $12,000 of income for married couples for 2008.
The business tax breaks would consist of so-called bonus depreciation (allowing businesses to immediately write off 50 percent of equipment and other capital) and doubling the amount of certain investments that small businesses can immediately expense from $125,000 to $250,000.
The Spending Increases that Were Left Out
Several advocacy organizations have called attention to the fact that the whole point of an effective stimulus is to put money in the hands of people who are most likely to spend that money right away to increase demand and provide an immediate boost to the economy. The stimulus proposal announced yesterday, however, would give smaller tax rebates to those people who work and pay federal payroll taxes but have incomes too low to pay federal income taxes.
Another group who would likely spend any money given to them includes those with no or very little earnings, who could be helped with increased unemployment benefits or food stamps. An expert with Moody's Economy.com has studied the effects of different stimulus measures on the economy and finds that increased UI benefits and food stamps provide the greatest increase in demand for each dollar spent. Business tax breaks, on the other hand, produce relatively little demand for each dollar spent. Investment usually takes quite a while to plan and implement and most investment is made by businesses that would not have tax liability anyway.
These aspects of the plan are very troubling, but they are not sufficient reason for members of the House to oppose it. The plan does provide some help for low-income and middle-income people, and House passage could be followed by a much improved bill in the Senate. Hopefully, this could lead to a final bill that does more for the economy and for Americans who need help.
Both the White House and Democratic leaders in Congress are discussing the possibility of some sort of economic stimulus package in the wake of a report from the Labor Department showing that unemployment rose in December from 4.7 to 5.0 percent. While the number of jobs increased overall during the month, the private sector shed 13,000 jobs.
The White House has indicated that the President will announce today the broad principles of a stimulus plan, which will likely involve tax breaks rather than increased spending. The President is said to be considering tax rebates similar to the rebate checks mailed to taxpayers in 2001, as well as extending the existing Bush tax cuts. The latter idea has been panned by economists (including Martin Feldstein, former chief economic adviser to President Reagan) since the Bush tax cuts do not expire until the end of 2010 and therefore extending them could not possibly do anything to counteract a recession taking place today. What's more, the resulting increase in the budget deficit would actually hurt the economy overall.
Democratic leaders and several economists point out that spending could be very effective in stimulating the economy and certain types of tax breaks could be as well, if they were carefully structured. A recent forum on this topic sponsored by the Brookings Institution included Feldstein, former Treasury Secretary Robert Rubin and other economists. They all agreed that any stimulus should be "temporary, timely and targeted." Democratic House Speaker Nancy Pelosi, Ways and Means Chairman Charles Rangel and several other Democratic leaders have echoed these three principles.
The Democratic and Republican House leadership met on Wednesday to discuss the possibility of a bipartisan effort to enact a stimulus package. No deal was reached, but both sides have suggested they could work together to pass legislation quickly. Some House Republicans have indicated that they might offer amendments that would extend the Bush tax cuts but that they will not make their support for a stimulus package conditional on passing such an amendment. Meanwhile, Rangel has said that he is open to including some business tax breaks, even though he may not agree with them, in order to get a bill passed.
However, some dark clouds appeared to form over the discourse on the stimulus package on Friday morning. It was reported that the White House was considering $800 rebates for income tax payers in the 15 percent bracket. Taxpayers in the 10 percent bracket would get only part of the benefit the President is proposing, and those not even in the 10 percent bracket would get nothing.
Meanwhile, the top three Democratic presidential candidates all have their own stimulus plans, although it's not entirely clear how influential they will be on the issue.
Any stimulus also must be targeted to those who are likely to spend whatever money is given to them. Low-income people are far more likely to immediately spend any extra money they receive in the form of a tax rebate or extended unemployment insurance, for example, whereas higher-income people may be more inclined to save or invest any extra money they receive, meaning it will be a long time before it has any palpable effect on the economy. Targeting the tax cuts or spending might be particularly difficult for members of Congress, who naturally want as many voters and contributors as possible to get benefits.
The Center on Budget paper explains that certain measures have a much higher stimulative impact on the economy because they benefit those who will immediately spend any money they receive. For example, extended unemployment benefits provide $1.73 worth of increased demand for every dollar spent. On the other hand, a tax break for capital gains and dividends provides only 9 cents of increased demand for every dollar of revenue reduced.
Immediate, one-time tax rebates are on the list of measures favored by the experts at the Brookings forum earlier this month, but they may have to be targeted to low-income families to be truly effective. A survey done in 2001 found that less than a quarter of taxpayers planned on actually spending their rebate checks. The rest would save it, which provides no immediate boost for the economy overall.