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.

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.

Read the report.

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."

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

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

Read the fact sheet and report for your state.

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.

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

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

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

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

Read the full report.

"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.

Job Creation

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

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

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

Estate Tax

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

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

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

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

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

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

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

Corporate Tax Breaks (aka "Tax Extenders")

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

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

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

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

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

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

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