On July 14, Douglas Holtz-Eakin, chief economic adviser for John McCain’s presidential campaign and former director of the Congressional Budget Office, gave written and oral testimony to the Senate Finance Committee concerning the Bush tax cuts. Because these tax cuts expire at the end of 2010, Congress must decide which portions of them to extend or make permanent, and which portions should expire as scheduled.

Holtz-Eakin argued for permanently extending the Bush income tax cuts for the rich, while dropping expansions in the Earned Income Tax Credit and Child Credit that benefit working class people. He also oddly asserted that raising revenue will not reduce deficits. He went on to repeat some common misconceptions about businesses and their reaction to tax rates.

The overall thrust of Holtz-Eakin’s testimony was that taxes need to be lower on the rich (to encourage them to work, save and invest) and higher on the poor (to encourage them to work).

A new report from Citizens for Tax Justice explains that, to make his case, Holtz-Eakin endorsed several myths about the Bush tax cuts.

Read the report.

A Washington Post editorial earlier this week declared, "Senate Republicans, committed as they are to preventing the debt from mounting further, can't approve an extension of unemployment benefits because it would cost $35 billion. But they are untroubled by the notion of digging the hole $678 billion deeper by extending President Bush's tax cuts for the wealthiest Americans."

Well, that's a little unfair, because Congressional Republicans actually want to increase the deficit by a full trillion dollars by extending the Bush tax cuts for the wealthy.

The $678 billion is just the cost of making the Bush income tax cuts for the richest two percent of taxpayers permanent. (President Obama and Republicans agree that they should be made permanent for the other 98 percent.) Republicans have also been pushing for years to make permanent Bush's repeal of the federal tax on the estates of millionaires. This would add over $300 billion during the first decade when its costs would be fully felt, compared to Obama's more restrained (but still awfully generous) proposal to cut the estate tax.

As the Post explains, Senate Republican Whip Jon Kyl recently said that the cost of new spending should be offset, but the revenue loss from tax cuts should not. According to Talking Points Memo, Republican Senator Judd Gregg explained that new government spending is "growing the government" and therefore should be offset, presumably with cuts in spending, but tax cuts should not be offset.

Of course, deficit-financed tax cuts have to be paid for one day, and that could be done through tax hikes. Congressional Republicans might believe that Congress will be forced to shrink government when revenues decline, but that obviously didn't happen after the Bush tax cuts were enacted.

Senate Republicans Bring Back Supply-Side Economics

But the real prize for articulating their position goes to Senate Republican Leader Mitch McConnell. When asked about this, he replied, "That's been the majority Republican view for some time, that there's no evidence whatsoever that the Bush tax cuts actually diminished revenue. They increased revenue, because of the vibrancy of these tax cuts in the economy."

That's right. The most powerful Republican alive believes that when Congress cuts taxes, the result is that revenues increase.

This is the extreme version of "supply-side economics." The basic idea behind this school of thought is that tax cuts can change incentives to invest so much that they result in huge economic growth, which results in increased incomes and therefore increased income tax payments that more than make up for the loss of tax revenue resulting directly from the tax cuts.

CTJ has already explored in great detail the empirical evidence against this idea, the people who promote it anyway, and the fiscal disasters that have resulted.

But don't take our word for it. President George W. Bush's own Treasury also concluded that tax cuts do not increase revenue or come close to paying for themselves.

Douglas Holtz-Eakin Contradicts McConnell

So have the Republicans obtained some new support for supply-side economics since then? Apparently not, since the Republican witness at Wednesday's Finance Committee hearing on the Bush tax cuts conceded that they did not pay for themselves.

Douglas Holtz-Eakin, former director of the Congressional Budget Office and an adviser to the presidential campaign of John McCain testified at the hearing in favor of making permanent all the Bush tax cuts (including those for the richest taxpayers). According to his written testimony (which he paraphrased during the hearing), making the tax cuts permanent would have a positive economic effect that would reduce the direct cost of the tax cuts by 22 percent.

We have no idea how he came to that figure. But Holtz-Eakin is the closest thing the Republicans have to a reasonable and credible economist who will promote their views. (Even though we think he's wrong about most of what he says, as we explained in the previous article.) Since Holtz-Eakin is the best economist the Republicans have on their side, one would think that Senator McConnell would get on the same page.

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.

Americans know that taxes are necessary to fund the services government provides like roads, schools, and social security. We contribute so that our country can build and maintain the necessary infrastructure and public goods and provide a safety net for all of us. At the same time, Americans think that the wealthiest among us aren't paying their fair share.

And yet those who support the previous administration's policies of slashing taxes for the rich will be very effective in making their voices heard on Tax Day. They have a message that sounds appealing (usually involving lower taxes with no negative repercussions) and a network of supporters with plenty of cash to amplify their message.

The following list describes how you can cut through the nonsense and stand up for tax fairness this April 15.

CTJ: Obama Cut Taxes for 98 Percent of Working Americans
CTJ has a new fact sheet showing that President Obama has cut taxes for 98 percent of working Americans in 2009. State-by-state reports are included. Polls show that the vast majority of people think that Obama either raised their taxes or left them the same for 2009, and these publications aim to clear up that widespread misunderstanding. 

US PIRG: How Much Tax Havens Cost Ordinary Americans
The U.S. Public Interest Research Group reminds taxpayers that, while we do our duty and file our taxes, there are corporations and individuals out there who shirk this responsibility by using offshore tax haven countries to hide assets. On April 15, U.S. PIRG is sponsoring post office demonstrations and releasing a new report Tax Shell Game: What Do Tax Dodgers Cost You? They are encouraging folks to send in post cards to their Members of Congress to send a message to Washington that the American people deserve a better system.

Jobs with Justice: Tax Wall Street Day of Action
Jobs with Justice is organizing a Tax Wall Street Day of Action on April 15th. They are calling on supporters to deliver letters to national banks and collect petition signatures at local post offices as Americans stop by to mail their tax returns. The petition will ask Congress to tax Wall Street speculation.

UFE: Take the Tax Fairness Pledge
United for a Fair Economy has created the Responsible Wealth Tax Fairness Pledge where you can estimate your savings from the Bush tax cuts and pledge them to an organization that works for tax fairness. By the end of 2010 the Bush tax cuts will have cost more than $2.5 trillion in revenue that could have been used for critical investments in education, infrastructure or to reduce the deficit.

Are You Tired of the Tea Party? Join the Other 95%
President Obama cut taxes for 95 percent of working Americans (or 98 percent, if you count AMT relief) in 2009. But only 12 percent know it. Join the "other 95 percent" and say "Thanks for our tax cut, President Obama."

Or Join the Coffee Party
Tired of the tempest in a teapot, Coffee Party USA was started to encourage folks to "get together and drink cappuccino and have real political dialogue with substance and compassion." You can join the movement or start your local chapter here. Their motto: Wake Up and Stand Up.

IPS: More About the Way the World Is
The Institute for Policy Studies offers an analysis of the federal income tax system that seems more like two different systems: one for the wealthy and powerful and another one for the rest of us. Their paper includes analyses of the "flat tax," the national debt, and the myths about tax cuts for the wealthy allegedly spurring the economy.

CBPP on the Tax Foundation Tax Freedom Day Report: If Only We Were Rich
The Center on Budget and Policy Priorities has published a report refuting the oft-quoted numbers from the Tax Foundation about how many days people work each year just to pay their federal income taxes. As CBPP points out, the analysis is heavily skewed by the amount of income tax paid by the wealthy. Eighty percent of U.S. households pay tax at a lower rate than the Tax Foundation's estimated "average" federal obligation.

Wealth for the Common Good: Shifting Responsibility
Wealth for the Common Good has released a report Shifting Reponsibility: How 50 Years of Tax Cuts Have Benefited America's Wealthiest Taxpayers detailing how America's highest earners have seen their taxes drop by as much as two-thirds over the last 50 years. The trend of "asking less from those with more" has contributed to perhaps the greatest income inequality the U.S. has ever seen. The report calls for various measures to mitigate this dangerous trend and restore revenue to the federal treasury.

NPP: Where Did Your 2009 Federal Income Tax Dollars Go?
The National Priorities Project has released a report Where Do Your Tax Dollars Go - Tax Day 2010 showing how federal tax dollars were spent in 2009. Out of every dollar, 26.5 cents goes for military-related spending, 13.6 cents goes to pay interest on the debt, and only 2 cents goes towards education.

CAP: Why Cutting Discretionary Spending Won't Solve Our Budget Imbalance
The Center for American Progress has developed an interactive pie chart to help you learn about the federal government's discretionary spending, including whether cuts in those programs will really help reduce the federal deficit. Look at What is Non-Defense Discretionary Spending here.

UFE: How Will the States Close Their Budget Gaps?
United for a Fair Economy's Tax Fairness Organizing Collaborative just published a report Solutions that Work for Main Street: Progressive Guidelines for Closing Recessionary State Budget Gaps."  The report identifies pragmatic principles for closing state budget gaps in ways that enhance economic recovery, ongoing stability, and more widely shared prosperity. Also see their report Leaving Money on the Table showing that residents in states that rely heavily on the sales tax instead of an income tax pay much more federal income taxes as a result.

CTJ: Don't Believe the Hype About the Rich Paying All the Taxes
On Tax Day, you'll hear anti-tax people say that the rich are paying a disproportionate share of taxes. They're wrong. When you look at the tax system as a whole, including federal, local, and state income, payroll, excise, and sales taxes, the system is just barely progressive. A CTJ analysis shows that when you include those taxes, effective tax rates are almost flat.

It's difficult to design a tax plan that will lose $2 trillion over a decade even while requiring 90 percent of taxpayers to pay more. But Congressman Paul Ryan has met that daunting challenge. A new CTJ report shows that Congressman Ryan's budget plan has nothing to do with balancing the budget, but has everything to do with creating a tax system that takes more from the poor and less from the rich.

If the extensive tax proposals in his plan were fully in effect in 2011:

• The federal government would collect $183 billion less in 2011 and more than $2 trillion less over a decade than it would if Congress adopted President Obama's tax proposals.
  
  
• Federal taxes would be lower for the richest ten percent, and higher for all other income groups, than they would be if President Obama's proposals were enacted.
  
  
• The bottom 80 percent of taxpayers would pay about $1,700 more, on average, than they would if President Obama's proposals were enacted.
  
  
• The richest one percent would pay about $211,300 less on average than they would if President Obama's proposals were enacted.
  
  
• The poorest 20 percent would pay 12.3 percent of their income more than what they would pay under the President's proposal, while the richest one percent would pay 15 percent of their income less than they would pay under the President's proposal.

Read the report.

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.

Late last year, CTJ published a report examining the lack of scrutiny directed toward tax expenditures, and the repeated promises to address this problem made by past Administrations.  Unfortunately, the President’s most recent budget proposal shows no signs of progress on this issue.  As CTJ points out in an op-ed in today’s Sacramento Bee: “for the second year in a row, the Obama administration has chosen [in its budget] to simply copy-and-paste the Bush administration’s language on this issue, complete with all the same promises about what will be done at some point over the ‘next few years.’”

Read the op-ed.

"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.

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

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

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

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

The Ill-Advised Budget Commission Idea

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

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

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

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

The Washington Post Scandal

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

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

On December 9, the U.S. House of Representatives 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. Congress would receive these reports at the same time it is trying to decide which of the Bush tax cuts should be extended, what to do with the President's tax reform proposals, and how to balance the federal budget. In this context, it is hoped that the reports will prod some lawmakers to take a more critical look at corporate tax breaks before extending 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 for the points made in the letter.)

Prospects in the Senate are unclear. One problem is the full agenda the Senate has with health care reform.

Another 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. This is, frankly, an all-purpose excuse for legislators who want to avoid closing even the most unfair and outrageous loopholes. They know full well that comprehensive tax reform might not happen for decades. (The last one was in 1986, after all).

The carried interest loophole allows managers of private equity funds (a euphemistic term for buyout funds) to pay taxes at a lower rate than their secretaries. It involves using the tax subsidy (the special top rate of 15% for capital gains) that was intended for people who invest their own money. Whether or not the capital gains tax subsidy is justified is another matter. (We believe it's not.) But private equity fund managers are not investing their own money anyway. They're being paid to manage other people's money, but by calling their compensation "carried interest" they're able to pay income taxes at the low, capital gains rate.

The notion that Congress can tackle tax schemes this blatantly unfair only in the context of comprehensive tax reform (which apparently only comes once every 25 years, if even that often) is ridiculous. Advocates of tax fairness need to call upon the Senate to approve H.R. 4213 as it was written and approved by the House of Representatives. 

Citizens for Tax Justice and several other national organizations have come together to support passage of (H.R. 4213), which fairly and responsibly offsets the cost of the "tax extenders." The House of Representatives plans to vote on this bill as early as December 9.

Read the letter in support of H.R. 4213.

To be sure, many of these organizations question the efficacy and fairness of some of the "tax extenders," which are provisions that Congress enacts periodically to extend, for a year or so, various temporary tax breaks. But we nonetheless agree that the core revenue-raising provisions included in this legislation are important reforms to our tax system. We  support this bill for the following reasons:

H.R. 4213 would reverse Congress's tradition of increasing the budget deficit every year by extending "temporary" tax breaks without paying for them.

Unlike many previous "tax extenders" bills, this legislation includes revenue-raising provisions that would offset the costs of extending these tax breaks. Enacting corporate tax breaks (which make up the bulk of the "tax extenders") without paying for them contributes to our federal budget deficits and our national debt, which is borne by all Americans. The revenue-raising provisions in this bill prevent an increase in the deficit while also making the tax code fairer and more efficient.

H.R. 4213 would finally close the loophole for what private equity fund managers call "carried interest." (See CTJ's previous analyses of the carried interest loophole.)

A middle-income person typically pays income taxes as high as 25 percent plus payroll taxes. Private equity fund managers can receive millions of dollars (or even billions of dollars, during boom times) in compensation for their work, but by calling this income "carried interest," they pay only income taxes at a 15 percent rate.

The "carried interest" label essentially allows these fund managers to pretend that this income is a return on capital investments (and thus eligible for the exception in the income tax that subjects capital gains to an income tax rate of no more than 15 percent). This pretense clearly contradicts the will of Congress in creating the subsidy for capital gains, which was meant to reward those who invested their own money, not those who are simply being paid to manage other people's money.

H.R. 4213 also includes a proposal introduced by Finance Committee Chairman Max Baucus and Ways and Means Committee Chairman Charles Rangel to prevent wealthy Americans from cheating on their U.S. taxes by hiding their income in offshore tax havens. (See CTJ's analysis of tax haven legislation.)

While this proposal is not as strong as we would prefer, it would be an important step forward to ensure that all Americans pay their fair share in taxes. Middle-income Americans typically have few opportunities to hide their income from the IRS. But wealthy Americans have access to lawyers and accountants who help them hide their income in offshore tax havens. Tax havens are countries that have a very low income tax (or no income tax) and laws that prevent their banks from cooperating with IRS enforcement efforts.

While the vast majority of taxpayers at all income levels do the right thing and pay their fair share, a minority of wealthy Americans are engaging in these activities that are both illegal and unfair. The Baucus-Rangel proposal would create strong incentives for foreign banks to provide information that would help the IRS identify tax cheats without creating any significant burden on the banks or their honest customers.

H.R. 4213 requires that the Joint Committee on Taxation (JCT) conduct studies evaluating the "tax extenders" before the end of next year, when Congress is likely to act on them again. (See CTJ's report calling on Congress and the administration to conduct regular reviews of tax expenditures.)

Providing a special corporate tax break through the tax code has the exact same effect as providing a subsidy through direct spending. Unfortunately, lawmakers have made almost no attempt to evaluate or even think critically about the effectiveness of corporate tax breaks before extending them each year. This contrasts significantly with lawmakers' attitudes towards the discretionary spending that they grapple with annually.

JCT's reports of the effectiveness of tax breaks will at least provide Congress with a basis to judge whether or not these tax provisions are worth their costs. This is a common sense reform that is long overdue.

A new report from Citizens for Tax Justice explains why it’s time for the federal government to finally follow through on its long-unfulfilled promise to evaluate the usefulness of special tax breaks.

Does the research and experimentation tax credit, for example, actually encourage research?  Or does it simply enrich high-tech firms?  Does the mortgage interest deduction increase homeownership, or does it only reward people who would have purchased homes anyway?  Shockingly, these types of fundamental policy questions have not been addressed in any type of systematic and transparent fashion by our government.

In total, the federal government spends over $1 trillion each year on programs it administers via the tax code – i.e. “tax expenditures.”  To put that in perspective, annual spending on tax expenditures is actually slightly larger than the entire discretionary spending budget (i.e. the portion of federal spending that Congress must approve each year).

The lack of scrutiny directed toward tax expenditures first gained attention in the late 1960’s when an official listing of tax expenditures was finally produced in an effort to highlight these programs’ size and importance.  In 1993, Congress indicated a desire to take this concept one step further by suggesting that the performance of tax expenditures be regularly reviewed.  Soon after this, the Executive Branch did make some slow progress toward reviewing tax expenditures before effectively abandoning the idea soon after the start of the Bush Administration.

CTJ's new report makes the case for resuming these efforts toward the creation of a tax expenditure review system.  Among the reasons for moving forward on this issue now are:

- Tax expenditures, whether measured as a share of GDP or as a share of income taxes, have increased immensely over the past twenty years.

- Restoring fiscal sustainability will be nearly impossible without a closer look at the more than $1 trillion spent annually via the tax code.

- Creating a new “cross-program” performance review framework, of the type advocated by President Obama, will require the review of tax expenditures.

- Tax expenditure review fits perfectly into President Obama’s agenda to improve government transparency.

- A new dataset, described by the OMB as permitting “more extensive, and better, analyses of many tax provisions” will become available in the very near future.

- State efforts on the tax expenditure review front have provided the federal government with some powerful lessons from which to draw in creating a review system.

Read the report.

Read the 2-page summary.

Read the summary of the report from a state-level perspective.

Citizens for Tax Justice (CTJ) has joined forces with a broad coalition of organizations called Rebuild and Renew America Now (RRAN) to promote a simple message: Congress has a whole lot of options to raise revenue to pay for health care reform and other initiatives without unfairly impacting low- or middle-income people and without harming the economy.

These progressive revenue options include both the tax changes included in President Obama's fiscal year 2010 budget proposals as well as additional options formulated in a recent report by CTJ and endorsed by Health Care for America Now (HCAN) and the Service Employees International Union (SEIU). (See CTJ's report on the President's tax proposals and CTJ's report on additional revenue options to fund health care reform.)

RRAN is a coalition that engaged in education, communications and lobbying efforts in support of the President's budget and other progressive initiatives earlier this year and has mobilized advocates and activists all over the country. Many of the organizations involved are usually focused on particular public services or progressive reforms, but have realized that all public services and reforms are in danger if Congress can't bring itself to raise the revenue needed to pay for them.

RRAN has invited organizations (both national organizations and state organizations) to sign onto its two-page statement of principles for this new campaign for progressive revenue options. Signing does not commit an organization to do anything (although all are also encouraged to become active in RRAN's activities) but simply states support for efforts to pay for initiatives in progressive ways. Anyone who is authorized to sign on behalf of an organization can visit the website of the Coalition on Human Needs (CHN) or simply click here.

The statement lists three broad principles to guide Congress's efforts to find revenue:

1. Adequacy. The federal tax system should raise sufficient revenue over time to meet our shared priorities and invest in our common future.

2. Fairness. Tax preferences that overwhelmingly benefit the wealthy and corporations should be eliminated, and individuals and businesses should contribute their fair share of taxes, based on ability to pay.

3. Responsibility. We should not saddle future generations with unsustainable levels of debt.

The statement also lists examples of the kinds of tax policies RRAN supports:

• raising revenues from upper-income households;
• assessing a significant tax on large estates;
• reducing abuses among corporations and individuals who shelter income in offshore tax evasion or avoidance schemes;
• closing financial industry, oil and gas, and other inefficient corporate loopholes; and
• reducing tax preferences for unearned as opposed to earned income.

For more information in the coming days, visit RRAN's website: www.rebuildandrenew.org

On May 11, the Treasury Department released its "Green Book" containing new details of the tax changes included in the President's fiscal year 2010 budget proposal. In addition to extending the Bush tax cuts for all but the richest Americans and making permanent many of the tax cuts in the recently enacted economic recovery act, the President would also make many changes that would raise revenue by closing loopholes, blocking tax avoidance schemes and making the tax code more progressive.

A new report from Citizens for Tax Justice examines and describes the significant revenue-raising provisions that are sure to be debated fiercely in the months to come.

Read the report.

Approval Marks a Major Step Towards Enacting President's Agenda

On Wednesday, both the House and Senate approved a Congressional budget resolution for fiscal year 2010 that paves the way for several of the President's major initiatives. The resolution allows Congress to make new investments in education and clean energy and puts in place procedures that will make it easier for Congress to enact comprehensive health care reform. It also allows Congress to extend the Bush tax cuts for all but the richest Americans.

The budget resolution allows for about $3.5 trillion in federal spending in fiscal year 2010 and includes important tax and spending provisions related to years after that. It is not a law and is not binding, but puts in place caps on the spending that Congress appropriates each year, sets targets for tax and spending changes and includes certain procedural changes that make it more likely Congress will meet these goals.

Tax Cuts Extended for All but the Rich

For example, the budget resolution allows Congress to reduce revenues by a certain amount by extending the Bush income tax cuts. It is understood that the amount of revenue-reduction allowed would be sufficient to extend the Bush tax cuts for those with incomes below $250,000. It also allows for Congress to reduce revenues by preventing the Alternative Minimum Tax (AMT) from expanding as it is scheduled to under current law. Similarly, it allows Congress to extend the estate tax rules in effect in 2009 instead of allowing the estate tax to revert to the rules put in place during the Clinton years, before Bush's cuts in the estate tax were enacted.

The resolution allows for Congress to enact these tax cuts without finding new revenue to pay for them -- on one condition, which is that Congress enacts a statutory pay-as-you-go (PAYGO) rule that will (in theory) prevent Congress from enacting any more legislation that will increase the deficit. That means that any additional tax cuts (say, an extension of the Making Work Pay Credit that was enacted for two years as part of the economic stimulus package) would have to be combined with revenue-raising provisions to offset the costs.

Predictably, allies of former President George W. Bush have expressed horror that Democratic leaders and President Obama wish to extend the Bush tax cuts for 97.5 percent of Americans rather than 100 percent. The Democrats and the President would allow the Bush tax cuts to expire for singles with incomes over $200,000 and married couples with incomes over $250,000 (which make up roughly the richest 2.5 percent of taxpayers).

For their part, House Republicans used the budget debate to demonstrate to the public just how lopsided the tax code would be if their goals were ever realized and just how much government would have to shrink because of the revenue losses that would result. Earlier this month, the ranking Republican on the House Budget Committee presented his tax and spending plan which would cut and privatize Medicare, convert Medicaid into limited block grants to states, repeal the recently enacted economic stimulus law and deeply cut the relatively small amount of government spending devoted to non-military, non-mandatory programs.

Citizens for Tax Justice published a report concluding that under this GOP plan, over a third of taxpayers, mostly low- and middle-income families, would pay more in taxes than they would under the House Democratic plan in 2010, while the richest one percent of taxpayers would pay $75,000 less, on average.

Final Budget Leaves Out the Senate's Outrageous Estate Tax Cut

Progressives scored a victory when Democratic leaders agreed to exclude from the final budget an amendment adopted by the Senate during its budget debate on April 2 which would slash the estate tax to benefit multi-millionaires. Before the Senate approved this amendment, Majority Leader Harry Reid (D-NV) said, "It is so stunning, so outrageous that some would choose this hour of national crisis to push for an amendment to slash the estate tax for the super wealthy." His common sense view carried the day as negotiators hammered out the final resolution.

The tax cuts enacted under President Bush in 2001 scheduled a gradual repeal of the estate tax, with the amount of assets exempted from the tax gradually increasing over a decade and the tax rate on estates gradually dropping until the estate tax would disappear entirely in 2010. Like almost all of the Bush tax cuts, this cut in the estate tax expires at the end of 2010, meaning that rules scheduled under President Clinton would come back into effect in 2011.

The budget resolutions passed out of the House and Senate budget committees in March both assumed that the estate tax rules in place in 2009 would be made permanent, meaning the Bush estate tax cut would be partially made permanent but the estate tax would not disappear entirely in 2010. The Center on Budget and Policy Priorities released a report finding that about 99.7 percent of estates would be untouched by the tax under this proposal.

Incredibly, 51 Senators voted in favor of the amendment offered by Senators Blanche Lincoln (D-AR) and Jon Kyl (R-AZ) to cut the estate tax even more than this. The 2009 estate tax rules exempt the first $7 million of assets passed on by a married couple (as well as assets they leave to charity) and tax the rest at a rate of 45 percent. The Kyl-Lincoln amendment called for a $10 million exemption for married couples and a 35 percent rate.

Taking Steps Towards Enacting the President's Priorities

Progressives scored another victory in the area of health care. House and Senate leaders decided to include in the final budget resolution a mechanism known as "reconciliation" which will allow the Senate to enact health care reform and higher education loan changes with a simple majority vote.

The practice of filibustering legislation in the Senate has, over the years, turned into a default rule that three fifths the Senate's members must agree to pass a bill. This means that legislation supported by Senators representing a majority of Americans is often blocked. Many advocates fear that this is exactly what could happen to health care reform and many other of the President's important initiatives.

Reconciliation is a way around this obstacle. A budget resolution can include reconciliation instructions specifying that committees will pass legislation that can then pass the full House and Senate under a streamlined process. In the Senate, that streamlined process means that the bill can be passed with just 51 votes.

The particular version of reconciliation included in this budget is optional, meaning Democratic leaders will resort to using it only if bipartisan consensus proves elusive.

Several Republican Senators, and some Democratic Senators, have taken the view that majority rule is undemocratic, and have called reconciliation a partisan ploy to "ram through" the President's agenda. (The idea of the Senate moving too quickly is a little hard for any Hill observer to understand.) More importantly, enacting health care reform will require Congress to raise a great deal of revenue, and finding a large bipartisan majority for that might be a challenge.

Finally, some have complained that reconciliation is only to be used for deficit-reduction, but this is entirely unconvincing because these are largely the same members who voted in favor of reconciliation bills during the Bush years that actually increased the deficit by cutting taxes.