Budget & Deficits News

Fact-Checking Tax Policy Points in President Trump's Address to Congress

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Despite some expectations that President Donald Trump would use his address to a joint session of Congress to lay out more details of his plan for tax legislation, the speech was extremely light on details. The few details mentioned were largely misleading or outright erroneous. Below we break down four tax-related statements from President Trump’s speech and lay out the full context of the issue discussed.

“Right now, American companies are taxed at one of the highest rates anywhere in the world. My economic team is developing historic tax reform that will reduce the tax rate on our companies so they can compete and thrive anywhere and with anyone.”

In his first statement on tax issues, President Trump claimed that American companies face the highest tax rates in the world. The reality is that while the United States does have one of the highest statutory rates in the world, the corporate tax code is so full of tax loopholes that most companies pay nowhere near the 35 percent top tax rate. In fact, an analysis of data from economically developed countries found that the overall U.S. corporate tax level is below average compared to our key economic competitors. Another study by the Institute on Taxation and Economic Policy (ITEP) and Citizens for Tax Justice found that profitable Fortune 500 companies paid an average tax rate of just 19.4 percent, just over half the statutory rate, with many major companies paying nothing in taxes at all.

“At the same time, we will provide massive tax relief for the middle class."

Returning to a frequent campaign theme, President Trump claimed that his tax and other economic policies would benefit the middle class. The reality is that President Trump’s previously proposed tax plans would do nothing like this. The detailed plan he released on the campaign trail last fall would bestow 58 percent of its benefit to the wealthiest 5 percent of taxpayers. A more accurate description of his tax cut plan is that it would provide the wealthy and corporations with a massive tax cut, while giving a cursory tax cut to almost everyone else. Furthermore, millions of low- and middle-income families could see their taxes rise under his plan given its changes to the lowest income tax brackets and changes to head of household rules.

“It’s a basic principle that those seeking to enter a country ought to be able to support themselves financially. Yet in America we do not enforce this rule, straining the very public resources that our poorest citizens rely upon.”

One of the major themes of President Trump’s address was his case for a crackdown on undocumented immigrants entering and currently residing in the United States. Trump claimed that undocumented immigrants strain public resources. One crucial fact that this description leaves out is undocumented immigrants pay a substantial amount in state and local taxes. According to a study by ITEP, undocumented immigrants collectively pay an estimated $11.6 billion in state and local taxes annually. Further, the study finds that undocumented immigrants on average pay 8 percent of their income in state and local taxes, which is on par with what the middle-income quintile pays in state and local taxes and higher than the 5.4 percent average rate paid by the top 1 percent of taxpayers.

“Currently, when we ship products out of America, many other countries make us pay very high tariffs and taxes, but when foreign companies ship their products into America, we charge them nothing or almost nothing.”

In one of the most muddled portions of the speech, President Trump made the case for some kind of border tax as retaliation against taxes he claims are unfairly placed on goods exported by the United States. Given his previous statements, one way to interpret it is that President Trump is continuing to wrongly argue that other countries discriminate against U.S. goods by applying their value added taxes (VATs) to U.S. goods. The problem with this statement is that VATs do not discriminate against U.S. goods because they apply equally to all goods imported or produced domestically in a given country. In addition, jurisdictions at the state and local level in the United States apply sales taxes in the exact same way, so under President Trump’s logic the U.S. already applies the same sort of tax onto foreign goods.

A second and potentially complementary way to interpret President Trump’s statement here is that he believes that U.S. goods face disproportionate tariffs throughout the world. The truth, however, is that the U.S. maintains a substantial schedule of tariffs against foreign products as well, meaning that any countries that apply tariffs to U.S. goods are certainly not doing so unilaterally.

Tax Cuts for the Rich Are the Main Feature, Not a Bug, of the Trump Tax Plan

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Incoming Treasury Secretary Steven Mnuchin made waves this week with his announcement that the tax plan proposed by his boss, President-elect Donald Trump, will not cut taxes for the wealthy, promising “no absolute tax cut” for upper-income families.

This statement flies in the face of every available analysis of Trump’s tax plan, from the truly huge high-end tax cuts Trump proposed during the 2015 primary battle to the trimmed-down high-end tax cuts he proposed earlier this fall. A September 2016 analysis by our partner organization Citizens for Tax Justice found that Trump’s plan would cut taxes for the best-off 1 percent of Americans by an average of over $88,000 if fully implemented in 2016. The CTJ analysis also showed that by any standard measure, the tax cuts going to the top 1 percent under the revised Trump plan would far exceed the cuts going to any other income group: the top group’s tax cut clocked in at 5.1 percent of that group’s personal income, more than double the tax break going to any other group. All of which is to say that giving an “absolute tax cut for the upper class” is the main feature of Trump’s plan—rather than, as Mnuchin implies, a bug to be fixed—and that only a complete rewrite of the Trump tax plan could possibly make Mnuchin’s claim true.

A comment from Trump advisor Stephen Moore suggests (disturbingly) that Mnuchin may have simply misunderstood, or mis-stated, the nuances of the Trump plan. Moore told the Wall Street Journal that Trump’s plan “was designed so that the [itemized] deduction cap offsets the revenue loss from lowering the top tax rate on ordinary income from 39.6% to 33%.” Of course, this seems like a pretty arbitrary goal: why seek to achieve revenue neutrality between two discrete provisions of the Trump plan if you’re then going to lard on an assortment of other high-end giveaways, from estate tax repeal to ending the alternative minimum tax?

Unfortunately for Moore, it turns out that his explanation doesn’t hold water either. A new ITEP microsimulation analysis shows that even if the Trump tax plan was limited to dropping the top tax rate and capping all itemized deductions in the way Trump has proposed, the best-off 1 percent would still see, as a group, tax cuts averaging over $12,400 in 2016. Which means that there is simply no way that Mnuchin’s statement can be seen as anything but a outright falsehood when applied to Trump’s September tax plan.

It is, of course, possible that Mnuchin’s statement reflects Trump’s intention to once again completely rework his tax plan in the runup to the 2017 legislative session. But prior revisions of the Trump plan have only pared back its cost, without meaningfully changing the tax fairness impact of the plan. Trump and his advisers have consistently failed to identify enough loophole-closers to pay for his proposed reductions in the personal and corporate income tax rates. This strategy of enthusiastically answering the easy questions and dodging the hard ones is sadly all too familiar to observers of tax politics.

Unless President-elect Trump is now willing to abandon core features of his plan, such as dropping the top tax rate to 33 percent or repealing the estate tax, Mnuchin’s comments must be seen as either an admission that the next Treasury Secretary has a poor grasp of the nuances of tax policy, or that Mnuchin isn’t especially wedded to the truth.

Tax Foundation Uses Dubious Modeling to Support Ryan's Tax Cuts for the Rich

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The rightwing Tax Foundation today released an analysis of Speaker Paul Ryan's tax plan. Not surprisingly, it found the plan would carry a relatively small price tag over the next decade, reducing federal revenues by only $191 billion. 

This dubious finding sharply contrasts with an analysis released by Citizens for Tax Justice last week, which pegged the 10-year cost of the Ryan plan at  $4 trillion, a figure 20 times larger than the Tax Foundation’s questionable estimate.

What explains the huge gap between these two sets of findings? The main driver is the Tax Foundation’s one-sided approach to “dynamic scoring,” the budgetary practice of assessing the fiscal impact of tax changes by looking not just at the direct effects on tax revenue, but the indirect effects of these tax policy changes on the economy. Before waving its “dynamic scoring” wand, the Tax Foundation assigns the Ryan plan a national debt-inflating $2.4 trillion ten-year cost. But the  magical dynamic effects of the Ryan plan, the Tax Foundation claims, would offset all but $191 billion of that.

An additional difference between the CTJ and Tax Foundation estimates has to do with the “border adjustments” that Ryan proposes for his corporate tax. This would amount to a 20 percent tariff on imports and a tax rebate on exports. There is some controversy about whether the World Trade Organization would find such a scheme acceptable. This means that the $1.1 trillion such a scheme might raise (on a net basis) should not be automatically included in a revenue analysis of the Ryan plan. The Tax Foundation breezily asserts that the tariff would be acceptable, while CTJ thinks that it is quite unlikely. This choice explains most of the remaining difference between the two organizations’ revenue estimates.

But Tax Foundation’s use of one-sided "dynamic scoring" explains the bulk of the difference. Under the best of circumstances, dynamic scoring is fraught with uncertainty. Cutting or increasing tax collections, and cutting or increasing government spending in a way that keeps budget deficits under control, can plausibly have an effect on economic growth.  But there is little or no agreement among economists on the direction of that effect, let alone its magnitude. So an economic model based on this unproven assumption is highly suspicious at best.  

The Tax Foundation’s approach to dynamic scoring notoriously assumes that while tax cuts always spur economic growth, government spending on education, roads and health care has no positive effect on the economy. This one-sided assumption effectively guarantees that any analysis from its model will always find that tax cuts are economically helpful--no matter how devastating their impact on the government’s ability to provide basic services--and tax increases are harmful. For example, studies have found that capital gains tax rates have no meaningful relationship to economic growth, yet the Tax Foundation has previously estimated that higher capital gains rates have such a huge negative impact on growth that raising them would lose revenue.

Further, the Tax Foundation model always finds that tax cuts for the rich will have a wildly unrealistic positive impact on the economy, in essence providing justification to policymakers who continually propose regressive tax policies that many academics have found contribute to growing income inequality.

A more clear-eyed approach to measuring the “dynamic” effect of federal tax changes would at least attempt to quantify the very real—and very beneficial—effect of public investments on the national economy. The Tax Foundation’s unwillingness to admit that government spending can be helpful renders its analysis of the Ryan plan’s revenue impact virtually meaningless.

Ryan's New Tax Plan Aligns with Trump's, Though in Some Ways It's More Extreme

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Since House Speaker Paul Ryan signaled his support of Republican presidential candidate Donald Trump earlier this month, the pundit class has continually speculated whether Trump is “conservative enough” and how Trump’s policy agenda would align with the party’s standard bearers.

With last Friday’s release of Ryan’s blueprint for tax overhaul called “A Better Way”, it is apparent Ryan’s view of tax policy has much in common with the regressive, budget-busting plan Trump sketched out last fall — and in some ways is even more extreme.

The most obvious similarity between the two plans is their cost. At a time when the nation faces pressing budget shortfalls in both the short- and long-run, further reducing our already low tax receipts is a recipe for fiscal disaster. Yet both Ryan and Trump seem unconcerned by this. While the $4 trillion, 10-year estimated cost of Ryan’s tax cuts is dwarfed by the $12 trillion cost of Trump’s plan, any tax reform proposal with a price tag that includes the word “trillions” is exceedingly out of touch with the harsh fiscal realities facing the federal budget going forward.

Speaker Ryan and Trump also appear to have similar philosophies about who should be the biggest beneficiary of their tax largesse. Ryan’s proposal raises the stakes, taking Trump’s top-heavy approach to a new level. CTJ’s analysis finds that candidate Trump would give 37 percent of his tax cuts to the top 1 percent of Americans. Our analysis of Ryan’s plan finds it would reserve a staggering 60 percent of its tax breaks for this small privileged group. In fact, the top one-tenth of the top 1 percent would enjoy 35 percent of the Ryan tax cuts.

Candidate Trump and Speaker Ryan also appear to have similar views about corporate taxes. Trump’s plan would reduce the yield of the corporate tax by $2 trillion over the next decade. Ryan’s plan outdoes Trump’s, with an estimated price tag of $2.5 trillion over 10 years. To put this in context, the price tag of Ryan’s plan is more than half of what the corporate income tax is projected to bring in over the next 10 years. While both candidates would sharply reduce corporate tax rates, Ryan would make matters worse by moving to a territorial tax system that would allow multinational corporations to indefinitely continue the charade of pretending that a large share of their profits are earned in foreign tax havens. Both proposals to slash corporate tax collections come at a time when profitable Fortune 500 companies are paying only about half the current statutory tax rate, federal tax collections are at record low levels and U.S. corporate taxes as a share of the economy are substantially smaller than corporate tax collections in most other developed nations.

To be sure, there are differences between the approaches Ryan and Trump would take to cripple our revenue-raising capacity. But the two blueprints for tax change outlined by Ryan and Trump are notable both for their stark favoritism toward the rich and the yawning budget holes they would create for our nation in years to come.

Read the full analysis of Ryan’s tax plan.

Congressional Progressive Caucus Budget Shows Path to a Fair and Adequate Tax System

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The Congressional Progressive Caucus (CPC) earlier this week released a proposed federal budget with important policy ideas that, shamefully, have no chance of passing in the current political climate.

The budget proposes revenue-raising tax reforms, both on the individual and corporate side, and would use the proceeds to reduce the deficit, invest in universal preschool, substantially boost infrastructure spending, make college more affordable and restore spending to domestic programs that have been hacked in recent years.

In contrast, the prevailing discourse in Washington has been driven in recent years by a relentless push for ever more spending cuts, ignoring entirely the value of the programs or investments being made. Even after facing the fallout of deep tax cuts in 2001 and 2003, discussing how to raise more revenue is anathema to the party that controls Congress. The perfect articulation of this is the recently released House GOP budget, which would raise no new revenue, yet it calls for making draconian cuts to low-income programs—cuts that would be in addition to reductions already made as part of the sequester and other budget deals. The Center on Budget and Policy Priorities (CBPP) notes that the GOP budget would cut roughly 40 percent of federal resources for low-income assistance, representing the “most severe budget cuts in modern history for Americans of limited means.”

It’s time to shift the national dialogue about the federal budget away from plans for deeper spending cuts or more tax cuts.

What’s in the CPC Budget Proposal?

The CPC 2016 budget proposal provides an exceptional blueprint for how Congress could make the tax system fairer, while at the same time raising sufficient revenue to pay for important public investments. According to an analysis by the Economic Policy Institute (EPI), the CPC budget would create millions of jobs, reduce the deficit to a fiscally sustainable level and make substantial investments in infrastructure, healthcare and education.

On the individual side of the tax code, the CPC would end the preferential tax rate on capital gains, restore the pre-Bush tax rates on individuals over $250,000 and enact new higher tax brackets on individuals making over a million dollars. Ending the preferential rate on capital gains is especially important because it would ensure that wealthy investors are no longer able to pay lower tax rates than many middle-income working families. Citizens for Tax Justice (CTJ) estimated for the CPC that these provisions together would raise $1.5 trillion over 10 years.

The CPC budget contains a few additional progressive revenue raisers on the individual side of the tax code. First, the budget would finally end the outrageous provision of the tax code, known as stepped up basis, that allows accrued capital gains to escape taxation at death, a move that would raise $825 billion over 10 years. In addition, the budget proposes to cap the value of itemized deductions at 28 percent, a progressive provision that would raise an estimated $646 billion in revenue over 10 years and significantly curtail the extent to which itemized deductions disproportionately benefit the wealthy. Finally, the budget would make the estate tax more robust by lowering the exemption level to $3.5 million, increasing the progressivity of its rate structure and closing loopholes, all of which would raise an estimated $231 billion over 10 years.

On the corporate side, the CPC budget takes aim at a number of the most egregious corporate tax breaks. To start, the budget would close the deferral loophole, which is a provision that allows companies to defer paying taxes on their “foreign income” and thus drives corporations to store large swaths of their income in tax havens. The CPC estimates that eliminating deferral (which includes ending the Active Financing Exception) would raise about $983 billion over 10 years. Adding to this, the CPC would also take aim at the inversion loophole ($41 billion) and the stock option loophole ($32 billion) as well as end tax breaks for fossil fuel companies ($139 billion).

Taken together, the CPC budget would raise $8.8 trillion in additional revenue over the next 10 years. To put this in context, revenue levels as a percentage of GDP would rise from its current average projected level of 18.1 percent under current law to 21.9 percent under the CPC budget. While they are unlikely to be passed anytime soon as a group, the tax proposals in the CPC budget reveal the sheer number of options that lawmakers could choose to provide much needed revenue to make new investments, stave off further austerity and curb annual deficits. 

After Years of Shrinking, Nation's Deficit Set to Grow in 2016; Recent Tax Cuts a Contributor

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The Congressional Budget Office (CBO) Tuesday provided a sneak preview of its forecast for the nation’s finances over the next decade. And the news isn’t good. The CBO projects that, after years of shrinking, the federal deficit will grow in fiscal year 2016 to $544 billion, a $130 billion increase over what the office previously predicted.

Tuesday’s report summarizes the top-line findings of the CBO’s annual “Budget and Economic Outlook” document, which will be released next week. It’s pretty easy to see why the CBO wanted to give Congress as much time as possible to mull these data over: they show the nation’s finances deteriorating dramatically going forward.

The shift from decreasing to growing deficits shouldn’t be surprising to members of Congress who in December enacted tax extenders, a huge package of primarily business-oriented tax cuts. The short-term cost of this “extenders” tax package explains virtually all of the big bump in the forecast 2016 deficit.

If nothing changes, deficits will only continue to grow after 2016, according to CBO. In fact, the new CBO data show annual budget deficits gradually growing to more than $1 trillion by 2022. This means that 10-year budget deficits totaling almost $9.4 trillion will face our next commander in chief.

All of which makes the fiscal policy priorities of most of the presidential candidates seem even more surreal. Faced with a massive, $9.4 trillion 10-year budget hole, the most sensible directive for fiscal policy going forward would be to “stop digging.” Unfortunately, the tax policy proposals outlined by every Republican candidate would dramatically decrease federal revenues and make the 10-year budget deficit at least twice as big as what the CBO is currently projecting.

Doubling down may be an entertaining strategy for gamblers, but it is no way to run a country. The new CBO data make it clear that the main criterion for evaluating sensible tax reform plans going forward must be that these plans raise new revenues, both to reduce the budget deficit and to pay for essential government programs on which all Americans rely.

Ted Cruz's Tax Plan Would Cost $16.2 Trillion over 10 Years--Or Maybe Altogether Eliminate Tax Collection

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Update March 9th, 2016: We have since revised downward our analysis from $16.2 trillion to $13.9 trillion, to reflect that Ted Cruz's staff has informed the media that the actual VAT rate will be 18.56 percent, rather than the 16 percent that he had been advertising. 

During Tuesday’s Republican presidential candidates’ debate, Sen. Ted Cruz (R-TX) made a claim that, in theory, shouldn’t be too hard to live up to. He said his tax plan is less irresponsible than plans put forth by his competitors, and he claimed the ten-year cost of his plan is less than a trillion. “It costs less than virtually every other plan people have put up here,” Cruz said.

Being less irresponsible than Jeb Bush, Marco Rubio and Donald Trump—each of whom have proposed tax plans that would cost $7 trillion or more over the next decade—is a low bar to hurdle. Yet contrary to his assertions, Cruz’s plan would be more costly than any of the other plans put forth by his competitors. A Citizens for Tax Justice (CTJ) analysis of the Cruz tax plan finds that it would cost $1.3 trillion in its first year alone and a staggering $16.2 trillion over ten years.

Cruz’s plan would eliminate the corporate income tax, the estate tax, and the payroll tax, digging an $18 trillion hole in federal revenues over a decade. He also proposes to sharply reduce the personal income tax, replacing the current graduated rate system with a flat-rate 10 percent.  Cruz’s plan would repeal most itemized deductions and tax credits, but it would leave the mortgage interest and charitable deductions largely intact, along with the Child Tax Credit and the Earned Income Tax Credit. On balance, these personal income tax changes would lower income tax revenues by 60 percent and add another $12.8 trillion to the plan’s 10-year cost.

Cruz proposes making up for the $31 trillion in lost revenue by introducing a regressive value-added tax (VAT), and, it seems, a healthy dose of magic pixie dust.

Cruz’s claim that his plan would cost “less than a trillion” depends critically on raising an enormous amount from his 16 percent VAT, which would apply to almost everything American consumers purchase. The remaining revenue shortfall would, in Cruz’s estimate, be offset by a supposed economic boom based on the discredited supply-side magic that has been part of the far right’s economic fantasies for decades.   

But Cruz’s math has a gigantic hole in it. He wouldn’t just make consumers pay his VAT, he would also make the government pay the tax (to itself) on all of its purchases, from warplanes to paper clips and the wages it pays to its employees. Cruz’s claim that the government can raise money by taxing itself accounts for a third of the alleged yield from his VAT.

Without this sleight of hand, Cruz’s overall plan would cost more than $16 trillion over a decade and reduce total federal revenues by well over a third.

Even this enormous amount may be a low-ball estimate since Cruz insists that he would “eliminate the IRS.” If he really means that, then he would apparently reduce total federal revenues by closer to 100 percent. After all, without a tax collection agency, why would anyone pay taxes?

Candidates' Tax Cuts Unequivocally Skew Toward the Wealthy

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As Citizens for Tax Justice (CTJ) outlined in a post last week, most major Republican presidential candidates have released tax proposals that would overwhelmingly benefit the wealthy and balloon the national debt. No one can refute this, but candidates and anti-tax, trickle-down economics supporters are trying to obscure the facts.

Last week, the business-backed Tax Foundation released a blog that chides reporters for using dollar amounts instead of percentages to inform the public about how generous candidates’ tax cuts would be for the top 1 percent.  They may as well dangle a shiny object. Shifting the debate toward an analytic discussion of percentages versus average dollars is a distraction. The real issue is why are candidates and their allies trying to convince the public that corporations and the wealthy need more budget-busting tax breaks in the first place?

Federal lawmakers are struggling to find ways to fund the Highway Transportation Fund, pay for debts that have been built up over the past four decades and maintain essential public services. How enormous tax cuts fit into this equation is a far better issue to debate than average dollars versus percentages or shares. Better still, why not call candidates on the carpet and ask them to explain why the nation needs massive tax cuts and what programs they would cut as a result of the lost revenue?

The tax cuts for “jobs creators,” and trickle-down, stimulate-the-economy argument is tired, shopworn and unproven. The public has previously been sold the vision of a future in which everybody—but mostly and especially the rich—gets a tax cut and the nation’s economy grows by leaps and bounds. It didn’t happen in the past, and no serious person thinks it will happen in the future.

When CTJ analyzes tax proposals, its tables show average tax changes in dollars by income group, tax changes as a share of income and the overall share of the tax cut that each income group would receive. Including all three columns of data reveals a complete picture of the distributional effects, as opposed to just the change in after tax income which, in isolation, can obscure the impact.

The most important figures regarding the GOP candidates' tax plans are the enormous revenue losses that each would incur. In the case of Sen. Marco Rubio, CTJ estimates it would lose $11.8 trillion over a decade. Jeb Bush’s plan would add $7.1 trillion to the national debt over 10 years. Donald Trump’s plan would blow a $12 trillion hole in the federal budget over a decade. An analysis of Rand Paul’s flat tax plan found it would starve the federal government of $15 trillion over a decade, and a forthcoming CTJ analysis of Ted Cruz’s plan likely will find it would be equally as devastating to the federal budget.

It is fair game to evaluate whether the nation can afford a tax proposal in which the biggest share and dollar amount flow to the wealthy.

CTJ director Bob McIntyre says criticisms of using dollars to evaluate candidates’ tax plan are a ruse.

“Why is anyone even talking about tax cuts?” McIntyre said. “We already don’t raise enough revenue to pay for existing programs, and as more and more Baby Boomers continue to retire, we’ll need a lot more revenue to pay back IOUs to Social Security, while maintaining other essential programs.”

By trumpeting tax cuts without talking about the consequence and then attempting to shift the public debate toward theoretical discussions about percentages versus whole numbers, candidates and anti-tax advocates are trying to obfuscate the real issue, McIntyre said.

Given the reality of our nation’s fiscal situation, neither dollars nor percentages can justify more huge tax cuts for the wealthy. That’s the substantive discussion we should be having.

Tax Cut Crazy Talk

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Sometimes when presented with fantastical information, the only appropriate response is a heavy sigh and a plea to stop. Please. Just. Stop. 

Such has been the case time after time this year as presidential candidates have released tax reform proposals that promise to drastically slash taxes across the board and also generate strong, economic growth. Please. Just. Stop.

Earlier this week, Citizens for Tax Justice released an analysis of Republican presidential candidate Marco Rubio’s tax proposal, and the results are exasperating but not surprising. The senator’s plan reserves the greatest share (34 percent) of its tax cuts for the top 1 percent (average annual cut of $223,783), and it would balloon the national debt by $11.8 trillion over a decade.

If this story sounds familiar, well, it is.  

CTJ has analyzed other candidates’ tax plans, too. It found that Jeb Bush would give nearly half of his tax cuts to the top 1 percent and add $7.1 trillion to the national debt over 10 years. Donald Trump’s plan would target more than a third of his tax cuts to the top 1 percent, and, like Rubio, would blow a $12 trillion hole in the federal budget over a decade.

Sens. Ted Cruz and Rand Paul are offering flat tax proposals that would lower taxes for the rich, increase taxes on low-income people and cost even more than Trump or Rubio's plans. And Ben Carson has proposed a loosey-goosey “tithing” plan (at a rate of 10 percent or 15 percent, depending on when you ask him) with few details, but apparently with the highest revenue loss of all.

All of these candidates are telling the American public that they have the best interest of the middle class at heart. But a bit of simple math quickly refutes that falsehood.

Yes, most of the candidates claim they would cut taxes for all income groups (with the exception of Bobby Jindal, who fervently and explicitly calls for much higher taxes on the poor). But the superrich would be the greatest beneficiaries by far. And once enormous cuts in public services that these plans would require are taken into account, only the very rich would come out ahead.

To be sure, all of the candidates claim that their plans would produce an enormous increase in economic growth. For example, Bush, in a Wall Street Journal op-ed titled, “My Tax Overhaul to Unleash 4% Economic Growth,” stated, “By focusing on tax reform like I did in Florida, America can grow faster, too.” Likewise, Trump said his plan, "will create jobs and incentives of all kinds while simultaneously growing the economy.”

But these are just assertions with no backing. The candidates seem to have forgotten that the nation has tried trickle-down economic policies before without success.

When pressed about his deficit-busting plan on CBS’s Face the Nation, Rubio said, “It has to be a combination of things. You have to have the spending discipline on the mandatory spending programs and you need to sustain significant economic growth.”

Well, at least one candidate admits that we can’t have vast tax cuts and adequately fund the nation’s programs and services too.

Josh Barro at the New York Times compared the candidates’ plans to “puppies and rainbows.” Many others also have roundly criticized Republican promises of tax cuts without revenue consequence. You can read some of them here, here, here, here , here, and here.

Recall that George W. Bush promised the nation could cut taxes across the board — but especially for the rich — without budgetary fall out. Instead, Bush’s tax cuts turned surpluses into deficits, even with budget cuts. And as for boosting the economy, economic growth was poor throughout Bush’s presidency and toward the end saw the start of the worst economic recession since the 1930s. Even still, Republican candidates are proposing to double- and triple-down on Bush-era tax policies.

Please. Stop.

“These candidates don’t want to tell the American public the truth,” said Bob McIntyre, director of CTJ. “Taxes are already at historically low rates, and our nation cannot have more massive tax cuts and also meet our priorities. In fact, we need considerably higher taxes, especially on tax-avoiding corporations and wealthy investors.  Polls show that a large majority of Americans agree, which makes one wonder why the GOP candidates are calling for just the opposite.”

Today, federal lawmakers are struggling to find ways to fund the Highway Transportation Fund, pay for debts that have been built up over the past four decades and maintain essential public services. And this is with current tax rates. The answer to these very real complex national issues is certainly not crazy, fantastical tax-cut proposals that overwhelmingly benefit the wealthy.

Paul Ryan Wants to Cut Taxes for the Rich and Make Life Harder for Low-Income People

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Anti-tax champion Grover Norquist recently said Paul Ryan is a ‘prophet” who “points the way to the Promise Land.” Coming from Norquist, that statement alone is reason enough for pause. But the newly elected Speaker of the House’s record on tax and budget policy also raises serious alarm regarding the direction of the nation’s fiscal policy.

For years, Rep. Ryan has been one of the leading champions of regressive tax policies. Now, as Speaker of the House, he will have a bigger microphone and a more powerful platform to push his pro-corporate, anti-worker vision for the nation’s tax code.

As chairman of the House Budget Committee in 2014, Ryan called for consolidating the existing income tax brackets down to two (10 and 25 percent), eliminating an unspecified number of tax expenditures, repealing the alternative minimum tax, reducing the corporate tax rate to 25 percent, and instituting a territorial tax system for multinational corporations. Even under the most generous assumptions, a CTJ analysis found that his plan would give millionaires an average tax break of at least $200,000 each year. Under less generous assumptions, this tax cut for the rich would balloon to nearly $330,000.

“Ryan’s colleagues in the House have said he would unite the party. Based on his record on economic policy, that unfortunately means he and his colleagues would like to unite behind regressive tax policies that ask the least of those most able to pay,” said Bob McIntyre, director of CTJ.

Beyond supporting regressive tax changes, Ryan also staunchly opposes any tax increases. He signed Grover Norquist’s no-tax pledge and said he would not support any budget deal that included an increase in revenue. Not surprisingly, given his desire to reduce the deficit without increasing revenue, Ryan’s budgets require draconian cuts to critical public services. For example, Ryan’s 2014 budget includes $3.3 trillion in cuts to programs for low- and moderate-income families, such as SNAP, Medicaid and Pell Grants. In other words, Ryan’s budget simultaneously calls for massive tax cuts for the wealthy and devastating cuts to critical safety net programs.

One of the ways that Ryan has attempted to paper over the harsh reality behind these is to embrace the world of fuzzy math. During his brief tenure as chairman of the Ways and Means Committee, Ryan ushered in a new rule requiring that the non-partisan scorekeepers at the Congressional Budget Office and the Joint Committee on Taxation (JCT) use dynamic scoring in their official cost estimates on proposed tax changes. While it has not been used extensively up to this point, dynamic scoring could have the magical effect of making costly tax cuts appear to have little effect on revenue collection due to economic growth that supposedly would result.

The nation is already struggling to fund basic priorities that Americans widely support. Federal spending today as a percent of GDP is less than it was during Ronald Reagan’s entire tenure.

“The nation cannot tax cut its way to prosperity,” McIntyre said. “Unfortunately, House members have just elected a speaker who will unite the party behind ideological, status quo policy ideas that would benefit the elite few at the expense of the rest of us.” 

The IRS: You Don't Have to Like Them, but You Do Have to Fund Them

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Congress is considering further gutting the Internal Revenue Service’s enforcement capacities even as a new report from the Taxpayer Advocate shows that previous rounds of budget cuts have put the IRS dangerously close to being unable to perform basic enforcement and compliance functions.

Lawmakers have cut the IRS’s budget in each of the past five years all while giving the IRS increased oversight responsibility under the Affordable Care Act and Foreign Account Tax Compliance Act (FATCA). Further, the IRS processed 1.5 million more filings this year than last. This is a practice that hurts law-abiding taxpayers and rewards tax evaders.

The IRS budget is down 17 percent from 2010, adjusted for inflation, with another $838 million in cuts scheduled for 2016. These cuts are forcing the IRS to reduce services that help citizens pay their taxes according to the Taxpayer Advocate. During the 2015 tax season, IRS customer service representatives answered 37 percent of phone calls and callers waited an average of 23 minutes to speak with a representative.

Furthermore, the IRS automatically hung-up on 8.8 million callers–a 1500 percent increase since 2014–due to an overwhelmed phone system. The Taxpayer Advocate argues that these dismal levels of customer service will result in fewer people voluntarily paying their taxes.  Currently 98 percent of taxes are paid voluntarily and on time. Any drop in voluntary compliance will lead to greater enforcement costs and less revenue.

Although the IRS is choosing to focus more of its limited resources on making sure citizens pay their taxes, enforcement is still weak and getting worse. The number of employees dedicated to enforcement has dropped by 20 percent since 2010. John Koskinen, the Commissioner of the IRS, stated in January that reduced funding will result in $2 billion of lost revenue this year. This means that the $838 million in ‘savings’ from cutting the IRS budget will really result in $2 billion in losses for the entire federal government. Indeed, losses could be even greater because each additional dollar spent on enforcement yields six dollars of revenue and every dollar spent on “audits, liens and seizing property from tax cheats” yields ten dollars of revenue. In 2011, the commissioner of the IRS even testified to Congress that every dollar spent on enforcement, modernization, and management saves the government $200.

Currently there is a proposal attached to the highway funding bill that requires the IRS to outsource some tax enforcement to private debt collectors. This policy was practiced from 2006 to 2009 and lost money. Critics are also concerned about an increase in scammers who claim to represent the IRS, an alarming trend that has been growing in recent years. Clearly, the government would have to compensate private collectors, but it would be far more cost-effective to fully fund IRS enforcement.

Right now there is no end in sight for the fiscally irresponsible budget cuts to the IRS. Even with the $75 million increase in funding for taxpayer services, Congress is proposing to cut the 2016 budget by more than double the 2015 cuts and spending $2.8 billion less than what President Obama requested. Critics of the IRS argue that reducing the IRS budget will result in more efficient use of funds and more accountability to the American people. The main issue with this argument is that the IRS has already employed many cost saving techniques such as encouraging electronic filing and referring taxpayers to the IRS website rather than speaking with a representative. As noted by the Taxpayer Advocate report, the cuts have already begun to impact taxpayer filing services, fraud prevention, FATCA enforcement, and digital security.

The IRS needs more funds, not fewer, to properly serve taxpayers, maintain high levels of voluntary compliance, and enforce the laws Congress has passed.  

Big Medical Device Makers Decry Device Tax While Dodging Billions by Offshoring Profits

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Stymied in their efforts to fully repeal the Affordable Care Act (ACA), Republican leaders in Congress continue their efforts to undermine the law by starving it of funding.

Today, the Senate Finance Committee will consider legislation that would repeal some of the tax changes enacted to pay for the ACA. Republican lawmakers have indicated their interest in repealing the tax on medical devices since before it took effect in 2013, a position that is perhaps related to an ongoing lobbying spree by the medical device industry. Their efforts have generated some bipartisan support due to claims the tax hurts small business. But if their repeal efforts reflect a desire to protect medical device companies from the $2 to $3 billion a year the tax has been forecast to raise, then congressional tax writers should keep in mind that big, profitable medical device corporations have likely avoided more than 30 times that amount in federal income taxes by shifting their U.S. profits offshore.

Enacted as part of the 2009 Affordable Care Act, the medical device tax is a 2.3 percent excise on the sale of most medical devices sold in the United States. It applies both to U.S.-based companies and to their foreign competitors on sales within the United States. Congress enacted it, in part, to help fund expanded access to health care. The underlying rationale is that the medical device industry would reap substantial financial benefits from more consumers accessing health care through ACA and could, in turn, take on a small tax.

The 15 biggest U.S.-based medical device companies, as measured by 2014 revenues, will likely pay some of the tax. These companies have another thing in common: they have all chosen to shelter some of their profits from U.S. tax by declaring them to be “permanently reinvested” in foreign countries (see table). The companies, which include General Electric, Johnson& Johnson, 3M, Baxter and Abbott Laboratories, collectively disclosed $257 billion in permanently reinvested foreign profits at the end of their most recent fiscal years.

Corporations that declare their profits to be permanently reinvested abroad don’t have to report any deferred federal income tax on those profits to their shareholders. And these companies typically flout rules requiring them to estimate how much U.S. income tax they would owe if and when these profits become taxable in the United States. Just 57 companies in the Fortune 500 disclose the tax rate they would pay on these profits.

Two of these 15 device companies report their likely tax rate on repatriated profits, but the other 13 do not. If the 13 non-disclosing U.S. device makers paid income tax at the same 29 percent tax rate disclosed by the 57 companies included in our recent report, their resulting federal tax bill would be $69 billion. Added to the $4.5 billion tax bill collectively disclosed by the 2 device companies on this list, the 15 medical device companies profiled here may be avoiding almost $74 billion in federal income taxes on profits that they hold (at least on paper) offshore. It is possible that these companies have avoided even more tax than is calculated here.

President Barack Obama has proposed a half-measure that would subject the permanently reinvested earnings of U.S.-based multinational corporations to a one-time 14 percent tax. But there is little legislative momentum behind efforts to ensure that these companies’ offshore cash is taxed at the regular 35 percent corporate income tax rate, as it should be. The result is that the 15 companies profiled here will likely continue to avoid roughly $74 billion in federal income taxes on their offshore cash.

The medical device tax, by contrast, has been forecast to raise less than $30 billion over the next ten years. Many of the biggest medical device makers are foreign-based corporations, so these 15 companies will pay only a fraction of the $2-3 billion annual yield of the medical device tax. As long as these companies continue to avoid paying taxes on their offshore stash, it’s hard to see why Congress should prioritize repealing the medical device tax. 

Good - and Bad - Ways to Fund Infrastructure

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With funding for the Highway Trust Fund (HTF) set to expire yet again on May 31st, many states are already delaying much needed infrastructure projects due to concerns over the fund's ongoing solvency. Such delays and the fund's impending expiration are putting fire to the feet of congressional lawmakers to find a solution to the perennial lack of dedicated revenue, due to our out-of-date gas tax, needed to pay for all of the infrastructure projects supported by the fund. In looking for a way to bridge the gap in funding, Congress should reject proposals to patch the HTF using some form of a tax on the repatriation of offshore profits and instead focus on a more permanent fix through the modernization of the gas tax.

Good: Raising the Gas Tax

Why does the HTF always seem to be in constant and dire need of additional funding? The answer is that lawmakers have repeatedly refused to update and reform the federal gas tax, the primary funding source of the HTF. The federal gas tax has not been increased since 1993, and the 18.4 cent-per-gallon tax has lost more than 28 percent of its value due to construction cost inflation and fuel efficiency in the time period since being fully dedicated to transportation in 1997.

With the HTF deadline again nearing, many Democrats and Republicans finally seem to be catching on to the need to increase the gas tax to make up for its longtime loss in value. Last week for example, a bipartisan group of House members proposed increasing the gas tax by indexing it to inflation, and scheduling further gas tax increases to occur in the future unless lawmakers agree on another funding mechanism.

Now would be an especially advantageous time to increase the gas tax given that gas prices have dropped to relatively low levels in recent months. These lower prices would make it easier for consumers to absorb the impact of a gas tax increase since they are already experiencing the benefit of the significantly lower prices.

The bipartisan push for increasing the gas tax and indexing it to inflation also makes a lot of sense given that it’s the only viable approach offered so far that would provide a long term solution to the HTF's constant funding problems. In addition, the gas tax is a sensible way to fund transportation infrastructure because it generally requires those who use our infrastructure the most, by driving long distances or heavy vehicles, to bear most of the responsibility of its upkeep.

Bad: Repatriation

Besides modernizing the gas tax, the most often talked about way to fill in the gap in funding for the HTF has been either a voluntary or mandatory tax on profits held offshore by corporations. The problem with such proposals is that they would reward and encourage offshore tax avoidance, while at best only providing a temporary fix to the gap in funding.

The worst form of these proposals is a repatriation holiday, such as the one recently proposed by Senators Barbara Boxer and Rand Paul. Under their repatriation holiday proposal, multinational corporations could voluntarily bring back profits held offshore by paying a tax rate of 6.5 percent rather than the 35 percent rate they would normally owe.

On its face, this and other similar repatriation holiday proposals cannot be used to fund the HTF, or anything else, because they would actually lose revenue instead of raising it. In fact, the nonpartisan scorekeepers at the Joint Committee on Taxation (JCT) found that a proposal similar to the Boxer-Paul proposal would lose $96 billion over 10 years. The reason behind this is that the holiday would encourage companies to hoard even more of their profits in offshore tax havens moving forward in anticipation of another holiday, and much of the money repatriated under a holiday would have been eventually repatriated at a higher tax rate anyway.

In contrast to a repatriation holiday, many lawmakers have also proposed raising revenue to fund infrastructure through a mandatory or deemed repatriation tax on profits held offshore by corporations as part of a broader corporate tax reform. For example, President Obama has proposed to pay for infrastructure using a 14 percent mandatory tax on unrepatriated profits as part of a broad corporate tax reform that would include a 19 percent minimum tax on foreign profits moving forward. Similarly, Representative John Delaney has proposed a mandatory tax rate of 8.75 percent and would default to a tax system with a minimum tax of 12.25 percent on corporation's foreign profits.

The trouble with either proposal is that they would reward companies for their current offshore tax dodging with a rate lower than the current rate of 35 percent, and over the long term would put in place international tax regimes that continue to incentivize companies to shift operations offshore. In addition, while both proposals would raise a substantial amount of revenue, they would only patch the HTF for a limited number of years, after which lawmakers would have to find another funding sourcing to pay for the gap in infrastructure funding. Finally, using revenue gained from taxing offshore profits to bridge the gap in the HTF would mean that this revenue would not be available for a variety of other important public investments where this revenue could be used.

House Budget Proposal Silent on Fate of Budget-Busting Tax Extenders

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The GOP House budget proposal released Tuesday implies that lawmakers intend to allow the controversial package of business tax cuts known as tax extenders to expire for good. If true, this would be an important step toward a fairer tax system. Unfortunately, they probably don’t mean it.

As we have noted before, the extenders are mostly a motley array of ineffective giveaways to businesses. There’s the research credit that gives businesses tax breaks for such dubious activities as developing new soft drink flavors or exploring how to replace workers with machinery. And then there’s bonus depreciation, which allows businesses to write off the cost of capital investments at a much faster pace than which materials actually depreciate. There’s also the infamous “active finance” loophole, which is likely a main driver in allowing General Electric to pay next to nothing in federal income tax most years.

The House budget blueprint says nothing at all about the fate of these and other tax “extenders,” each of which expired at the end of 2014. On its face, this suggests that Republican leaders are ready to say a permanent adieu to these ill-advised tax breaks, which have been the subject of a year-end drama almost every year recently. After all, the blueprint’s authors are pretty vocal about the few high-end tax cuts they explicitly propose in the document, so one would expect they’d be poised to brag about the extenders as well. But in light of Republican leaders’ recent history in dealing with budget blueprints—and with the extenders—a very different interpretation seems more plausible. In all likelihood, the House leadership fully intends to bring the extenders back—it just would prefer not to have to explain, at this time, how Congress will find the revenue needed to pay for them.

We’ve been here before: a year ago, the House budget plan formulated by then-Budget Chair Paul Ryan was just as conspicuously silent on reviving the extenders. But the House leadership subsequently revealed their true stripes, approving several bills over the course of 2014 that would not only have brought these misbegotten tax breaks back, but also would have made some of them permanent.

While this strategy is intellectually dishonest, this approach to budgeting makes perfect sense for those seeking only to masquerade as fiscal conservatives. During the budget season, everyone wants to be able to claim they’ve proposed a “balanced budget.” And the more tax cuts you propose, the harder it is to say with a straight face that your budget proposal is fiscally responsible. But months from now, when the goal has shifted from burnishing their “fiscal conservative” credentials to pushing through tax cuts for grateful corporations, the budget-busting impact of the extenders will be less of an issue.

This shell game has real consequences for the federal budget, and for middle-income working families. Every time Congress passes up the chance to root out unwarranted tax loopholes for corporations and the wealthy, that’s increasing the odds that the next budget fix will fall on low- and middle-income taxpayers.

Budgets are moral documents, laying out a vision of the priorities of a government and of its citizens. From this perspective, the House budget blueprint’s hypocritical silence on the fate of the tax extenders borders on the sociopathic. 

GOP Budget Proposal Once Again Punts Tough Questions

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Once again, U.S. House leadership has released a budget blueprint that promises a “stronger America,” but is, at best, vague about the hard choices lawmakers really must make to ensure the nation has enough resources to meet its basic priorities.

After releasing A Balanced Budget for a Strong America Tuesday, House Budget Committee Chair Tom Price asserted that the budget blueprint “balances the budget within ten years.” But like so many Republican budget proposals before it, the plan would achieve balance almost entirely through spending cuts. The outcome of budget battles in both Republican and Democratic administrations demonstrates balanced budgets are never achieved solely through spending cuts.

On the tax side, the House budget plan appears to have been sketched out on a cocktail napkin. Apart from enacting two new tax cuts that would overwhelmingly benefit the wealthy—and implicitly hiking taxes on low-income families by cutting two targeted tax credits for working families--the House plan is vague about how it would approach urgent reforms of individual and corporate tax laws.

Last year, we criticized the House Budget proposal for being very specific about how low it would cut  top tax rates, while offering no details about which loopholes it would close to pay for these rate cuts. It didn’t seem possible, but this year’s proposal offers even fewer details. On the important question of how to restructure the income tax, the blueprint says only that it would “lower rates… [and broaden] the tax base by closing special interest loopholes that distort economic activity.” This may be an appropriate talking point for a political candidate, but the budget plan should offer something more than campaign rhetoric.

And while the plan is mostly devoid of comprehensive tax reform proposals, it offers copious details on two proposed tax cuts that would disproportionately benefit the wealthy. The plan would repeal Medicare tax expansions designed to help fund healthcare reform, and it would repeal the Alternative Minimum Tax (AMT). The Medicare tax repeal would blow a $1 trillion hole in the federal budget over the next decade, and dismantling the AMT would lose more than $300 billion over the same period. 

More worrisome is that the House budget also appears to endorse a backdoor tax increase on low-income working families by allowing temporary expansions of the federal Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) to expire. The tables in the House blueprint show no change in revenues from a current-law baseline, implying that these temporary changes will be allowed to expire on schedule at the end of 2017. Allowing these provisions to expire would essentially be a tax hike on more than 13 million working families.

This should be no surprise to observers of the legislative process, since the Republican leadership in the House has repeatedly signaled its intention to let these valuable anti-poverty strategies expire. But in combination with the two high-end tax cuts, the net impact of these changes would be to make the federal tax system less fair.

It’s not easy to design a fiscal blueprint that avoids the hard tax reform questions facing the nation while simultaneously hiking taxes on low-income families and cutting them for the best-off, but the House Budget blueprint appears to have accomplished this.

How Corporate Tax Reform Should Figure in Congressional Budget Proposal

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Having roundly ignored President Barack Obama’s budget proposal for fiscal year 2016 when it was introduced in February, Republican leaders in the House of Representatives are poised to introduce their own budget blueprint next week. The big question is whether new Budget Committee Chair Tom Price (R-GA) will follow in the footsteps of outgoing Chair Paul Ryan, who in recent years made a habit of releasing budget blueprints that were all hat and no cattle.

Ryan’s plans typically called for taking bold steps to reduce the federal budget deficit by eliminating tax “loopholes,” but were utterly silent on the question of whose ox should be gored in this process. By answering the easy questions (how far income tax rates should be cut) and refusing to even touch the hard ones (which loopholes should be closed), Ryan’s budget plans made budget-busting, highly regressive tax proposals the main topic at budget time each year.

Representative Price now has a valuable opportunity to depart from Ryan’s irresponsible approach to budgeting. If the committee’s new leaders are truly committed to achieving deficit reduction in a sustainable way, Price’s plan should:

1) Answer the hard questions first. Cutting income tax rates is simply not affordable unless congressional tax writers can first put together a well-defined plan for eliminating specific tax breaks, rather than vaguely calling for “closing loopholes.”

2) Raise new revenues through corporate tax reform. Our corporate tax raises less, as a share of the economy, than almost every other developed democracy. Corporate tax reform is of vital importance—but it must be done in a way that focuses on eliminating unwarranted tax breaks and increasing the yield of the tax. Revenue-neutral tax changes would miss an important opportunity to restore our nation’s fiscal balance.

3) Don’t leave states—and drivers-- in the lurch. Last year’s House Budget plan was silent on how to deal with the looming shortfall in the Highway Trust Fund, the nearly-depleted funding source that is supposed to pay for repairs and improvements to our vital, but crumbling, highway system. By refusing to take the obvious step of increasing the federal gas tax for the first time in two decades, Ryan’s budget forced states to fend for themselves in their efforts to maintain roads and highways.


Head of Consortium of Leading Corporate Tax Avoiders to Testify on Benefits of a Balanced Budget

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The head of a consortium of businesses that includes multiple profitable companies that consistently pay no or abysmally low federal taxes has been tapped to testify Wednesday at a Senate Budget Committee hearing on the "Benefits of a Balanced Budget."

Former Michigan Gov. John Engler heads the Business Roundtable and is the hearing’s lead witness. It’s not clear whether the long-term decline of our corporate income tax—and the budget deficits this decline has helped create—will be a topic of conversation at the hearing, but if it comes up it’s pretty clear what Engler will say. The Roundtable has been among the loudest voices calling for cutting the corporate tax rate from its current 35 percent. We have noted previously that the Roundtable’s position is based on erroneous claims that U.S. corporations are paying uncompetitively high tax rates domestically.

Yet it’s hard to see just what the Roundtable members have to complain about. One prominent member of the Roundtable is Xerox, a company that has long featured prominently in our regular surveys of Fortune 500 corporate tax avoidance. As it happens, Xerox released its 2014 financial report last week. The report suggests that Xerox shouldn’t be too worried about our corporate tax rate being too high, since it has been phenomenally successful at avoiding it. The company reported $629 million in pretax 2014 U.S. earnings, and it didn’t pay a dime in federal income tax on those profits. In fact, the company received a tax rebate of about $16 million last year.

And 2014 was no anomaly. Over the past five years, the company has paid an effective tax rate of just 5.4 percent on $3.6 billion in U.S. profits.

Xerox is not alone in undercutting the Roundtable’s case for corporate tax cuts. Our February 2014 magisterial survey of tax avoidance by profitable Fortune 500 corporations found that the Business Roundtable’s membership is riddled with tax avoiders: American Electric Power paid zero income taxes in three of the five years between 2008 and 2012. FedEx had two zero-tax years in the same period, as did Honeywell and International Paper. General Electric avoided all income taxes in three of five years. Goldman Sachs only managed to zero out its income taxes in one of five years—still an impressive feat given that in their zero-tax year, it reported $4.8 billion in U.S. profits. And Boeing and NextEra Energy topped them all by paying no income tax in four of five years, despite being consistently profitable in each of those years.

Few would disagree with the idea that deficit reduction is a worthy goal. But John Engler and the Business Roundtable seem not to realize that their tax avoidance is a real impediment to achieving this goal. One can only hope that the Senate Budget Committee can convince them to help achieve the “Benefits of a Balanced Budget” by actually paying their fair share of income taxes. 

The Case for Keeping the Medical Device Tax

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In a testament to the power of health industry lobbying, lawmakers on both sides of the aisle have expressed support for repealing the medical device tax, a levy created as part of the Affordable Care Act that is expected to raise $29 billion over the next 10 years to help fund broader access to health care.

The medical device tax is a 2.3% tax that applies to firms selling medical devices including artificial hips and joints, pacemakers, and MRI machines. It excludes items such as eyeglasses, contact lenses, hearing aids and any medical device purchases made by the general public from retail stores for individual use. Exported items are also exempt from the tax.

Health insurance providers, pharmaceutical companies, and the medical device industry are all expected to gain from the ACA by earning greater profits as more people enter the healthcare marketplace. The tax is intended to reciprocate those benefits by tacking on a small flat rate to a firm’s revenue.

Medical device manufacturers have been trying to gut the tax since it passed in 2010. The industry spent more than $200 million successfully lobbying Congress and waging a campaign using the typical anti-tax talking point that claims any new levy is a jobs and innovation killer. But the argument for repealing the medical device tax does not hold up.

A new analysis by the Congressional Research Service (CRS) found that in all predicted scenarios, the tax would have minimal effects on the medical device industry and job loss. The CRS suggests that it could have as much as a 0.2 percent impact on output, and little if any effect on research, development, and innovation. The report attributes this low impact on the fact that the tax is relatively small, exports are exempt from taxation, and consumer demand is relatively inelastic.

At the very least, any repeal of the medical tax should pay for the $29 billion in revenue that would be lost, yet those fighting the tax have not found a politically viable way to replace the lost revenue. In addition, a repeal would set a precedent for the repeal of other taxes used to fund the ACA, creating a dangerous cycle that could weaken the law, which is clearly the intent of some lawmakers.

Other sectors of the healthcare industry have successfully incorporated ACA taxes, and without brouhaha, and we now have the numbers to show that the medical device industry can, too.

Tax Rate for Richest 400 People at Its Second Lowest Level Since 1992

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New IRS data released this month reveal that the nation’s 400 richest people paid their second-lowest average tax rate in the past quarter century.

These tax filers paid just 16.7 percent of their adjusted gross income (AGI) in federal income taxes in 2012, the latest year data are available. This means the nation’s wealthiest paid, on average, less than half the top statutory federal income tax rate of 35 percent that was in effect in that year. Since the IRS began tabulating these data in 1992, the only other year the wealthiest paid a lower tax rate was in 2007.

How the very richest paid such a low rate is no mystery. These individuals derived about 70 percent of their income from capital gains and dividends, which in 2012 were taxed at just 15 percent, a fraction of the top statutory rate to which those who get their income from working a 9 to 5 are subject.

Fortunately, tax changes enacted at the end of 2012 as part of the “fiscal cliff” deal, and as part of the legislation enabling the Affordable Care Act, increased top income tax rates on both wages and capital gains starting in 2013, so it’s likely that effective tax rates on the top 400 taxpayers will increase in 2013 to reflect this.

But federal income tax rules still allow a gigantic tax preference for capital gains relative to salaries and wages. The top tax rate on capital gains is now 23.8 percent, well below the 39.6 percent top tax rate now applicable to wages. This means that the best-off Americans still can reduce their effective tax rates well below those facing many middle-income Americans going forward.

For this reason, it makes perfect sense that President Obama’s new budget proposal would scale back tax breaks for capital gains. During his State of the Union address, the president proposed increasing the top capital gains rate to 28 percent for wealthy investors, restoring the rate to where it was through the Bush I Administration and until 1997. But even if Obama’s proposal is enacted, the best-off Americans would still enjoy a double-digit tax break on their capital gains.

Of course hackneyed talking points prevailed among anti-tax proponents after the president announced his proposal: Stifling investment, slowing economic growth, etcetera, etcetera. The fact is these doomsday scenarios have not proven to be true in the wake of previous tax increases, and we should be debating tax policy within the broader context of how to raise enough revenue to fund the nation’s priorities.

As much as some would like to delink tax policy from, say, the condition of roads and bridges or the quality of our public health system, schools, and the quality of public safety services, it’s all intertwined.  And make no mistake, the tax breaks available to just 400 of the best-off Americans absolutely make a difference in our ability to provide these important services. Astonishingly, these 400 individuals enjoyed almost 12 percent of all capital gains income nationwide in 2012—meaning that roughly one in every nine dollars of capital gains tax breaks went to these 400 individuals in that year.

Most Americans no longer need to be reminded that wealth has been concentrating more and more at the top, or that ordinary working people have been economically standing still. But the IRS’s data on the top 400 taxpayers has not lost its capacity to shock, and remains an important reminder that our political institutions, and especially our tax laws, often act to make inequality worse, not better.

House GOP Embraces Dubious Math with New Dynamic Scoring Rule

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The new budgetary mantra of the House GOP appears to be: if you can't make the math add up, change the rules of math.

On Tuesday the House did exactly that with its passage of a  new rule requiring the non-partisan Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT) to use "dynamic scoring" rather than static scores for official cost estimates on proposed tax changes. Dynamic scoring is a controversial method of assessing the effect of tax cuts. It allows lawmakers to claim that a tax reform proposal is revenue neutral, even if it would lose revenue under a conventional score. House Republicans embrace the method because they can claim tax cuts pay for themselves, rather than increasing the deficit or making it even more difficult to raise enough revenue to fund basic priorities. The ability to obscure the true cost of tax cuts could prove especially appealing to incoming Chairman of the Ways and Means Committee Paul Ryan, who has long proposed steep tax cuts for the rich, while at the same time calling for massive cuts to programs for low- and moderate-income people.

The idea behind dynamic scoring is that, in addition to accounting for the behavioral impacts of a given piece of legislation which is included in a static estimate, budget estimates should include the overall impact on the economy. The problem is that there is just too much uncertainty about the overarching economic impact of individual pieces of legislation, which is why this has not been included historically as part of single-point budget estimates.

The high level of uncertainty in these estimates is demonstrated by the fact that when JCT was asked to do a dynamic score of former Rep. Dave Camp's tax-reform bill, they estimated that the legislation could increase GDP anywhere from 0.1 percent to 1.6 percent during its first decade, meaning that there was a 16-fold spread between its high and low estimates. What drove this extreme level of variability between JCT's different estimates were changes in the whole host of assumptions that go into modeling the legislation's impact. Based on this, one of the biggest potential problems with dynamic scoring is that it could politicize the estimate process by allowing more space for estimators to make politically motivated assumptions in their economic modeling.

Advocates of tax cuts intend to use dynamic scoring to push the thoroughly debunked supply-side economics idea that tax cuts pay for themselves. In reality, even President George W. Bush's own Treasury Department rejected this idea when it found that his massive tax cut package might make no difference at all on growth over the long term.

Looking forward, it remains to be seen just how JCT and CBO will respond to this new requirement and what kind of assumptions they will use in estimating the dynamic impact of future legislation. Let's hope that they are allowed to remain a bulwark against fiscally irresponsible tax cuts, rather than being used to lend faux creditably to supply-side claims.

Cutting the IRS Budget is a Lose-Lose for American Taxpayers

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The decision to further cut the Internal Revenue Service's (IRS) budget by $346 million next year from its already low 2014 level is almost certainly the most ill-advised cut in the announced omnibus spending bill passed in the House of Representatives Thursday night and now moving forward in the Senate.

IRS budget cuts actually increase the budget deficit because they result in lower revenue collections. In fact, one study found that every dollar spent on the IRS's enforcement, modernization and management system reduces the federal budget deficit by $200 and another report found that every dollar the IRS "spends for audits, liens and seizing property from tax cheats" garners $10 back.

The latest cut to the IRS comes on top of years of devastating budget cuts, with the agency's budget already chopped by 14 percent between 2010 and 2014 (controlling for inflation). As a result, the IRS has cut its staff by 11 percent since 2010. These budget cuts have been enacted even as the IRS has to process more and more taxpayer information each year and to administer the distribution of billions in new tax credits as part of healthcare reform.

Given its increasing responsibilities and decreasing budget, it’s no wonder the National Taxpayer Advocate (NTA), a well-respected non-partisan IRS watchdog, said in its latest annual report that the IRS budget is one of the agency's "most serious problems" and that the "IRS desperately needs more funding." One area where the effects of the budget cuts are especially visible, according to the NTA, is in the customer service division, where only 61 percent of taxpayers seeking to speak with a customer service representative were able to get through.

The tragic thing about these budget cuts is that they have become politically self-reinforcing. For years, anti-tax conservatives have been happy to jump on any IRS misstep to justify punishing the agency with more budget cuts, which then makes the agency less able to function and more prone to precisely these same missteps.

Demonstrating this principle, many conservatives are using a new Treasury inspector general report showing that the IRS improperly paid out billions in child and earned income tax credits as a convenient prop to bash the IRS for "gross mismanagement" and "bureaucratic incompetence." One point that these critics leave out is that this same report concludes that the IRS simply "does not have the resources nor does it have alternative compliance tools needed to adequately address the erroneous EITC payments identified." In fact, Congress has failed to enact several Treasury and IRS proposals or provide funding that would enable the agency to reduce the error rate.

Taking these politically opportunistic attacks to their extreme, a recently released documentary  compared the IRS's recent missteps to fascism and genocide in its advocacy for the IRS's total abolition. The rhetoric of abolishing the IRS used to be the kind of irresponsible speech cordoned off to the political extremes. More recently, the Republican National Committee fundraised on the explicit promise that donating would help the party "Abolish the IRS," though the committee never explained how it would go about paying for government without some equivalent agency to collect taxes. 

Besides the politicians, the only real beneficiaries of IRS cuts are the tax dodgers and cheats that will have even less reason to fear that they will be caught by the woefully inadequate tax enforcement. For example, the IRS commissioner recently noted (Subscription Required) that the agency simply does not have the capacity to take advantage of new international reporting requirements on multinational corporations to help with its corporate tax enforcement efforts. Failure of these enforcement efforts have left honest taxpayers holding the bag for an estimated $385 billion in unpaid taxes each year.

Rather than cutting the IRS’s budget, Congress should substantially increase its budget. A good start would be increasing its FY2015 budget by $1.5 billion, compared to the current proposed level in the budget deal, as President Obama proposed in his most recent budget. Such an increase would be a win-win for taxpayers since it would substantially decrease the deficit and at the same time improve the functioning of the IRS so that it can more fairly and effectively enforce the tax code. 

What Horrors Await Us in Congress after the Election?

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There are two types of tax legislation Congress may enact after it returns to Washington for its lame duck session in November: bad policy and extremely bad policy. 

The Least Bad Scenario

Let’s start with the least terrible scenario, which would involve Congress enacting the Expire Act, the “tax extender” legislation approved by the Senate Finance committee in April. This bill would extend for two years a list of tax breaks so long that almost no one understands them all. (Except us, of course, see our report explaining them.)

The bill is an $85 billion deficit-financed handout to businesses at a time when lawmakers refuse to provide any help to working people hit hard by the recession unless the costs are somehow offset.

You want to extend emergency unemployment insurance? That must be paid for. Want to undo the automatic spending cuts that slashed Head Start and medical research before Congress curbed them last year? Savings were found elsewhere to prevent an increase in the deficit. But businesses get a free pass as Congress shovels another $85 billion in deficit-financed tax cuts at them. If Congress continues this tradition of extending these breaks every couple of years, the cost over the next decade will be around $700 billion.

The tax extenders are also mostly bad policy. Some provide subsidies to businesses for doing certain things, like investing in research or equipment, that they would have done anyway, resulting in a windfall for companies and no clear benefit to the rest of the taxpayers. As our report explains, some of the extenders even encourage offshore tax avoidance by corporations.

However, the damage of this bill pales in comparison to what the House of Representatives has pursued this year.

The Very Bad Scenario

Not satisfied with the Senate’s approach, the House voted to make several of these provisions permanent, which of course has a much bigger price tag and eliminates the possibility of ever getting rid of them, or at least reforming them. The question on everyone’s mind is whether or not House Republicans will demand that tax legislation enacted during the lame duck session must include at least some of these permanent provisions.

Research Credit

One tax break the House has voted to make permanent is the research credit, at a cost of $155 billion over a decade. CTJ has assailed the research credit for subsidizing activities that most Americans would not consider “research.”

“In fact, the definition of ‘research’ is so vague that Congress seems to be inviting companies to push the boundaries of the law and often cross it. The result is the type of trouble associated with accounting firms like Alliantgroup, which is managed by a former high-level staffer of Senator Chuck Grassley of Iowa and has former IRS commissioner Mark Everson serving as its vice chairman. Alliantgroup’s clients range from a hair care products maker who claimed its executives were doing ‘research,’ to a software company who was advised to claim that its purchasing manager was doing ‘research.’”

Bonus Depreciation

Another tax break the House has voted to make permanent is “bonus depreciation,” which is a significant expansion of existing breaks for business investment, at a cost of $269 billion over a decade. The Congressional Research Service's (CRS) review of the research on bonus depreciation found that it does not affect the overwhelming majority of firms’ investment decisions and is an ineffective way to stimulate the economy.

Members of the House majority might clamor for some other tax cuts that they also approved this year.

Repeal of the Medical Device Tax

Enacted as part of healthcare reform, the medical device tax raises a critically needed $26 billion over the next ten years to help pay for the costs of expanding healthcare to millions of Americans. It’s interesting that the House is so eager to award the medical device company Medtronic, which has lobbied for repeal of the tax, even while the same corporation plans to “invert,” and claim to the IRS that it is a foreign company that is mostly not subject to U.S. corporate income taxes. 

Ban on State Taxes on Internet Access

While the argument for restricting state and local governments from placing any tax on internet access was weak back in 1998, it makes zero sense in 2014 to continue to coddle the goliath internet companies by allowing them to escape the kinds of taxes that states impose on other services.

Before leaving Washington, the House voted to combine these provisions into a staggering half-trillion-dollar giveaway as part of the so-called Jobs for America Act.

Wild Cards

Corporate Inversions

If Congress is going to throw $85 billion in tax cuts at corporations, it would seem logical to at least attach one of the proposals that would end the worst tax dodging we have seen in years: corporate inversions. Corporations are basically claiming to be foreign companies to avoid taxes. In a spectacular failure to take responsibility, Congress went home to campaign without closing the loopholes that make inversions possible. The chairman of the Senate Finance Committee, Sen. Ron Wyden, is said to be negotiating with the committee’s ranking Republican, Sen. Orrin Hatch. Sen. Hatch has declared that he could not agree to any anti-inversion legislation unless it met a list of impossible and bizarre conditions, including absolutely no revenue raised and steps taken towards a territorial tax system. A deal between Wyden and Hatch seems unlikely, but it could happen.

Two Offshore Corporate Tax Breaks

The House has not voted to make permanent the two tax extenders that provide breaks for corporations’ offshore profits — but there is reason to wonder if they will try before this Congress ends. One of these breaks is the active financing exception (the G.E. loophole), which provides an exception to the general rule that corporations cannot defer paying U.S. taxes on offshore income when it takes the form of interest (which is easy to manipulate for tax avoidance purposes). Another is the seemingly arcane “CFC look-through rule” which aided Apple’s infamous tax avoidance schemes.

Republican National Committee Wants to Abolish the IRS

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abolishtheirs.jpgWith the 2014 election season in full swing, the Republican National Committee (RNC) has found its new fundraising campaign: calling for outright abolishment of the Internal Revenue Service (IRS). While the RNC's new fundraising campaign is not surprising given the IRS's unpopularity and recent controversies, it does promote the deeply irresponsible idea that the IRS is not a critical component of a properly functioning government.

The RNC's campaign depends on its potential donors who will embrace their anger at the IRS and contribute to a campaign that claims it will abolish it, but ignores the fact that there is no viable way to have a functioning federal government without the IRS or some agency performing its exact function. Needless to say, the IRS collects nearly all the money that pays for the federal government, so those calling for its abolition would still need a way to collect the trillions of dollars necessary to fund Social Security, Medicare, the military, highways and the myriad of other crucial services that they support.

Even accepting the fact that this fundraising campaign is just overblown rhetoric, the underlying point that the IRS should be punished through "abolishment" or even just significant spending cuts is destructive. In fact, recent cuts in the IRS's budget have already hamstrung the organization's ability to respond to taxpayers’ needs and directly contributed to poor training and procedures that fueled the agency's recent controversies in the first place. In addition, cutting the IRS's budget actually increases the national deficit because every dollar spent on tax enforcement generates at least $10 in return.

While many GOP candidates have shied away from the irresponsible rhetoric of the RNC, Iowa senatorial candidate Joni Ernst has embraced the RNC's messaging saying that "closing the door" at the IRS would be a wonderful start to fixing the federal government. Similarly, anti-tax conservatives like Sens. Rand Paul and Ted Cruz have long established their conservative bonafides by calling for the abolishment of the IRS. Perhaps more disconcerting than all this rhetoric is the fact that the House GOP has voted to exacerbate problems at the agency by using the IRS's recent unpopularity to push deep cuts to the agency's budget, including a particularly short-sighted cut of a quarter of the IRS's enforcement budget.

Rather than demagoguing about abolishing the IRS, national political parties and their members in Congress should call for a substantial increase in the agency's budget and consider the multitude of thoughtful reforms proposed by groups like the non-partisan National Taxpayer Advocate.

New Report: Addressing the Need for More Federal Revenue

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A new report from Citizens for Tax Justice explains why Congress should raise revenue and describes several options to do so.

Read the report.

Part I of the report explains why Congress needs to raise the overall amount of federal revenue collected. Contrary to many politicians’ claims, the United States is much less taxed than other countries, and wealthy individuals and corporations are particularly undertaxed. This means that lawmakers should eschew enacting laws that reduce revenue (including the temporary tax breaks that Congress extends every couple of years), and they should proactively enact new legislation that increases revenue available for public investments.

Parts II, III, and IV of this report describe several policy options that would accomplish this. This information is summarized in the table to the right.

Even when lawmakers agree that the tax code should be changed, they often disagree about how much change is necessary. Some lawmakers oppose altering one or two provisions in the tax code, advocating instead for Congress to enact such changes as part of a sweeping reform that overhauls the entire tax system. Others regard sweeping reform as too politically difficult and want Congress to instead look for small reforms that raise whatever revenue is necessary to fund given initiatives.

The table to the right illustrates options that are compatible with both approaches. Under each of the three categories of reforms, some provisions are significant, meaning they are likely to happen only as part of a comprehensive tax reform or another major piece of legislation. Others are less significant, would raise a relatively small amount of revenue, and could be enacted in isolation to offset the costs of increased investment in (for example) infrastructure, nutrition, health or education.

For example, in the category of reforms affecting high-income individuals, Congress could raise $613 billion over 10 years by eliminating an enormous break in the personal income tax for capital gains income. This tax break allows wealthy investors like Warren Buffett to pay taxes at lower effective rates than many middle-class people. Or Congress could raise just $17 billion by addressing a loophole that allows wealthy fund managers like Mitt Romney to characterize the “carried interest” they earn as “capital gains.” Or Congress could raise $25 billion over ten years by closing a loophole used by Newt Gingrich and John Edwards to characterize some of their earned income as unearned income to avoid payroll taxes.

Read the report. 

Rep. Dave Camp's Latest Tax Gambit Is "Fiscally Irresponsible and Fundamentally Hypocritical"

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Fresh off a two-week spring recess, House Ways and Means Committee Chairman Dave Camp today shepherded through six bills that would provide corporate tax breaks at a whopping cost of more than $300 billion over the next decade.

The tax breaks are a subset of the temporary business tax breaks or “tax extenders.” Given the nation’s many other pressing priorities, its nothing short of outrageous that the committee, on a party-line vote, approved this package of corporate giveaways.

Rep. Sander Levin, the committee’s ranking Democrat, called this approach “fiscally irresponsible and fundamentally hypocritical” given House leaders’ refusal to extend emergency unemployment assistance or make permanent tax breaks that will help working people with children, including recent EITC and child tax credit expansions.

“To say Republican action today is hypocritical is a serious understatement,” Levin said. He and his Democratic colleagues voted against each of the measures, while Camp’s Republican colleagues voted in favor of each.

The party-line vote was not a certainty given many of the committee’s Democrats are sponsors of the bills. Ultimately, many Ways and Means Democrats said although they support making certain business tax breaks permanent, they oppose doing so in a way that provides hundreds of billions of dollars in deficit-financed tax breaks for businesses while the House refuses to address the needs of the unemployed and working people with children. The unified opposition may mean the full House and Senate may think twice before following Camp’s approach.

Citizens for Tax Justice has explained that the tax breaks made permanent by this legislation demonstrate fealty to corporations over ordinary people and are simply bad policy.

A recent CTJ report describes significant problems in the research credit that should be addressed before it is extended or made permanent. CTJ and other organizations have also called upon Congress to allow the expiration of two breaks that encourage offshore tax avoidance: the so-called “active financing exception” and “look-through rule” for offshore subsidiaries of American corporations.

The Senate Finance Committee has taken a different approach. Instead of choosing certain temporary tax breaks to make permanent, it voted earlier this month to extend the entire package of 50-plus expiring provisions (often called the “tax extenders”) for two years, without offsetting the cost. CTJ has explained that this approach is also deeply problematic.

Some of the tax extenders should be dramatically reformed, and some should be allowed to expire altogether. None should be enacted unless Congress offsets the costs by repealing other tax breaks or loopholes that benefit businesses.

"Tax Extenders" Would Mean Even Lower Revenue than the Ryan Plan

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The tax extenders making their way through Congress would cut federal revenue below the level proposed in Rep. Paul Ryan’s budget. This once again demonstrates that anything goes when it comes to providing tax breaks for corporations.

As CTJ explained in its report last week, the Ryan plan includes huge tax cuts for the very rich. But Ryan nonetheless proposes to eliminate unspecified tax breaks to offset the costs and thus collect the same amount of revenue as current law.

The tax extenders, on the other hand, would cut revenue, and increase the deficit, by $700 billion over the coming decade if Congress continues its practice of extending these breaks every couple of years or makes them permanent.

Even organizations not particularly known for progressive positions have pointed out this fact and how it damages the fiscal outlook that lawmakers claim to care about whenever they are discussing domestic spending.

CTJ has explained that the tax breaks that make up the bulk of the “tax extenders” do not provide any economic benefits that would justify the increase in the budget deficit that would result.

We have called the “tax extenders” the biggest budget buster many have never heard of. Fortunately, more and more people are publicly decrying this giveaway to corporations.

Citizens for Tax Justice:
“Four Reasons Why Congress Should Reject the "Tax Extenders" Unless Dramatic Changes Are Made”

Citizens for Tax Justice op-ed in the Hill:
“Tax Extenders: The Biggest Budget Buster You’ve Never Heard Of”

Americans for Tax Fairness:
“35 National Organizations Say Oppose Offshore Corporate Tax Loopholes in Tax-Extenders Legislation”

The Financial Accountability & Corporate Transparency (FACT) Coalition:
“FACT Urges Chairman Wyden: Don’t Let First Major Action Favor Multinationals”

The National Priorities Project:
“Congress May Extend Corporate Tax Breaks But Not Unemployment Benefits”

Offshore Loophole Got Snuck Back in Tax Extenders Bill Behind Closed Doors

New York Times editorial:
“Hypocritical Tax Cuts”

Washington Post editorial:
“Lawmakers Should Offer Up a Fiscally Responsible ‘Tax Extenders’ Bill”


Last week, the Congressional Progressive Caucus released its budget proposal, the Better Off Budget, which eliminates the automatic spending cuts (the “sequestration” that has slashed public investments and harmed the economy) while also increasing employment by 8.8 million jobs and cutting the deficit by $4 trillion over a decade.

The Better Off Budget is able to accomplish all of this partly because it is willing to do the one thing that Congressional majorities have refused to do: raise revenue. Estimates for the revenue provisions in the Better Off Budget were provided by Citizens for Tax Justice and the Economic Policy Institute.

The budget proposes returning to the tax rules that applied at the end of the Clinton years for Americans with incomes exceeding $250,000 and taxing investment income at the same rates as income from work. The budget also incorporates a proposal from Congresswoman Jan Schakowsky to provide additional income tax brackets (with rates of 45 percent and higher) for those with incomes exceeding $1 million.

A tax credit similar to the Making Work Pay Credit (which was provided temporarily under the recovery act enacted in 2009) would be available in 2015 and 2016, and in a scaled back form in 2017. Citizens for Tax Justice has explained that the Making Work Pay Credit was more targeted towards families struggling to get by, and therefore more effective in stimulating the economy, than other tax breaks.

The Better Off Budget also makes some important changes to the corporate income tax, including doing away with the rule allowing American corporations to “defer” paying U.S. taxes on profits that are officially “offshore.” CTJ has long argued that deferral encourages corporations to use accounting tricks to make their U.S. profits appear to be earned in countries where they won’t be taxed (offshore tax havens). While the administration and members of Congress have proposed complicated rules to crack down on this type of tax avoidance, the most straightforward and effective solution is to stop rewarding these games by ending deferral.

Because the Congressional Progressive Caucus is willing to take on the corporate interests and others that the rest of Congress tiptoes around, it is able to put forward a plan that actually provides more deficit reduction with less pain for working Americans. The Better Off Budget would reduce the deficit to 1.4 percent of gross domestic product (1.4 percent of economic output) within a decade, as illustrated by the chart from the Caucus below. The President’s budget would leave a larger deficit, 1.6 percent of GDP, while under the current law the deficit would be 4 percent of GDP.

New CTJ Reports Explain Obama's Budget Tax Provisions

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New CTJ Reports Explain the Tax Provisions in President Obama’s Fiscal Year 2015 Budget Proposal

Two new reports from Citizens for Tax Justice break down the tax provisions in President Obama’s budget.

The first CTJ report explains the tax provisions that would benefit individuals, along with provisions that would raise revenue. The second CTJ report explains business loophole-closing provisions that the President proposes as part of an effort to reduce the corporate tax rate.

Both reports provide context that is not altogether apparent in the 300-page Treasury Department document explaining these proposals.

For example, the Treasury describes a “detailed set of proposals that close loopholes and provide incentives” that would be “enacted as part of long-run revenue-neutral tax reform” for businesses. What they actually mean is that the President, for some reason, has decided that the corporate tax rate should be dramatically lowered and he has come up with loophole-closing proposals that would offset about a fourth of the costs, so Congress is on its own to come up with the rest of the money.

To take another example, when the Treasury explains that the President proposes to “conform SECA taxes for professional service businesses,” what they actually mean is, “The President proposes to close the loophole that John Edwards and Newt Gingrich used to avoid paying the Medicare tax.”

And when the Treasury says the President proposes to “limit the total accrual of tax-favored retirement benefits,” what they really mean to say is, “We don’t know how Mitt Romney ended up with $87 million in a tax-subsidized retirement account, but we sure as hell don’t want to let that happen again.”

Read the CTJ reports:

The President’s FY 2015 Budget: Tax Provisions to Benefit Individuals and Raise Revenue

The President’s FY 2015 Budget: Tax Provisions Affecting Businesses

The latest budget deal in Congress seems to indicate that anti-government, anti-tax lawmakers will not force a costly shutdown of the federal government in 2014 as they did in 2013, although they still threaten to cause the U.S. to default on its debt obligations if some yet-undefined demands are not met. In today’s dysfunctional Congress, that’s considered a great achievement. Congress could have replaced all of the harmful sequestration of federal spending for next year and the year after by closing the tax loopholes used by corporations to shift jobs and profits offshore, as recently proposed by Reps. Lloyd Doggett and Rosa DeLauro. Sadly, the deal negotiated by Senate Budget Chairman Patty Murray and House Budget Chairman Paul Ryan does none of that.

Deal Replaces Some Sequestration, Further Reduces the Deficit

On Wednesday the U.S. Senate approved the Murray-Ryan budget deal, which was negotiated by Senate Budget Chairman Patty Murray and House Budget Chairman Paul Ryan and approved last week by the House. It would undo $63 billion of the $219 billion sequestration cuts scheduled to occur in 2014 and 2015 under the Budget Control Act of 2011 (the deal President Obama and Congressional Republicans came to in one of the previous hostage-taking episodes).

Most mainstream economists believe that governments should not cut spending when their economies are still climbing out of recessions, but that’s pretty much exactly what Congress did by approving the 2011 law resulting in sequestration of about $109 billion each year for a decade.

The Murray-Ryan deal would reduce that by $45 billion next year and by $18 billion in the following year. While the deal replaces $63 billion of sequestration, the total savings in the deal add up to $85 billion, which means the deal technically reduces the deficit compared to doing nothing. But about $28 billion of the savings come from simply extending some of the sequestration cuts longer than they were originally intended to be in effect (extending them into 2022 and 2023). This enables Rep. Ryan to claim that the deal further reduces the deficit. But this has no real policy rationale except for those who believe that shrinking government is good in itself, regardless of the impacts.

Any major budget deal approved during a recession ought to provide an increase in unemployment insurance, which is the sort of government spending that puts money in the hands of the people most likely to spend it right away, thus enabling local businesses to retain or create jobs. But under the Murray-Ryan deal, the extended unemployment benefits that were enacted to address the recession would run out (at the end of this month for many people). As the Center on Budget and Policy Priorities explains, in the past Congress has not allowed these benefits to run out until the rate of long-term unemployment was much lower than it is today.

Tax Loopholes Left Untouched, but Revenue Raised through Fees

The Murray-Ryan deal does not close a single tax loophole for corporations or individuals. A bill recently introduced by Reps. Lloyd Doggett and Rosa DeLauro demonstrates exactly how this could be done. The DeLauro-Doggett bill basically borrows the loophole-closing provisions from Senator Carl Levin’s Stop Tax Haven Abuse Act and uses the revenue savings to replace sequestration for two years.

To take just one of many examples of how it would work, the DeLauro-Doggett bill would close the loophole allowing corporations to take deductions each year for interest payments related to the costs of offshore business even though the profits from that offshore business will not be taxable until the corporation brings them to the U.S. years or even decades later. This reform is estimated to raise around $50 billion over a decade. Another provision would reform the “check-the-box” rules that allow corporations to tell different governments different things about the nature of their subsidiaries and whether or not their profits have been taxed in one country or another, resulting in profits that are taxed nowhere. This reform is estimated to raise $80 billion over a decade.

These two reform options appear on a list of potential loophole-closing measures released by Senator Murray’s committee (as well as in the DeLauro-Doggett legislation). The committee’s list also included others that Citizens for Tax Justice has championed, like closing the carried interest loophole to raise $17 billion over a decade, closing the John Edwards/Newt Gingrich loophole (for S corporations) to raise $12 billion, closing the Facebook stock option loophole to raise as much as $50 billion, and several others. (Many of the reforms on the budget committee list are explained in this CTJ report.)

Instead of closing tax loopholes, the Murray-Ryan deal raises revenue through fee increases that are not technically tax increases but would probably feel like tax increases to the people experiencing them. For example, fees on airline tickets that pay for the Transportation Security Administration (TSA) would increase to $5.60 per ticket, raising $12.6 billion over a decade. The premiums paid by companies for the Pension Benefit Guaranty Corporation (to guarantee employee’s pension benefits) would increase, raising $7.9 billion over a decade. Another provision would increase federal employee pension contributions, raising $6 billion over a decade. These are just a few examples.

These measures do raise revenue, but it would seem more straightforward to remove the loopholes that complicate the main taxes we rely on to fund public investments and that eat away significantly at the amounts of revenue they can raise. Members of Congress can only run for so long before facing the need for tax reform.

Why Everyone Is Unhappy with Senator Baucus's Proposal for Taxing Multinational Corporations

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Max Baucus, the Senator from Montana who chairs the committee with jurisdiction over our tax code, has made public a portion of his ideas for tax reform. Multinational corporations that have lobbied Baucus for years are unhappy because his proposal would (at least somewhat) restrict their ability to shift jobs and profits offshore. Citizens for Tax Justice and other advocates for fair and adequate taxes are unhappy because his proposal would not raise any new revenue overall — at a time when children are being kicked out of Head Start and all sorts of public investments are restricted because of an alleged budget crisis.  

The Need for Revenue-Raising Corporate Tax Reform

Materials released from Senator Baucus’s staff explain that this part of his proposal is “intended to be revenue-neutral in the long-term.” The idea behind “revenue-neutral” corporate tax reform is that Congress would close loopholes that allow corporations to avoid taxes under the current rules, but use the savings to pay for a reduction in the corporate tax rate.

Among the general public, there is very little support for this. The Gallup Poll has found for years that more than 60 to 70 percent of Americans believe large corporations pay “too little” in taxes.

There is almost no public support for the specific idea of using revenue savings from loophole-closing to lower tax rates. A new poll commissioned by Americans for Tax Fairness found that when asked how Congress should use revenue from “closing corporate loopholes and limiting deductions for the wealthy,” 82 percent preferred the option to “[r]educe the deficit and make new investments,” while just 9 percent preferred the option to “[r]educe tax rates on corporations and the wealthy.”

Of course, Baucus also says that he “believes tax reform as a whole should raise significant revenue,” which would mean that reform of the personal income tax would raise revenue. But there are questions about how that can work, given that he also wants to reduce personal income tax rates.

A growing number of consumer groups, faith-based groups, labor organizations and others have called on Congress to raise revenue from reform of the corporate income tax, as well as from reform of the personal income tax. In 2011, 250 organizations, including groups from every state, signed a letter to lawmakers calling for revenue-positive corporate tax reform, and a similar letter in 2012 was signed by over 500 organizations.

CTJ has repeatedly demonstrated that most corporate profits are not subject to the personal income tax and therefore completely escape taxation if they slip out of the corporate income tax. We have also explained that the corporate income tax is a progressive tax, which is needed in a tax system that is not nearly as progressive as most people believe.

The Need to Stop Corporations from Shifting Jobs and Profits Offshore

While CTJ and other tax experts are still going through the fine print of Baucus’s proposal to understand its full impact, it is clear to us that the proposal would stop some American corporations from using offshore tax havens to avoid U.S. taxes as successfully as they do today. Some multinational corporations are upset by this, but that doesn’t in itself mean that Baucus’s proposal is extremely strict.

CTJ has demonstrated that several very large and profitable corporations — like American Express, Apple, Dell, Microsoft, Nike and others — are making profits appear to be earned in offshore tax havens so that they pay no taxes on them at all. Any proposal that makes the code even slightly stricter will cause these companies to pay more and, naturally, cause them to complain bitterly. 

These companies are taking advantage of the most problematic break in the corporate income tax, which is “deferral,” the rule allowing American corporations to “defer” (delay indefinitely) paying U.S. corporate income taxes on the profits of their offshore subsidiaries until those profits are officially brought to the United States. Deferral is really a tax break for moving operations offshore or for using accounting gimmicks to make U.S. profits appear to be generated in a country with no corporate income tax (like Bermuda or the Cayman Islands or some other tax haven).

CTJ has long argued that the best solution is to simply repeal deferral and subject all profits of our corporations to U.S. corporate taxes in the year they are earned, no matter where they are earned. (We already have a separate foreign-tax-credit rule that reduces U.S. corporate taxes to the extent that companies pay corporate taxes to other countries, to prevent double-taxation.) Barring this, Congress could at least curb the worst abuses of deferral with the type of reforms proposed by Senator Carl Levin.

The big multinational corporations lobbied Baucus and others to expand deferral into an even bigger break, an permanent exemption for offshore profits, often called a “territorial” tax system, which CTJ and several small business groups, consumer groups and labor organizations have always opposed.

Baucus did not propose either approach. His proposal is somewhat like a territorial tax system except that he would place a minimum tax on the offshore profits of American corporations, which would take away much of the advantage that the corporations thought they might obtain after their years of lobbying. American multinational corporations would be required to pay a minimum level of tax on their offshore profits, during the year that they are earned.

But if a corporation is paying corporate taxes to a foreign government at a rate as high or higher than the U.S. minimum tax, there would never be any U.S. taxes on the profits generated in that country. This means that offshore profits of American corporations would still be subject to a lower tax rate than domestic profits, which may preserve some incentive to shift jobs and profits offshore.

Baucus proposes two different versions of a minimum tax. One would require that profits generated in other countries be taxed at a rate that is at least 80 percent of the regular U.S. corporate tax rate. Baucus has not yet revealed what corporate tax rate he will propose, but if one assumes it is 28 percent, that would mean that the foreign profits must be taxed at a rate of at least 22.4 percent. If they are taxed by the foreign country at a rate of, say, 18 percent, that would mean the corporation would pay U.S. corporate taxes of 4.4 percent. (18+4.4=22.4)

The second option Baucus offers would require that “active” profits generated abroad be taxed at a rate that is 60 percent of the U.S. tax rate while “passive” profits generated abroad be taxed at the full U.S. rate (both before foreign tax credits). The concept of “active” income and “passive” income already is a major part of our tax code, but Baucus would define them differently for this option. The basic idea is that “passive” income (like interest payments, rents and royalties) is income that is extremely easy to move from one subsidiary to another and therefore easily used for tax avoidance if it’s not taxed at the full U.S. rate. 

The Baucus proposal has several other innovations that are too numerous to fully explain here. To give one example, the proposal says that if an American corporation has a subsidiary in another country that earns profits by selling to the U.S. market, those profits would be subject to the full U.S. corporate tax rate in the year that they are earned. How well this would work might depend heavily on how easily this can be administered.

Since there are no public estimates of the revenue impacts of the provisions Baucus has proposed, it is not yet clear how important many of them are. Stay tuned as we examine this proposal and learn more.

Paul Ryan Says No to Any Revenue Increase, Again

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The House and Senate budget conference committee that was formed as part of the deal that ended the federal government shutdown and raised the debt ceiling is unlikely to come to any “grand bargain” that dramatically reduces the deficit or increases public investments. This is because, as House Budget Committee Chairman Paul Ryan reiterated this week, Congressional Republicans will oppose any proposal that includes new revenue.

“Taking more from hardworking families just isn't the answer. I know my Republican colleagues feel the same way,” Ryan said during a meeting of the conference committee on Wednesday. “So I want to say this from the get-go: If this conference becomes an argument about taxes, we're not going to get anywhere. The way to raise revenue is to grow the economy.”

There can be no reasonable “grand bargain,” which is usually interpreted to mean a deal including cuts to programs like Social Security and Medicare, if Congressional Republicans continue to block any and all revenue increases. The U.S. collects lower taxes as a percentage of its economy, than any Organisation for Economic Co-operation and Development (OECD) nations other than Mexico and Chile. Our current federal tax system is projected to collect revenue equal to 18.5 percent of our economy a decade from now. As we have pointed out before, in only a handful of years over the past three decades has federal spending been this low.

There are still useful things the committee might do, in theory, like changing the way sequestration affects certain programs. But the overall level of federal spending may be stuck at its current austere level, which has already done much damage to the economy.

Even the apparent glimmers of interest in revenue among Republicans on the conference committee are misleading. Rep. Tom Cole, for example, raised the possibility of “raising revenue” by enacting a tax amnesty for repatriated offshore profits like the one that was enacted in 2004. The non-partisan Joint Committee on Taxation has already concluded that allowing American corporations to officially bring to the U.S. their offshore profits (many of which are already being invested in the U.S.) would raise revenue for a few years and then lose revenue as companies are encouraged to shift even more profits offshore and wait for the next tax amnesty.

Committees can talk around the issue all they want, but there is simply no getting around the need for increased revenue.

Shutdown Ends with Deal Creating Yet Another Budget Panel

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Sixteen days after parts of the federal government were shut down because House Republicans refused to approve a spending plan unless it defunded or delayed health care reform and after coming close to causing a breach of the federal debt limit that would cause a catastrophic default, Congress and the President have enacted legislation to address both problems — for a while.

The deal does not change health care reform in any significant way and provides appropriations to keep the federal government running through January 15. It also suspends the debt ceiling until February 7, likely giving the Treasury until sometime in March before it requires another change in the debt ceiling.

As we have already explained, President Obama and Congressional Democrats had already more or less accepted the level of spending demanded by Republicans (a level of spending that assumed sequestration or other cuts equally large would stay in place) at the beginning of the debate over the continuing resolution (CR) that Congress needed to enact to keep the government running. But House Republicans demanded eliminating or delaying the health care reform law — even though it is funded entirely separately from the programs covered by the CR.

Of course, this all could happen again. The government could partially shut down again on January 15 if spending legislation is not enacted, and the U.S. could default on its debt in March if legislation is not enacted to raise the debt ceiling. Hopefully, Congressional Republicans will accept President Obama’s stance that the debt ceiling is simply not something that should be negotiated at all because a debt default would be so calamitous for the U.S. and the world economy. But there will still be plenty to argue about when Congress turns to the spending legislation needed to avoid another shutdown.

Budget Conference Panel Should Raise Taxes or Go Home

The deal that Congress and the President just enacted sets up a process for Congress to work out its differences and avoid another shutdown, at least in theory. The deal calls for the House and Senate to form a conference committee to work out the differences between the fiscal year 2014 budget resolutions approved in the spring by each chamber, and to report an agreement by December 13.

But the most likely scenario is that the committee will come to no agreement at all by December 13, and Congress eventually will enact another continuing resolution that keeps federal spending at the current harmfully anemic level.

Unlike the President’s debt commission in 2010 (the “Simpson-Bowles commission”) and the Joint Select Committee on Deficit Reduction in 2011 (the “Super Committee”), this panel is the normal conference committee that traditionally works out differences between House-passed and Senate-passed bills.

But it’s very unlikely that the committee can come to any such agreement. The Senate budget resolution is relatively moderate, but the House budget resolution is so ideological that it makes compromise seem impossible.

The House budget resolution, nicknamed the “Ryan Plan” after House Budget Committee Chairman Paul Ryan, calls for overhauling the tax code without raising any new revenue and calls for huge program cuts to balance the budget. The Senate budget resolution, crafted by Senate Budget Committee Chair Patty Murray, would raise $975 billion over a decade, bringing revenue to an extra 0.7 percent of the economy, and also calls for $975 billion in spending cuts.

We have pointed out before that the level of tax revenue projected to be collected under current law (which has recently been adjusted downward from 19.1 to 18.5 percent of the economy) would not have covered federal spending in any but a handful of the past thirty years. It is also wildly unrealistic to assume, as the Ryan plan does, that the deficit can be eliminated without raising revenue from this level.

This is why the spending cuts included in the Ryan plan are so draconian that they involve eliminating health insurance for millions of Americans and making massive cuts to safety net programs for poor and working families.

A CTJ report explains that the few details that the Ryan plan does set out for tax reform could not possibly be enacted without giving millionaires an average tax cut of at least $200,000, while requiring people at lower income levels to make up the difference.

The two resolutions also take different approaches to the deficit. The Senate resolution reduces it but does not eliminate it entirely, which is appropriate given that the projected short-term deficit has dropped sharply. Paul Ryan’s schizophrenic view that deficits are a huge problem but revenue increases cannot be used to address them is reflected in the House resolution’s reliance on enormous, harmful cuts in entitlements and safety net programs to balance the budget.

In theory, Murray and Ryan, who will co-chair the new budget conference committee, could come up with a compromise that does some good, like ending the damage done by sequestration. But any “deal” or “compromise” that fails to raise tax revenue from wealthy individuals and corporations should be rejected. 

Paul Ryan's Latest Idea: Enact the Spending Cuts Proposed by Obama, Ignore His Revenue Proposals

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Congressman Paul Ryan, chairman of the House Budget Committee and former vice presidential candidate, penned an op-ed in the Wall Street Journal this week proposing that Congress might end the government shutdown and avoid a cataclysmic debt default if Democrats agree to cut spending and not raise revenue. There is absolutely nothing new about Rep. Ryan taking this approach. (Although some of his Republican peers are reportedly disappointed that he did not also call for the defunding of health care reform.)

As we recently explained, the President and Congressional Democrats have already completely capitulated to Republican demands on reduced levels of spending to be set out in a “continuing resolution” (CR) to keep the government running. The shutdown resulted from House Republicans’ refusal to approve a CR that did not also defund or delay health care reform, which is an unrelated matter because it is funded separately (and in fact its implementation moves forward even now as much of the government is closed).

We also explained that the need to increase the debt ceiling does not involve increasing the deficit or increasing the size of government, but only carrying out the laws already enacted by Congress. And yet, House Republicans have demanded several policy “concessions” in return for raising the debt limit, which is necessary to avoid a catastrophic default on U.S. debt obligations.

In his Walls Street Journal op-ed, Ryan argues that we should “ask the better off to pay higher premiums for Medicare... reform Medigap plans to encourage efficiency and reduce costs... and ask federal employees to contribute more to their own retirement.”

President Obama, according to Ryan, “has embraced these ideas in budget proposals he has submitted to Congress. And in earlier talks with congressional Republicans, he has discussed combining Medicare's Part A and Part B.”

Others have pointed out that all of President Obama’s comprehensive budget proposals have, in fact, included the entitlement cuts Ryan mentions, but coupled them with increased revenues. For example, CTJ has explained that the President’s proposed budget blueprint for fiscal year 2014 would have raised revenue by $851 billion over a decade (not counting certain revenue-raising provisions that the President unfortunately wants to use to offset tax breaks for businesses). The idea has always been that the President would agree to some spending cuts if Congressional Republicans agree to a revenue increase.

A graph from the Washington Post shows that the offers traded back and forth between President Obama and House Speak John Boehner leading up to the “fiscal cliff” deal all included significant revenue increases as well as cuts in spending. (Yes, even Speaker Boehner offered significant revenue increases initially).

But Ryan ignores all of that. He argues that a deal to end the shutdown and raise the debt ceiling should include a move towards tax reform that would not raise revenue. “Rep. Dave Camp and Sen. Max Baucus have been working for more than a year now on a bipartisan plan to reform the tax code,” Ryan writes. “They agree on the fundamental principles: Broaden the base, lower the rates and simplify the code.”

Actually, one of the most fundamental principles needed in designing a tax code is determining the amount of revenue you want to raise, and Camp and Baucus have not come to any agreement on that. Camp, like Ryan, has repeatedly called for a reform of the tax code that does not raise any additional revenue, while Baucus has called for a revenue increase without being specific about the amount.

A recent CTJ report explains that the level of revenue the federal government will collect under our current tax laws would equal about 18.5 percent of our economy a decade from now. That’s lower than the level of federal spending for all but a few years over the past three decades. With the retirement of the baby-boomers and the need for public investments in infrastructure, education, nutrition and other programs that will help us thrive as an economy and as a nation, it is simply absurd to call for a budget deal that precludes any increase in revenue.

Understanding the Government Shutdown and Debt Ceiling Debates

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In recent weeks, Capitol Hill has been fixated on two major deadlines to pass important legislation. One was October 1, when spending authority ran out for many federal operations causing a partial government shutdown because Congress did not enact legislation to continue to fund those programs. The second deadline, which is much more serious, is October 17, when the U.S. debt will reach the existing $16.7 trillion debt ceiling set in federal law, making it impossible for the federal government to entirely meet obligations like Social Security payments and debt payments.

The government shutdown is tragic because it needlessly closes down public services and removes money from the economy with no benefit whatsoever. Breaching the debt ceiling would be catastrophic because it would lead the U.S. to default on its debt obligations, which is difficult to even fathom because much of the global economy is based on U.S. debt (on U.S. Treasury bonds).

Recent reports are that the government shutdown may continue on for some days and some lawmakers may attempt to link legislation to open the government with legislation to raise the debt ceiling.

The two posts below address some important aspects of this situation that you may not have heard about regarding both the shutdown and the debt ceiling.

What You Need to Know about the Government Shutdown

What You Need to Know about the Debt Ceiling

What You Need to Know about the Government Shutdown

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Congressional Democrats have already capitulated to Republican demands on what level of spending should be enacted to keep the government running.

The last government shutdown, which stretched from the end of 1995 into the start of 1996, happened because the parties disagreed about the size of the spending bills that would keep the government funded. Wherever you stand on that issue, you can logically see how such a disagreement might result in no spending bills being approved and a consequent shutdown of the government.

But this year, Democrats have already agreed to the level of spending proposed by the Republicans, at least in the short-term.

Congress has failed to enact the appropriations bills that are supposed to fund federal government operations (in some cases because Republicans could not support the low funding levels they earlier committed to.) But this happens frequently and is addressed by passage of a “continuing resolution” that provides short-term funding to whatever programs and agencies need it until Congress is able to work something out.

The “continuing resolution” (CR) approved by the Democratic-led Senate would keep the government funded for another six weeks — at the levels demanded by Republicans. As the Center for American Progress has explained, if the spending level of the CR was continued for the whole year it would amount to $986 billion in discretionary spending (the part of government spending Congress must approve each year). That’s roughly the same as the $967 billion called for in the most recent “Ryan budget” (the House budget resolution, named after House Budget Committee chairman Paul Ryan).

That’s considerably lower than the $1,058 billion that the Senate sought to spend in the budget resolution it approved in the spring, and much lower than the $1,203 billion in spending in 2014 that President Obama called for in his first budget proposal.

Once the Republican spending level is agreed to for the short-term CR, it is far more likely that Congress will continue funding the government at that same level for the rest of the year.

Put a different way, Congressional Democrats have basically conceded that sequestration of funding for federal programs under the Budget Control Act (across-the-board spending cuts that no one thinks make any sense) would remain intact for the time being. 

So if the parties essentially agree on the spending level, what is the problem? That brings us to the next point…

Congressional Republicans in the House (or a faction of them) have refused to approve the spending legislation needed to keep the government running unless it also includes provisions on the completely unrelated issue of health care reform.

The House Republicans approved a version of the CR that defunded the Patient Protection and Affordable Care Act (ACA, also known as Obamacare). The health care reform law is not even funded by this spending legislation, and in fact its implementation has proceeded this week even while other parts of the government shut down. In other words, Obamacare is a completely unrelated issue that the House Republicans have tacked onto their CR.

The Democrats in the Senate voted to send a “clean CR,” a CR without the health care provisions, to the House. The House then approved a CR with provisions that would delay for one year, rather than defund, the health care reform. (Many Republicans acknowledged that this delay would eventually lead to repeal of the law.)

In addition to the one-year delay of health care reform, this CR also included a provision that would repeal one piece of that health care reform — a tax on medical devices designed to get some of the businesses that would profit from the law’s expansion of health coverage to contribute to support it. Another CTJ post explains why repealing the medical device tax is a terrible idea.

The Democratic majority in the Senate rejected this Republican House-passed CR as well.

The government shutdown does not actually save money and probably increases the budget deficit.

The shutdown that occurred in 1995-1996 actually cost the government $2 billion in today’s dollars. There are a lot of reasons for this. Furloughed federal workers received back pay for the time they were out of work during the shutdown, but even if federal workers don’t receive back pay this time around, it’s not likely that the shutdown will reduce the deficit. Part of that is because of the various fees (for inspections, visas, entrance at national parks) that won’t be collected, as well as the costs of reopening agencies and programs after they’ve been closed.

A prolonged shutdown could reduce economic output generally — fewer people with paychecks means fewer consumers buying goods, which in turn means fewer profits for businesses and less income for people employed by those businesses. This lost income, and the lost taxes that would be collected on that income, is another reason to worry that the shutdown will increase, rather than decrease, the deficit.

What You Need to Know about the Debt Ceiling

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The need for Congress to increase the existing $16.7 trillion debt ceiling by October 17 does not involve increasing the deficit or spending but rather allows the government to issue debt to cover the costs of legislation that Congress has already enacted — including interest payments on existing debt.

In most governments around the world, any time a legislature approves spending or tax cuts that create a deficit or increase the deficit, the central bank is authorized to issue whatever debt is needed to accomplish this. The U.S. has a strange law, arising mainly out of a historical accident, which bars the federal government’s debt from rising above a certain level — even though the debt may be on course to blow through that limit because of the spending measures and tax cuts already enacted by Congress.

It’s generally been recognized that it would be irrational for Congress to refuse to raise the debt ceiling when it is necessary to carry out legislation already enacted by the same Congress. Past votes against debt ceiling increases were considered “message” votes, cast when it was clear that the increase would pass both chambers and be signed by the President. (And contrary to claims of Congressional Republicans, most deficit-reduction bills are enacted separately from the debt ceiling increases.)

That changed in 2011, when Congressional Republicans refused to increase the debt ceiling unless President Obama gave them “concessions” (which is a strange word to use when these “concessions” are in return for avoiding a debt default that would cause economic catastrophe for all of us). The concession given by the President was basically the spending caps and sequestration enacted as part of the Budget Control Act of 2011.

This event seems to have led Congressional Republicans to believe that threatening to cause the U.S. to default on its debt obligations is an effective and rational way to extract concessions from the President and the Democrats who control the Senate. This leads us to the next point…

House Republicans (or a faction of them) now refuse to raise the debt ceiling (in other words, threaten that the U.S. will default on its debt obligations) unless several unrelated parts of their legislative agenda are enacted.

The House Republicans have drafted a bill to raise the debt ceiling — and also enact a long list of items on the GOP agenda, including but not limited to: approving the Keystone pipeline, enacting tort “reform,” delaying health care reform for a year, means-testing Medicare, abolishing part of the Dodd-Frank financial reform, and setting up a process to enact a tax reform along the lines of the tax provisions in the most recent Ryan budget. This is the same Ryan tax plan that would provide millionaires with an average tax cut of at least $200,000 annually, as explained in a CTJ report

There are extremely strong legal arguments that if the debt ceiling is not raised in time, the President should declare that the debt ceiling itself is illegal and ignore it.

If Congress fails to enact an increase in the debt ceiling before October 17, the President will face laws that contradict each other: on the one hand, laws requiring money to be spent on various programs and debts to be paid, and on the other hand, the debt ceiling which will bar him from borrowing the funds necessary to do this. So if the debt limit is not increased, then President Obama will have to violate the law one way or another. Several government experts and attorneys have examined this issue and concluded that if the President must ignore one of these laws, he should ignore the debt ceiling.

This also makes the most sense as a matter of policy. If the debt ceiling is breached and the President does not ignore it, that will mean that one chamber of Congress can use periodic threats of default to control the executive branch of government, which would completely upend the Constitutional arrangement of separation of powers.

State News Quick Hits: Andrew Cuomo Loves Tax Cuts, So Does ADM, and More

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States are just beginning to come to terms with the impact that the shutdown of the federal government will have on state residents. This informative blog post from the Wisconsin Budget Project tells us what programs folks should and shouldn’t be worried about on the state level and links to several resources from The Center on Law and Social Policy (CLASP) that readers might find helpful.

Another day...another company asking for enormous state corporate tax breaks. This time Archer Daniels Midland Company (ADM) is asking Illinois lawmakers for $20 million in tax breaks to keep their headquarters in Decatur. During a House Revenue and Finance Committee hearing, Rep. Barbara Flynn Currie characterized testimony of an ADM executive as “essentially blackmailing the state ... saying if you don’t go through this hoop for us, we may think about going somewhere else.”  (H/T POLITICO's Morning Tax.)

The Tax Foundation and the National Taxpayers Union are urging the U.S. Supreme Court to hear a case that could allow Overstock.com -- and other online vendors like Amazon.com -- to shirk  their responsibility for collecting state and local sales taxes. While a previous Supreme Court precedent bars states from requiring sales tax collection by vendors who have no “physical presence” in the state (a ban which Congress is considering lifting via the Marketplace Fairness Act, which passed the Senate by a rare bipartisan vote in May), some states have chipped away at e-tax-evasion by interpreting “physical presence” more broadly than others. In New York, for example, Overstock.com has agreements with in-state affiliates to pay for customer referrals, thus requiring the company to collect sales taxes from its New York customers under a 2008 state law that has been upheld by the New York Court of Appeals. While a national solution that levels the playing field between all online vendors and the brick-and-mortar stores who have always collected sales tax is preferable, states should be free in the meantime to require sales tax collection from online retailers who have legitimate ties to their local economies. Hopefully the Supreme Court agrees.

Having already made some backwards moves on the tax policy front, New York Governor Cuomo now appears to be abandoning his commitment to study and improve the state’s tax structure. In December, he announced the New York State Tax Reform and Fairness Commission. The Commission was “charged with addressing long term changes to the state tax system and helping create economic growth.” But instead of going forward with this thorough examination, the Governor has just appointed former Governor George Pataki and Controller Carl McCall to head a task force whose sole objective is to find a way to cut between $2 and $3 billion in taxes next year, in just one year! Maybe the junior Cuomo really does plan on running for President -- of Texas.


The Medical Device Tax Should Not Be Repealed

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On Sunday, House Republicans passed a budget plan that included the repeal of the medical device excise tax, making the end of this tax one of its demands in the ongoing budget negotiations. As the Center on Budget and Policy Priorities (CBPP) notes, the case against the medical device excise tax is being driven by misinformation put out by the medical device industry, which is hoping to avoid paying their fair share in taxes by getting the tax repealed. (The trade association even wrote the letter 75 members of the House sent to Speaker Boehner asking for the repeal.)

One argument made by the industry against the medical device excise tax is that it singles them out for higher taxes. The reality, however, is that the excise tax was passed as one of many levies on various healthcare sectors to help pay for health insurance expansion.

More vaguely, the industry has argued that the medical device excise tax will threaten "medical innovation and Americans jobs." On its face, this charge is ridiculous considering that healthcare reform will increase demand for devices overall, and that the excise rate on the device is a mere 2.3 percent. That low tax rate should be a drop in the bucket to a medical device company like Medtronic, which had a profit margin of over 20 percent last year. In addition, the excise tax applies to medical devices imported to the US, and does not apply to devices made in the US if they are exported, meaning that the legislation was designed to protect competitiveness and job creation at US medical device companies.

The one critical thing that the medical device tax does accomplish is to raise crucially needed revenue. According to the Joint Committee on Taxation (PDF), the measure will raise about $30 billion over the next ten years. Given that the tax cuts passed earlier this year are already set to double the projected long term national debt, it does not make sense to exacerbate the debt further by passing billions more in tax cuts for an already lucrative industry.

As we noted last year, the push for repeal of the medical device excise tax is yet another example of corporate special interests trying to use their money and influence to increase their profits at the cost of ordinary American taxpayers. Hopefully, lawmakers will resist this relentless lobbying effort not only during immediate budget negotiations but in the long run as well.

CBO Confirms that Fiscal Cliff Tax Cuts Will Nearly Double Long Term Debt

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A new report from the non-partisan Congressional Budget Office (CBO) confirms that Congress's decision to make 85 percent of the Bush tax cuts permanent as part of the fiscal cliff deal will dramatically increase the annual deficit and the long term national debt going forward, something Citizens for Tax Justice (CTJ) has been projecting for years. In fact, the impact of the tax cuts was the biggest factor in causing the CBO to nearly double their estimate of the national debt from 52 percent of GDP to as much as 100 percent of GDP 25 years from now.

After digging all of us into this fiscal hole by passing these tax cuts, lawmakers like Wisconsin Representative Paul Ryan are using the CBO’s new, more dire debt projection to argue that it proves that "spending is out of control" and thus the solution to our fiscal problems is – wait for it – more spending cuts.

It's become "common-sense" to argue that the federal government should immediately cut spending to reduce the deficit, but this is mistaken. Over the past two years lawmakers have already enacted enough debt reduction (primarily through spending cuts) that the CBO projects that the national debt will actually go down slightly over the next decade, going from 73 percent of GDP in 2013 to 70 percent of GDP in 2022.  Even over the long term, when the debt is projected to grow substantially, "out of control" spending is not what is driving the increase that Paul Ryan is talking about. 

According to the CBO, even with the much talked about growth in healthcare costs and aging of the population, total spending on federal government programs will only grow a modest 10 percent over the next 25 years. The much more dire predictions of the growth in government spending that are often cited are largely driven by the projected increase in interest payments on the national debt, an amount which the CBO expects to nearly quadruple over the next 25 years if nothing is done.

Rather than being inevitable, the good news is that this massive increase in interest payments is entirely avoidable if lawmakers modestly increase revenue, rather than letting the debt substantially increase each year in order to cover the costs of massive tax cuts that were made permanent with the fiscal cliff deal in January. In fact, the CBO estimates that revenues would only have to increase by about 4.5 percent compared to current policy to stabilize the debt over the next 25 years and substantially reduce projected interest payments. Whether it's through ending corporate tax avoidance or reforming individual income tax expenditures, raising this modest amount of revenue could not only reduce the deficit but also have the added bonus of making our tax system more equitable as well. 

New Research: Blame Congress, Not Hybrids, for Road-Funding Shortfall

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Next Tuesday the federal gas tax will celebrate an unfortunate anniversary: 20 years stuck at a rate of exactly 18.4 cents per gallon.  A unique new report from our partner organization, the Institute on Taxation and Economic Policy (ITEP), puts this occasion in context and explains why the gas tax has fallen some $215 billion short of what a better-designed tax would be raising. The report shows that Congress’ embarrassing failure to plan for growth in construction costs is the main cause of our transportation funding gaps.

To hear some gas tax naysayers tell it, hybrids and other fuel-efficient vehicles are consuming so little gasoline that the gas tax can’t possibly raise enough money to keep our infrastructure from falling apart.  But ITEP’s new analysis shows that just 22 percent of the gas tax shortfall we’re experiencing today is due to growth in vehicle fuel-efficiency.  By far the more important factor (accounting for the other 78 percent of the shortfall) has been Congress’ decision to stop the gas tax rate from rising alongside normal growth in the cost of asphalt, machinery, and other construction inputs.

Seventeen states, home to over half the country’s population, now use smarter “variable-rate” gas taxes that tend to rise over time.  And we note that the federal government wisely allows other parts of the tax code to rise each year with inflation—like the personal exemption, standard deduction, and Earned Income Tax Credit (EITC), so similarly giving the gas tax room to grow shouldn’t be that hard.

ITEP’s report offers a better path forward, and explains how reform could have prevented our current funding predicament.  By allowing the gas tax rate to grow alongside both construction cost inflation and fuel-efficiency, the federal transportation fund could have been brought from frequent deficits to consistent surpluses.  ITEP finds that more than $215 billion in additional revenue could have been raised over the 1997-2013 period—money that would have made a real difference in putting people to work and improving the efficiency of our transportation network.

Read the report, A Federal Gas Tax for the Future.


When Congress Turns to Tax Reform, It Should Set These Goals

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Tax reform is a serious undertaking. The majority party in the House of Representatives now proposes to allow the U.S. to default on its debt obligations — refuse to pay the debts built up by Congress itself — unless it can force through a “tax reform” that raises no new revenue, along with other controversial measures.

Don’t be fooled. Raising the debt ceiling to avoid a default on U.S. debt obligations is a matter that should not require much debate, while tax reform is a completely separate issue that will require a vast amount of discussion and debate. The two do not belong in the same bill.

When lawmakers are serious about tax reform, they should turn to a new report from Citizens for Tax Justice that lays out just what tax reform should accomplish. If Congress is going to spend time on a comprehensive overhaul of America’s tax system, this overhaul should raise revenue, make our tax system more progressive, and end the breaks that encourage large corporations to shift their profits and even jobs offshore.

Read CJT’s new report —
Tax Reform Goals: Raise Revenue, Enhance Fairness, End Offshore Shelters



An Underfunded IRS Means More Tax Avoiders Get a Pass

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A troubling new report (PDF) released by the Treasury Inspector General for Tax Administration (TIGTA) has revealed that the substantial budget cuts imposed on the IRS meant that it recovered $5 billion less in revenue from enforcement efforts in 2012 compared to 2011. That is, while law abiding citizens and businesses paid the taxes that make up the bulk of our federal revenues, more non-payers, late-payers and under-payers are getting a pass because there aren’t enough IRS staffers to follow up with them.

This drop in revenue should come as no surprise given that the IRS's annual budget was actually cut by some $329 million dollars from Fiscal Year 2010 to 2012. To absorb these cuts, the IRS was forced to get rid of 5,000 front-line enforcement workers – a 14 percent reduction of its enforcement personnel. Not so coincidentally, the TIGTA report notes that this 14 percent reduction in personnel correlates with the 13 percent reduction in revenue from enforcement over the past two years.

As we've noted before, cutting spending on the IRS budget is about the most counterproductive (and we’re being polite – other words are more fitting) ways to reduce the deficit because every one dollar invested in the IRS’s enforcement, modernization and management system saves the federal government as much as $200 in the long run.  So that loss of $5 billion in tax revenue in the TIGTA report amounts to this: every dollar the government cut under the guise of savings actually increases the deficit by $15. How's that for bad math?

Rather than reversing the budget cuts to the IRS in Fiscal Year 2013, Congress allowed the sequester to cut an additional $600 million from the agency’s budget. Looking ahead to Fiscal Year 2014, House Republicans are pushing to carve an additional $3 billion from the IRS, which would represent a cut of almost 25 percent of its entire budget.

Meanwhile, some of those pushing for these cuts view them as somehow a way to fix the IRS after the recent (trumped up) scandal over the process of granting tax exempt status to certain political groups. The reality that these anti-tax conservatives seem to be missing is that that the lack of resources at the agency was one of the main causes of the administrative issues surrounding the scandal, according to the National Taxpayer Advocate (PDF). In other words, cutting the IRS's budget further will almost certainly generate more problems within the agency, not fewer. 

Considering that the $50 billion recovered through enforcement in 2012 is only a fraction of the estimated $450 billion total tax gap, Congress should not only restore the funding lost to years of budget cuts, but significantly increase funding to help us reduce the deficit and pay for critical government investments.   

The Wrongheaded Quest to Shrink the IRS

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Some House Republicans are hitting the IRS when it’s down, using recent scandals (such as they are, anyway) to push through a dramatic 25 percent cut to the IRS budget. Such a devastating cut would not only substantially increase the deficit, but would make the IRS less effective and exacerbate the myriad of problems it already faces, most of which are due to inadequate resources.

Even as its responsibilities have grown dramatically over the past decade, the IRS has continued to get too few resources to do its job, with its budget actually declining 17 percent since 2002 (adjusted for inflation and population). The results of these cuts have not been pretty. Nina Olsen, the National Taxpayer Advocate, noted (PDF) recently that Americans need to "wake up to the consequences of shrinking the IRS budget" and pointed to the fact that the budget cuts had the effect of "virtually eliminating funding for training, reducing taxpayer service to laughable levels (if it weren't so sad), and undertaking enforcement actions before any meaningful attempt to communicate with taxpayers."

Also, cutting the IRS's budget would actually increase the deficit and cost taxpayers more money than it would save. The primary reason – which is pretty obvious when you think about it – is that every dollar the IRS spends on activities like audits, liens, and seizing property brings in more than $10 in revenue. In addition, the IRS is currently making substantial long term investments in its enforcement, modernization and management systems, for which the federal government (i.e., us taxpayers) receives a $200 return for every dollar invested.

Some more hard-core anti-tax conservatives are going beyond the 25 percent cut, like Senators Rand Paul and Tex Cruz, and are calling for abolishing the IRS entirely, accompanied by enactment of a flat tax or some type of national consumption tax. While the mechanics of collecting these taxes without an agency resembling the IRS at the state or national level remain murky, it is clear that such proposals would have the effect of substantially increasing taxes on the poor and middle classes, while at the same time providing massive tax cuts to the wealthiest individuals.

Whatever gripes people may have about the IRS, the reality is that cutting its budget further will only make things worse. The best move for everyone (except maybe tax cheats) would be for lawmakers to significantly increase the IRS's budget going forward, so that it can do its job better – including collecting more revenue.

Senators Max Baucus and Orrin Hatch, the Democratic chairman and the ranking Republican of the Senate Finance Committee, have invited all members of the Senate to begin the debate over tax reform without any basic agreement on how much revenue is needed.

Under their “blank slate” approach, they ask their Senate colleagues to start with the assumption that the tax code has no “tax expenditures” (exceptions to the overall rules in the form of tax breaks for specific activities or situations). They ask Senators to tell them which tax expenditures they think are warranted and should be preserved in a newly overhauled tax system.

But the entire point of this exercise, and the entire point of reducing or eliminating tax expenditures, is still not settled. In their letter to colleagues, Baucus and Hatch explain:

While Members of the Senate have different views on whether the revenue raised from eliminating tax expenditures or other reforms should be used to lower tax rates, reduce the deficit, or some combination of the two, we believe that everyone should understand the trade-offs involved when adding tax expenditures back to the tax code.

We will have more to say about how lawmakers should determine which tax expenditures to repeal, preserve or reform. But for now it’s worth noting that the Senate’s top tax-writers believe that lawmakers can and should engage in a detailed discussion of tax provisions before they come to any agreement on something as basic as how much revenue is needed to fund public services and public investments. It’s almost as if they forgot that the whole point of the tax system is to raise revenue.

As we have explained before, our current tax laws will collect revenue equal to 19.1 percent of the economy a decade from now. We know this is unsustainable because even during the Reagan years, government spending equaled between 21.3 percent to 23.5 percent of the economy.

Congressional Democrats seem to be vaguely aware of this but have been far too timid in their tax proposals. Most recently, the budget resolution approved by the Democratic majority in the Senate (with no Republican votes) would raise revenue equal to just 19.8 percent of the economy in a decade, and offers no specifics whatsoever on how to do that.

Meanwhile, the budget resolution approved by the Republican majority in the House of Representatives would raise the same revenue level as current law (19.1 percent of the economy), but would overhaul the tax rules so that the very rich pay a smaller share of the total.

Chairman Baucus has attempted for a long time to move the tax reform conversation forward despite this utter lack of consensus on the basic question of revenue. As we have argued before, “This would be like holding bipartisan talks on immigration reform - if one party supported a path to citizenship while the other party pledged to round up all undocumented immigrants and deport them without exceptions.”

To their credit, Baucus and Hatch, in their letter to colleagues, do mention “maintaining the current level of progressivity.” But we have already shown that America’s tax system overall is just barely progressive as it stands. Putting a great deal of time and energy into an overhaul of the tax code that does not make our tax system more progressive or raise more revenue than the current rules would be a waste of time and certainly would not be “reform.”

Go Read This New Research on Corporate Taxes, Lobbyists and Our New Fiscal Reality

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While Citizens for Tax Justice has been taking a deep dive into offshore-tax sheltering and why the corporate tax is indispensable, some friends and allies have put out a series of reports over the past week on the economic impact (or not) of corporate taxes, the enduring dominance of corporate lobbyists and the need to revisit our fiscal policy debate in light of new evidence. Below we highlight the most crucial findings of these must-read reports.

Economic Policy Institute: Corporate Tax Rates and Economic Growth Since 1947

The Economic Policy Institute's (EPI) most recent report on corporate taxes by Thomas Hungerford (author of that high profile Congressional Research Service report showing income tax cuts create more inequality than jobs) debunks the pervasive myth that the US's corporate tax rate is harmful to the economy. For one, Hungerford notes that although the US has a high on-paper marginal rate compared to other countries, its effective corporate tax rate is just about average compared to other rich, developed countries. In addition, Hungerford notes that despite all the claims about corporate taxes preventing growth, corporate profits in the US are actually at an historic high.

Backing up these points (for our stats-minded readers), Hungerford performed a multivariate analysis comparing GDP growth and corporate tax rates and found that corporate tax rates (including the effective and statutory rate) have no correlation with economic growth. This conclusion even held true when controlling for other economic factors and for a lag effect on growth. In other words, the idea that cutting corporate taxes will increase growth in the US has no basis in the historic evidence.

Public Citizen: Lax Taxes

In it's report Lax Taxes, Public Citizen makes case studies of the lobbying around three pieces of progressive tax legislation to demonstrate the disproportionate firepower of corporate lobbyists versus public interest groups. Appallingly (though not surprisingly), Public Citizen found that 86 percent of the lobbyists who reported lobbying on the Stop Tax Haven Abuse Act (STHA), the CUT Loopholes Act, and the Wall Street Trading and Speculators Tax Act represented corporate clients. Looking at the STHA specifically, the group found that for every one pro-tax reform lobbyist there were 20 lobbyists representing industry interests.

Perhaps even more disturbing, Public Citizen found that of those lobbyists with previous government experience working on these bills, 96 percent of them represented corporate clients rather than ordinary Americans. This dynamic not only means that industry advocates have deeper connections to Congress, but also that current lawmakers and Congressional staffers have an incentive to appease corporate interests if they themselves want to get a job a lobbying gig after they leave Capitol Hill.

Further, Public Citizen also notes that groups opposing these pieces of legislation donated about four times as much in campaign contributions to lawmakers that those supporting them, which may explain why these common sense reforms have failed to move despite overwhelming public support for closing corporate tax loopholes.

Center for American Progress: It's Time to Hit the Reset Button on the Fiscal Debate

The prevailing ethos in Washington over the past few years is that budget deficits are out of control and that austerity measures must be taken in order to prevent economic catastrophe. A new report from the Center for American Progress (CAP) shows that this conventional wisdom is all wrong given recent policy actions and mounting evidence.

Most importantly, CAP points out in their report that Congress and the President have already enacted $2.5 trillion worth of deficit reduction (three-quarters of which took the form of spending cuts) since the start of fiscal year 2011. While many lawmakers and pundits are still warning that without additional and immediate deficit reduction the debt will spin out of control, the reality is that the current level of deficit reduction is already enough to stabilize the debt as a percentage of GDP through 2023.

CAP also notes that a research paper often cited by debt alarmists to argue for immediate deficit reduction has been pretty thoroughly debunked. Specifically, the claim by Carmen Reinhart and Kenneth Rogoff that a debt level over 90 percent of GDP jeopardizes economic growth is based on a calculation error (oops!) and does not take into account that causation can work both ways. 

One final important point in CAP’s report is growing evidence from Europe that austerity has actually made the economic situation there worse rather than better. Why? Budget cuts create a downward spiral by increasing unemployment and reducing consumption, which then results in even lower revenues and higher deficits. Some proponents of austerity have tried to counter this evidence by arguing that it's austerity in the form of tax increases that is driving lower growth, but this logic has also been debunked.

Proponents of Low Taxes Called Out in Austerity Debate

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The damage that austerity budgets have done to economies in Europe and elsewhere poses a problem for proponents of smaller government and lower taxes. How can they argue that cutting spending and shrinking government is such a good thing when it has it turned out so dismally for other countries? The arguments they employ to escape this problem show that they are far more committed to keeping taxes low than any other goal.

At a May 22 hearing of the Senate Budget Committee, Veronique de Rugy of the Mercatus Center argued that the composition of deficit-reduction programs is what matters. The problem with the recent deficit-reduction packages, she said, is that they relied too much on tax increases. If they had relied on spending cuts, their economies would be doing just fine and they would be more successful at getting their deficits under control.

At a June 4 hearing of the committee, Salim Furth of the Heritage Foundation made the same argument, and went further by claiming that most of the governments thought to have austerity budgets have actually increased their deficits because they increased spending by more than they raised taxes.

But this time at least one of the Senators had done his homework and had looked up the data. Senator Sheldon Whitehouse of Rhode Island presented data from the OECD (which Furth said he was relying on) showing 15 countries in Europe did enact austerity plans (plans reducing their budget deficits) and the spending cuts outweigh the tax increases in 9 of these. In only two of these countries did tax increases make up 60 percent of more of the enacted deficit-reduction.

As Dylan Matthews of the Washington Post’s Wonkblog explains, Furth’s claim that most governments increased deficits is based on each country’s spending as a percentage of Gross Domestic Product (GDP), or to put it differently, spending as a percentage of the overall economy. Some of the countries have seen their GDP shrink so dramatically in recent years that even after serious cutbacks of public services, their spending as a percentage of GDP is higher than before the recession. (At the same hearing, Larry Summers presented a more sensible way of measuring the deficit reduction governments have enacted.)

The bottom line is that governments in Europe and elsewhere are cutting the deficit mainly by cutting spending, and the economy has struggled as a result. Blaming sluggish economic growth on high taxes is simply wrong.

Do the Math: Sequester Cuts to IRS Increase the Deficit

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Let’s start with the facts. Every dollar invested in the IRS’s enforcement, modernization and management system reduces the federal budget deficit by $200. Here’s another metric. Every dollar the IRS “spends for audits, liens and seizing property from tax cheats” garners ten dollars back.

Can you say “return on investment?”

Here’s another fact. The IRS’s budget has been reduced by 17 percent since 2002 (per capita and adjusted for inflation), and that includes this year’s sequester cuts. To adapt to the $594.5 million in budget cuts required by the sequester, the IRS has announced it will be forced to furlough each of its more than 89,000 employees for at least five days this year. While deficit reduction is supposed to be the goal of the sequester, cuts to the IRS will probably increase the deficit because it’s the IRS, after all, that collects tax revenue.  In fact, one expert estimated recently that furloughing 1,800 IRS “policeman” positions could cost the Treasury – that is, all of us – some $4.5 billion in lost revenue.

Denied adequate resources over the years, the IRS has not been able to keep up with its current workload, let alone expand its work. For example, a new report on IRS enforcement found that the agency actually audited 4.7 percent fewer returns in 2012 than it did in 2011. Considering that the IRS typically recovers about 14 percent of the $450 billion of unpaid taxes in a single year with its current resources, by increasing IRS resources we stand to reap billions in additional revenue from noncompliant taxpayers.

The Obama Administration proposed in its fiscal year 2014 budget to increase the IRS’s budget to $12.9 billion, about $1 billion more than its 2012 budget, with about $5.7 billion of that going to enforcement.  This increase doesn’t go nearly far enough considering the substantial decline in its budget during the past decade, but it’s a small investment we’d be smart to make.


The President's Budget: What We Know So Far

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Information is starting to trickle out of the White House about the budget proposals that the President is to release on Wednesday of next week. The proposal will be controversial because it includes cuts in Social Security and Medicare spending. Here's what we know so far about the tax proposals in the plan.

1. It appears that President Obama will propose less in new revenue than the $975 billion called for in the budget resolution approved by the Democratic majority in the Senate. This seems very ill-advised, as we have already noted that the Senate resolution would not even raise enough revenue to pay for the level of spending that Ronald Reagan presided over. As the Washington Post explains,

The budget is more conservative than Obama’s earlier proposals, which called for $1.6 trillion in new taxes and fewer cuts to health and domestic spending programs. Obama is seeking to raise $580 billion in tax revenue by limiting deductions for the wealthy and closing loopholes for certain industries like oil and gas.

This revenue would be used to reduce the deficit.

The President's proposal will have some additional revenue-raising proposals, "increased tobacco taxes and more limited retirement accounts for the wealthy that are meant to pay for new spending." It is unclear how much those additional proposals would raise, but it appears that the total new revenue would be below what the Senate budget resolution calls for.

2. The vast majority of the President's proposed new revenue would come from his proposal to limit the tax savings of each dollar of certain deductions and exclusions claimed by wealthy taxpayers to 28 cents. A recent CTJ report breaks down the composition of the tax expenditures limited by this proposal and how some taxpayers would be affected.

3. One of the new revenue-raising proposals from the President that would pay for new spending is a limit on individual retirement accounts (IRAs) for the wealthy that CTJ proposed in its recent working paper on revenue proposals. We noted that IRAs provide a tax subsidy to encourage retirement saving, which Congress surely never intended to allow Mitt Romney to save $87 million tax-free.  

The Washington Post reports Obama’s plan would

… also seek to generate revenue by limiting how much wealthy individuals can accrue in their tax-retirement accounts. Such accounts would be capped at $3 million in 2013 dollars — which officials say is enough to finance a $205,000 a year income.  

We’ll have more analysis as we learn more.

On Saturday, the Senate approved the budget resolution that was crafted by Budget Chairman Patty Murray of Washington State, by 50 votes. (The resolution would have received 51 votes if New Jersey Senator Frank Lautenberg not been absent due to an illness.)

The most important implication of this vote is that a majority of Senators agreed that Congress should raise $975 billion over a decade and cut spending by the same amount, rather than attempt to achieve deficit-reduction entirely through spending cuts. Indeed,  the Senate rejected several amendments that would have reduced or eliminated the revenue increase.

The description of the plan from Murray’s budget committee staff explains that revenue would be raised by “closing loopholes and cutting wasteful spending in the tax code that benefits the wealthiest Americans and biggest corporations.” But a great deal is left to be determined because, as we explained earlier, this budget resolution offers no details on which loopholes or wasteful tax expenditures might be limited.

Murray Plan in the Senate a Stark Contrast to the Ryan Plan in the House

In any event, the Senate budget resolution is so different from the resolution approved by the House (the plan crafted by House Budget Chairman Paul Ryan) that it’s difficult to imagine how a Senate-House conference committee could ever “reconcile” or “merge” the two documents.  As CTJ has already demonstrated, the Ryan plan would provide millionaires an average net tax cut of at least $200,000, and possibly much more.

Senate Would Give States the Right to Require Online Retailers to Collect Sales Taxes

The Senate approved, by a vote of 75 to 24, an amendment to allow states to require out-of-state remote retailers (like Internet retailers) to collect sales taxes from their customers. This amendment has no binding effect but it shows that there are enough votes in the Senate to pass important legislation (the Marketplace Fairness Act) that would give states this authority.

Currently, a state is allowed to require a retailer to collect sales taxes from its customers only if the retailer is “physically present” in the state. This creates an unfair advantage for a company like Amazon, which is selling its products remotely, over a company like Target, which is physically present (because of its stores) almost everywhere it does business. Even worse, states are losing more and more revenue as more commerce happens online — a trend that can only increase with time.

It’s worth repeating (as CTJ has explained before) that this proposal would not actually increase taxes, but would only facilitate the collection of taxes that are due (but rarely paid) under current law.

Many Other Amendments Have Little Meaning

Votes taken on amendments during the Senate budget debate are generally not binding. Their greatest significance is that they show whether or not enough votes can be gathered to pass a given proposal in the Senate. For example, the vote on allowing states to require remote retailers to collect sales taxes demonstrates that there are more than the 60 votes needed in the Senate to approve that proposal when it comes to the floor as an actual bill.

But other amendments are not as helpful in determining support for actual legislation, and can be best described as posturing with little real meaning.

For example, the Senate rejected a Republican-sponsored amendment to repeal the estate tax, but then approved by 80-19 an amendment sponsored by Democratic Senator Mark Warner “to repeal or reduce the estate tax, but only if done in a fiscally responsible way.”

The Senate’s approval of this amendment does not indicate that an actual bill to reduce or repeal the estate tax would get 60 votes because an actual bill would either have to include specific provisions to offset the costs, or the bill would clearly increase the deficit. There have been votes on such bills in the Senate many times and they have never received the needed 60 votes, much less 80 votes.

To take another example, the Senate voted 79-20 to repeal a tax on medical device manufacturers that was enacted as part of health care reform. This was one of the taxes enacted with the idea that companies that would benefit from health care reform should share in its costs. The budget amendment says that legislation should be passed to repeal the tax “provided that such legislation would not increase the deficit.”

An actual bill to repeal this tax would require some sort of provisions to offset the cost, or it would increase the deficit, and Senators voting in favor would have to be ready to support those offsetting provisions or the increase in the deficit. It’s not obvious that any such bill would get 60 votes.

There are many other examples of amendments that were mostly about posturing, and many would be terrible policy if they were enacted as actual legislation. The estate tax, for example, has been gutted in recent years even though it’s the one tax that addresses concerns about income inequality and the richest one percent pulling away from everyone else. And the medical device tax was part of the intricate compromise that was necessary to enact virtually universal health coverage without increasing the budget deficit. It’s unfortunate that so many Senators feel a need to pander to the special interests who want to repeal these taxes.

The Myth that Tax Cuts Pay for Themselves Is Back

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Our report on Paul Ryan’s most recent budget notes that it includes a package of specific tax cuts but claims to maintain current law revenue levels, without specifying how. Our report assumes tax expenditures would have to be limited, as all of Ryan’s previous budget plans propose explicitly, to offset the costs of his tax cuts.

It is possible that Ryan doesn’t believe he would have to make up all of those costs, because he might believe that at least some of his tax cuts pay for themselves. In other words, Ryan might rely, at least partly, on “supply-side” economics.

One of the main ideas behind supply-side economics is that reducing tax rates will unleash so much productivity and investment and so much growth in incomes and profits that the tax collected on those increased incomes and profits will make up for the revenue loss from the reduction in tax rates.

The section of Ryan’s budget plan on tax reform cites, and is nearly identical to, a letter from Ways and Means Chairman Dave Camp and the Republican members of his committee explaining that they seek a tax reform that would “lead to a stronger economy, which would create more American jobs and higher wages. More employment and higher wages would lead to higher tax revenues which would simultaneously address both the nation's economic and fiscal reforms.” The letter goes on to say that they “will continue to oppose any and all efforts to increase tax revenue by any means other than through economic growth.”

Having Failed to Win the Argument Over the Income Tax Cuts and Capital Gains Tax Cuts, Supply-Siders Now Turn to Corporate Tax Cuts

Of course, if there was any possibility that we could actually get more revenue by paying less in taxes, we would all support that. The idea is so appealing that many lawmakers cling to it despite overwhelming evidence that it’s wrong.

Anti-tax lawmakers and pundits have tried to use the supply-side argument for several different types of tax cuts.

For example, the George W. Bush administration had the Treasury investigate whether or not the Bush income tax cuts would pay for themselves, and the Treasury reported back that, sadly, they would not.

To take another example, the editorial board of the Wall Street Journal has been obsessed for several years with the idea that income tax breaks for capital gains (if not other types of personal income tax cuts) pay for themselves. But the evidence shows that revenue from taxing capital gains rises and falls with the stock market and the overall economy, not changes in tax policy.

And yet another example is the apparent campaign underway now to convince Congress and the public that cuts in the corporate tax rate pay for themselves. On the same day as Ryan released his budget plan, the Tax Foundation released a report claiming that reductions in corporate tax rates pay for themselves. Two days earlier, Arthur Laffer, the leading proponent of “supply-side” economics, made the same argument in a U.S.A. Today column. (See ITEP's critiques of Laffer's other work as junk economics.)

The Tax Foundation report is particularly telling. The Tax Foundation explains that their “dynamic” estimates assume that changing the corporate tax rate affects the economy. But stop and think about what this means exactly. They are essentially feeding assumptions into a model and then reporting the result.

The effect of taxes on the economy is complicated, especially when you consider that taxes fund public investments (like infrastructure and education) that enhance economic growth by enabling businesses to profit.

The Tax Foundation has fed their model assumptions about the effects of taxes on the economy and assumptions about how significant those effects are. If they assumed that cutting corporate tax rates had a negative impact or only a small positive impact on the economy, then their model would conclude that these tax cuts do not pay for themselves. But they assume a large positive impact on the economy, and their model therefore concludes that such tax cuts do pay for themselves.   

Some Members of Congress Seek “Dynamic Scoring” for Tax Proposals

It is unclear that proponents of supply-side economics will be any more successful with corporate income tax cuts than they have been with other types of tax cuts. But there is a real danger because anti-tax lawmakers often demand that Congress’s process of estimating the revenue effects of tax proposals be altered to take supply-side economics into account.

In other words, some lawmakers demand that the revenue estimating process assume that tax cuts cause economic growth, which can in turn offset at least part of the revenue loss — meaning tax cuts can at least partially pay for themselves.

Using this type of “dynamic scoring,” as it is often called, would be particularly manipulative. For one thing, even if we believed that tax cuts putting money into the economy boosts growth enough to partially offset the costs, then it’s equally logical to assume that spending cuts taking money out of the economy would reduce growth enough to limit the amount of deficit reduction they achieve.

But of course Paul Ryan and Dave Camp, who are championing a budget plan that includes massive spending cuts, do not suggest that the estimating process be altered to assume that such effects on the economy limit the amount of savings achieved. These are not the type of “dynamic” effects they have in mind.

Comparing Congressional Budget Plans

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The bottom line on the revenue proposals in the three budget plans in Congress today can be stated simply: The Congressional Progressive Caucus’s plan (for which CTJ provided some estimates) is sensible. House Budget Chairman Paul Ryan’s plan is absurd, and Senate Budget Chairman Patty Murray’s plan is in the middle.

As our new report explains, Paul Ryan promises a specific set of tax cuts but promises to maintain current law revenue levels, meaning some unspecified reduction or elimination of tax expenditures must take place. Our report explains that the richest Americans would see a net tax decrease under this plan even if they must give up all the tax expenditures that Ryan has put on the table. And if the richest Americans pay less, then obviously someone else must pay more, in order to meet Ryan’s goal of revenue-neutrality.

The other two budget plans at least recognize the need for more revenue. Some have suggested that Ryan is softening his stance on revenue because he accepts the overall revenue level projected under current law, which is more than he accepted in the past. But the current law revenue level is entirely inadequate and untenable.

Here’s why. Ryan’s plan notes that under current law, federal revenue will equal 19.1 percent of GDP (19.1 percent of the overall economy) in 2023, and observers have noted that this is more than his previous budgets would have allowed. But this level of revenue would not have balanced the budget even during the Reagan administration, when federal spending ranged from 21.3 percent to 23.5 percent of GDP.

Chairman Murray’s plan would raise revenue by $975 billion over a decade, so that federal revenue will equal 19.8 percent of GDP in 2023. The plan from the Congressional Progressive Caucus (CPC) would raise revenue by $5.7 trillion, so that revenue will reach 21.8 percent in 2023. In other words, only the Progressives would come close to funding the type of spending that Reagan presided over.

It’s helpful to think about a given budget plan’s projected revenue as a percentage of GDP for the purpose of comparison, but one should not overstate the usefulness of this number. Chairman Ryan has often talked as though the goal of the budget process is hitting a certain percentage, rather than fairly raising enough revenue to pay for the public investments that actually build the middle-class and the country.

Most Americans probably don’t care what revenue is as a percentage of GDP as long as the revenue collected is enough to adequately fund the schools they send their kids to, maintain the highways they drive to work on, and keep their health care costs from bankrupting them.

Ryan’s budget clearly slashes funding for anything that would address any of those issues. That’s what happens if you balance the budget in a decade without raising any revenue.

The Murray Plan

There are many good things to say about Senator Murray’s plan, in that it calls for badly needed tax increases and better-designed spending cuts to replace the sequestration (the scheduled cuts of over $1.2 trillion over the decade).

The Murray plan also makes the case for more revenue, explaining that the projected current law revenue is lower, as a percentage of GDP, than it was during the last five times the budget was balanced (going all the way back to 1969). It also explains that the level of revenue it envisions is still less than was proposed in the Simpson-Bowles plan and the other plans that lawmakers calling themselves “centrists” claim to admire.

But the Murray plan does not specify what tax increases or spending cuts would be acceptable. The plan says it would raise revenue by “closing loopholes and cutting wasteful spending in the tax code that benefits the wealthiest Americans and biggest corporations,” which is certainly moving in the right direction for those of us who believe that the overall tax system is not asking very much from wealthy individuals or from corporations.

The Murray budget plan would use the reconciliation process (the process that avoids filibusters in the Senate) to pass legislation raising the promised $975 billion, and it does specify that the progressivity of the tax code must be maintained. But the plan does not specify what the tax increases would be. The plan explains how tax expenditures like deductions and exclusions benefit the rich, but fails to mention the most regressive tax expenditure of all, the preferential rate for capitals gains and dividends. The plan explains how corporations avoid taxes through offshore tax havens, but does not suggest fixing the problem by ending the rule allowing U.S. corporations to “defer” their offshore taxes, and does not even suggest rejecting proposals for a “territorial” system that would exacerbate the problem.

The Congressional Progressive Caucus (CPC) Plan

The CPC plan addresses all of these issues, repealing the enormously regressive capital gains tax preference and closing several loopholes used to avoid taxes on capital gains, repealing “deferral” and explicitly rejecting a territorial system, introducing new tax brackets for high-income individuals and many very specific proposals that have been championed by Citizens for Tax Justice. No one will agree with every provision in the CPC budget plan, but it is certainly a plan for people who want to have substantive discussions about what Congress should actually do.

The plan’s list of tax provisions range from huge (raising over a trillion dollars by ending far more of the Bush tax cuts than were allowed to expire under the fiscal cliff deal) to small (ending the Facebook stock options loophole) to very small (eliminating write-offs for corporate jets).

Even supporters of Murray’s plan should find the CPC plan useful because it provides a list of proposals that can be used to fill in some of the blank spots in the Murray plan.

Read CTJ's new report on the latest budget plan from House Budget Chairman Paul Ryan.

Paul Ryan’s budget plan for fiscal year 2014 and beyond includes a specific package of tax cuts (including reducing income tax rates to 25 percent and 10 percent) and no details on how Congress would offset their costs, all the while proposing to maintain the level of revenue that will be collected by the federal government under current law.

The revenue loss would presumably be offset by reducing or eliminating tax expenditures (tax breaks targeted to certain activities or groups), as in his previous budget plans.

CTJ's new report find that for taxpayers with income exceeding $1 million, the benefit of Ryan’s tax rate reductions and other proposed tax cuts would far exceed the loss of any tax expenditures. In fact, under Ryan’s plan taxpayers with income exceeding $1 million in 2014 would receive an average net tax decrease of over $200,000 that year even if they had to give up all of their tax expenditures.

Because these very high-income taxpayers would pay less than they do today in either scenario, the average net impact of Ryan’s plan on some taxpayers at lower income levels would necessarily be a tax increase in order to fulfill Ryan’s goal of collecting the same amount of revenue as expected under current law.

Replace the Sequester By Closing Tax Loopholes

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The “sequester” that went into effect on March 1st is another clear indication of the stranglehold that anti-tax zealots still have over Washington. While lawmakers across the political spectrum (and particularly those outside the Beltway) oppose the sequester’s $85 billion in across-the-board cuts, the failure to reach a deal to replace these cuts rests entirely with anti-tax lawmakers who have blocked any agreement that would include any revenue increases at all.

The primary argument made to justify this anti-tax position is that the fiscal cliff deal already raised a substantial amount of revenue; they’re saying the President "already got" his tax increase.  According to the official scorekeepers at the Congressional Budget Office however, the fiscal cliff deal actually reduces revenue by almost $4 trillion over the next decade because it made most of the Bush tax cuts permanent, renewed a slew of special interest tax breaks for a year, and extended some expanded refundable tax credits for five years.

Even if you accept that the Fiscal Cliff “raised” $620 billion in revenue (measured against what would have happened if Congress had extended all the tax cuts instead of 85 percent of them), the reality is that having anything close to a balanced approach to deficit reduction should include raising a whole lot more revenue. This may be news to Republican House Speaker John Boehner, who recently asked “When is the president going to address the spending side of this?” But Congress has already enacted $3 in spending cuts for every $1 in revenue raised by the fiscal cliff deal. If the sequester is allowed to stay in effect, or is replaced entirely by spending cuts, the ratio of spending cuts to revenue increases will rise to as high as 5-to-1.

For his part, President Obama has offered a plan that would replace the sequester with $1.8 trillion in deficit reduction, including $1,130 billion in spending cuts and $680 billion in revenue increases. The President is proposing to raise about $583 billion of the $680 billion in revenue by limiting the tax savings of each dollar of certain deductions and exclusions to 28 cents.

President Obama’s plan, however, does not ask for nearly enough revenue to replace the trillions lost by making the Bush tax cuts permanent, or to even make the level of revenue increases equal to the level of spending cuts enacted during his first term. In fact, if Congress enacted President Obama’s plan as is, it would still mean that well over $2 in spending cuts will have been enacted for every $1 in revenue increases. 

The fairest approach would be to replace the entirety of the sequester cuts with new revenue. To accomplish this, lawmakers should not only limit deductions and exclusions as President Obama is proposing, but should also consider raising hundreds of billions of dollars more by eliminating the tax breaks and loopholes that allow wealthy individuals and corporations to shelter their income from taxation.

Taking a step back, it’s simply unjustifiable to proceed with devastating spending cuts that would reduce already meager unemployment benefits by eleven percent, or deny aid to as many as 750,000 women and children, just to preserve exorbitant, unwarranted tax breaks for the wealthiest individuals and profitable corporations.

Simpson and Bowles' New Deficit-Reduction Plan: Raise Less Revenue, Because Politicians Say So

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Former White House chief of staff Erskine Bowles and former Senator Alan Simpson, co-chairs of President Obama’s ill-fated fiscal commission, have a new proposal for a “grand bargain” to reduce the budget deficit. Their newest idea is to raise less revenue than they suggested in their original proposal and rely more on cuts in public services and public investments. They have absolutely no policy rationale for this whatsoever, but state quite explicitly that they are proposing a new plan to adjust for the political positions of President Obama and House Speaker John Boehner.

This might come as a surprise to the many observers of Bowles and Simpson, including many of their admirers in Congress, who believed the original Bowles-Simpson plan was based on policy rationales developed by technocrats who weren’t weighed down by the political baggage that hinders our elected officials.

The original Bowles-Simpson plan, approved by a majority of the commission members in 2010 but not by the super-majority that was needed under its rules to refer it to Congress, would have raised $2.6 trillion in revenue over a decade to reduce the deficit. It also would have cut spending by $2.9 trillion to reduce the deficit.

The new Bowles-Simpson plan would raise just $1.2 trillion to reduce the deficit, including revenue saved in the time that has passed between the two plans. (This includes roughly half a trillion dollars saved in the New Year’s deal from allowing tax cuts for the rich to expire plus additional revenue that Congress would need to raise.)












In a Washington Post interview, Erskine Bowles reminded the reporter that President Obama called for raising just $1.4 trillion in new revenue during debates over the fiscal cliff, and then explained, “being far out front of the president on revenues wasn’t something I wanted to do again.”

This all begs a question: If politicians feel they need leadership from an unelected panel (like the President’s Commission or the “super committee”) to address the budget in a technical way, but the technocrats leading those panels are simply finding the middle-ground between the positions of the politicians, then who exactly is leading? 

Background: The Misunderstood (Original) Bowles-Simpson Plan

The original Bowles-Simpson plan was often said to achieve one-third of its deficit-reduction from revenue increases, mostly from a tax reform that would raise $80 billion in 2015 alone and $180 billion in 2020 alone.

But, as the Center on Budget and Policy Priorities explains, the original Bowles-Simpson plan raises much more revenue if you hold it to the same accounting standards used for most budget plans in Washington today — including savings from allowing tax cuts for the rich to expire and measuring revenue impacts over a full decade. By this standard, the original Bowles-Simpson plan raises about $2.6 trillion in new revenue and achieves almost half of its deficit-reduction goal through new revenue rather than spending cuts.

You might think that achieving half of a given deficit-reduction goal through spending cuts and another half through revenue increases is a centrist position. But with the President continuously compromising in his efforts woo Congressional Republicans to make a deal, and the latter refusing any increase in revenue at all, Bowles and Simpson now perceive the “middle-ground” to be somewhere entirely different.

None of this is to say that the original Bowles-Simpson plan was great policy. It would have (by some mechanism that was never entirely clear) capped revenue at 21 percent of GDP, even though government spending had reached 22 percent of GDP even back in the Reagan years.

The President, meanwhile, is calling for one-half of the remaining deficit reduction to come from increased revenues — and that’s not enough. When you add up all the deficit reduction that has occurred since Bowles and Simpson first failed in their attempt to bring Washington together, and the remaining deficit reduction Obama proposes, only about a third of it would take the form of increased revenue. The rest would come from spending cuts. That’s not balanced at all.

Front Page Photo of Barack Obama meeting with Alan Simpson and Erskine Bowles via Cal Almond Creative Commons Attribution License 2.0

The Four Takeaways from the CBO Budget Outlook

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With the fiscal cliff deal passed and with lawmakers looking to replace the sequester, the Congressional Budget Office’s (CBO) newest budget and economic outlook provides the clearest picture yet of our new fiscal landscape. Here are the most important things you need to know from this wonky 77 page report:

1. The Fiscal Cliff Deal will increase the deficit by $4.6 trillion.

The media often portrayed the Fiscal Cliff deal as an effort to reduce the deficit and increase revenues, yet the CBO notes that the deal actually caused the projected deficit to rise from approximately $2.3 to over $6.9 trillion over the next decade. The fiscal cliff deal included about $4 trillion in tax cuts (compared to what was then “current law”).

2. The Fiscal Deal included $54 billion in corporate tax breaks.

According the CBO, the one-year extension of accelerated depreciation and a two-year extension of the so-called “tax extenders” for businesses reduced taxes on corporations by as much as $54 billion over the next decade. The decrease in corporate tax revenues (and even larger increase in the deficit as a result) could be far higher over the next decade if lawmakers do not allow these breaks to expire, but instead choose to keep extending them every year or two.

3. The level of federal debt will remain relatively stable over the next decade if lawmakers do nothing.

Despite the continued howls for more deficit reduction, the CBO projects that under current law the level of the federal debt will remain relatively stable over the next decade, with the debt actually dropping from 76.3 percent of GDP in 2013 to 76 percent of GDP in 2022. The increase in the deficit in past years was largely driven by the Bush tax cuts, weaker revenues from the economic downturn, economy recovery measures, and spending on the wars in Iraq and Afghanistan, rather than some unsustainable and permanent increase in government spending. 

While the debt is projected to be stable over the next decade, the CBO warns this assumes that lawmakers do not step in and increase the deficit by $2.5 trillion by extending the corporate tax provisions set to expire, repealing the sequester, or by holding constant Medicare payment rates without offsetting policies.

4. Job and economic growth are still well below where they could be.

The CBO estimates that the US unemployment rate will remain at the abysmal level of 8 percent throughout 2013 and that our economy will keep producing well below its potential until as late as 2017. Lawmakers could counteract the weak economic recovery, while staying fiscally responsible, if they were to repeal spending cuts or enact new stimulus programs and then pay for them by closing tax loopholes. Increasing government spending is much more stimulative to the economy than continuing expensive tax cuts for businesses, so this would have the effect increasing economic growth while making our tax code fairer and economically efficient.

What Obama Should Tell America: Reducing the Deficit is Not that Hard

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We can probably expect the President’s first State of the Union address since being re-elected to include yet another plea to his Congressional adversaries to just be reasonable and meet him somewhere between his already compromised position and their Tea Party-enforced ideology.

We can probably expect the President to continue his calls for legislation that replaces all or part of the automatic spending cuts (sequestration) scheduled to begin March 1 with a mix of both revenue increases and spending cuts.  He calls this mix a “balanced approach” in spite of the fact that spending cuts have already been the main source of deficit reduction over the past two years, meaning that the only truly “balanced” way to replace sequestration at this point would be almost entirely by revenue increases.

We can also expect more talk of sacrifice from all Americans, and for the President to reiterate his openness to cutting programs that low- and middle-income Americans rely on – so long as the opposition agrees to some modest tax increases, on those who will hardly notice them.

A new working paper from Citizens for Tax Justice (CTJ) shows that all of this lopsided compromising is unnecessary and that Congress could raise enough new revenues to replace the entire scheduled sequestration and avoid the cuts everyone agrees will weaken our economy.  Sequestration, remember, was supposed to be a poison pill because of its unnecessarily blunt, across-the-board cuts of $85 billion from every program and agency this year, and $1.2 trillion over the next decade.

CTJ’s paper shows that such revenue increases can be achieved without affecting low- and middle-income Americans by instead asking profitable corporations, wealthy individuals – particularly those wealthy individuals sheltering their investment income – to pay their fair share in taxes.

For example, Congress could raise around $600 billion over a decade by ending “deferral” of U.S. taxes on offshore corporate profits.

In other words, Congress would repeal the rule allowing U.S. corporations to “defer” (delay indefinitely) paying U.S. taxes on their offshore profits until they bring those profits to the U.S.

Even if Congress didn’t need the revenue, there are still extremely important reasons to end deferral, as a new proposal from Senator Bernie Sanders and Congresswoman Jan Schakowsky would do. In some cases, for example, deferral encourages corporations to shift operations (and jobs) offshore; in other cases, it encourages corporations to use accounting gimmicks to disguise their U.S. profits as “foreign” profits generated in a tax haven like the Cayman Islands or Bermuda.

Another revenue raising option is taxing capital gains at death.

Under the current rules, income that takes the form of capital gains on assets that are not sold during the owner’s lifetime escape taxation entirely. The rationale for this special treatment seems to be that it would be difficult to determine exactly how much an asset has appreciated if it’s been held for many years, but that’s a red herring because the current break applies to assets that have been held for even just a couple years.

It is not known exactly how much revenue would be raised by ending this break, but the Joint Committee on Taxation has estimated that this break will cost the Treasury over $250 billion in just the next five years.

Another option is the President’s own proposal to limit the tax savings that wealthy individuals get from each dollar of deductions and certain exclusions to 28 cents.

The tax code is filled with deductions and exclusions that effectively subsidize certain activities and behaviors, like buying a home, giving to charity, obtaining health care and many others. But providing subsidies through the tax code in this way means that the wealthiest people, those in the top, 39.6 percent tax bracket, are saving almost 40 cents for each dollar they spend on home mortgage interest, charitable giving and health care.  Middle-income people, on the other hand, might (if they’re lucky) be in the 25 percent bracket and save just 25 cents for each dollar spent on these things.

Limiting the tax savings to 28 percent would at least reduce that unfairness and it would raise over half a trillion dollars over a decade. Sadly, there is talk that the President, responding to misinformation about how it would impact charitable giving, is open to diluting his proposal so that the charitable deduction is not much affected.

The President can champion policies that large majorities of Americans support.

New polling shows the public is on board with the proposals outlined above. About two-thirds of Americans say corporations should pay more in taxes and two-thirds say the rich should pay more than they pay today. Significantly, this poll was taken more than two weeks after the New Year’s Day deal that allowed tax cuts to expire for the rich, aka “raised taxes” on the wealthiest Americans.

The only thing standing in the way of progressive tax reforms that raise enough revenue to replace the sequestration is the same thing that always stands in the way: the interests of powerful corporations and wealthy investors.  Those special interest groups aside, the vast majority of Americans would support the President in a more progressive approach to tax reform.

Replacing the Sequester Requires Closing Tax Loopholes

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Over the weekend, President Obama and Senate Majority Leader Harry Reid both stated that closing tax loopholes is part of the solution to replacing the coming sequestration of federal spending.

CTJ’s recently updated working paper on tax reform options identifies three categories of reforms that would accomplish this. They include ending tax breaks and loopholes that allow wealthy individuals to shelter their investment income from taxation, ending breaks and loopholes that allow large, profitable corporations to shift their profits offshore to avoid U.S. taxes, and limiting the ability of wealthy individuals to use itemized deductions and exclusions to lower their taxes.

Sequestration: Spending Cuts No One Seems to Want

In 2011, President Obama and Congress agreed to across-the-board sequestration (automatic spending cuts) that they hoped to replace with more targeted, thought-out deficit-reduction measures.

Under the law they enacted, the Budget Control Act of 2011 (the BCA), the sequester was supposed to take effect in the beginning of this year. But the recent deal addressing the “fiscal cliff” replaced the first two months of sequester savings with some arcane accounting gimmicks, so now the sequester begins March 1 if Congress does not act. Between then and the end of the year, it would cut spending by $85 billion. Over a decade, the sequester will cut spending by $1.2 trillion.   

Those cuts are spread evenly across defense and non-defense spending, affecting the programs favored by politicians of every ideological stripe. Lawmakers agree that they do not like the scheduled sequester. Congressional Republican leaders argue that it should be replaced entirely with spending cuts while Democratic leaders in Congress and President Obama insist that revenue increases must be involved.

Revenue Is the Answer

The Center on Budget and Policy Priorities points out that if the sequester is averted with spending cuts and no revenue increases, that will mean that the combination of all the deficit-reduction measures, which began in 2011, would include five times as much in spending cuts as revenue increases. The President is calling for any deficit reduction from this point on to include an equal share of spending cuts and revenue increases. But even this would mean that the combination of all these deficit-reduction measures would include twice as much in spending cuts as revenue increases.

A fair approach would be for Congress to replace the sequester entirely with new revenue. There are several reform options described in CTJ’s working paper that would raise hundreds of billions of dollars over the coming decade.

Some of these reform options could be enacted on their own, like President Obama’s proposal to limit the tax savings of each dollar of deductions and exclusions to 28 cents. Others are more likely to be part of a larger tax reform, like ending the rule allowing corporations to “defer” (not pay) U.S. taxes on their offshore profits or ending the provision in the personal income tax exempting capital gains at death. All of these reforms would end or cut back tax breaks that are hugely beneficial to extremely wealthy families and large corporations but not to low- and middle-income families.

After Fiscal Cliff Deal, Warren Buffett Still Pays Low Tax Rate, GE Still Avoids Taxes

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Perhaps the most striking thing about tax policy in 2012 is that it featured a presidential campaign focused on taxes and then ended with major legislation that resolved none of the issues raised in that campaign.

Even after the fiscal cliff deal (the American Taxpayer Relief Act of 2012) takes effect, Warren Buffett and Mitt Romney will still pay a lower effective federal tax rate than many relatively middle-income working people. Their effective tax rate may be five percentage points higher (since the capital gains and stock dividends that wealthy investors live on will be taxed at a top rate of 20 percent rather than 15 percent) but this does not eliminate the unfairness that Warren Buffett highlighted.

Meanwhile, the tax loopholes that allow profitable corporations like General Electric (GE) to avoid taxes were actually extended as part of the fiscal cliff deal. The law includes a package of provisions often called the “extenders” because they extend several special interest breaks for one or two years each. The extenders officially only add $76 billion to the costs of the law, but a recent CTJ report explains how their cost is likely to be far greater because Congress has shown a desire to extend these provisions again each time they expire.

One of the “extenders” is the one-year extension of “bonus depreciation,” which allows companies to write off the costs of equipment purchases far more quickly than those assets actually wear out. When these purchases are debt-financed, the result is that these investments have a negative effective tax rate, meaning the investments are actually more profitable after-tax than before tax. While corporations don’t usually reveal exactly which loopholes facilitate their tax avoidance, this one is certainly among those used effectively by GE and the other corporate tax dodgers identified in CTJ’s reports.

However, another tax break extended in the fiscal cliff deal actually has been identified by GE, in its public filings with the SEC, as having a significant effect in lowering its effective tax rate. This is the so-called “active financing exception,” which was extended through 2013 (and retroactively to 2012, since it had expired at the end of 2011). A CTJ report from 2012 explains that this break essentially makes it easier for U.S. corporations with income from financial activities to shift their profits to offshore tax havens.

The New York Times article from March 2011 that famously exposed GE’s tax avoidance explained that the head of GE’s 1,000-person tax department literally “dropped to his knees” in the House Ways and Means office as he begged for — and won — an extension of the active financing exception.

One thing is clear: Despite what Senator McConnell says, the tax debate is not over. There is a need for real tax reform, which means eliminating loopholes and ending the practice of extending “temporary” loopholes every couple years.  

CTJ Reports Examine Revenue and Distributional Effects of the Fiscal Cliff Deal

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The legislation signed into law by President Obama on Wednesday makes permanent 85 percent of the Bush-era income tax cuts and 95 percent of the Bush-era estate tax cut still in effect in 2012. It also directs 18 percent of its income and estate tax cuts to the richest one percent of Americans — and directs an identical 18 percent of the tax cuts to the poorest 60 percent of Americans.

These are some of the findings of two reports from Citizens for Tax Justice. One examines the revenue impacts of the fiscal cliff deal and explains why the White House claims the bill saves $620 billion over ten years even while it is official estimated to reduce revenue by $3.9 trillion over ten years. The report also explains that the law includes a package of provisions known as the “extenders” because they extend several special-interest tax breaks for two years, and that these provisions are likely to be extended again in the future and eventually offset the revenue saved from allowing high-income tax cuts to expire.

The second CTJ report examines the distributional effects of the law. It finds that while the law will give the middle fifth of Americans an average tax cut of $880 this year, which is equal to 2.0 percent of their income. At the same time, the law will give the richest one percent of Americans an average tax cut of $34,190, equal to 2.3 percent of their income.

Read the two reports:

Revenue Impacts of the Fiscal Cliff Deal

Poorest Three-Fifths of Americans Get Just 18% of the Tax Cuts in the Fiscal Cliff Deal

Also see CTJ’s New Year’s Day report:

The Biden-McConnell Tax Deal Would Save Less than Half as Much Revenue as President Obama's Original Tax Proposal

Extending Tax Cuts for Income Above S250,000 is Wrong Solution to Fiscal Cliff

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Since he first began running for President, Barack Obama has consistently proposed to extend almost four-fifths of the tax cuts first enacted under President George W. Bush, proposing to allow the expiration of just the one fifth of the tax cuts that go solely to the richest two percent of Americans. This was President Obama's proposal to extend the tax cuts for income up to $250,000 for married couples and up to $200,000 for singles (PDF). To extend any more of these tax cuts for the richest two percent of Americans is entirely unwarranted and fiscally irresponsible.

Our latest report estimates the revenue impact of the President's proposal to extend the Bush tax cuts for income up to $250,000/$200,000 and to reclaim a fraction of the lost revenue by limiting the savings from deductions and exclusions for high-income Americans. Compared to what would happen if Congress extends the Bush income tax cuts and makes no other changes, this would save $1.4 trillion. Compared to what would happen if Congress does nothing and lets the Bush tax cuts expire, this would lose $2.4 trillion.

That report also illustrates the impact of President Obama's recent proposal which became public on December 17, and which is the same except that the income threshold for higher tax rates on ordinary income would be raised from $250,000/$200,000 to $400,000. If the limit on deductions and exclusions is still included, this would save 85 percent as much revenue as the President’s original, $1.4 trillion proposal. If the limit on deductions and exclusions is not included, the report finds this would save just 49 percent as much as Obama’s original, $1.4 trillion proposal.

Today, several news reports indicate that the deal taking shape in Washington would raise less revenue than the President's December 17 proposal. There are reports that the threshold for higher income tax rates would be $400,000 for singles and $450,000 for married couples, and that this $450,000/$400,000 threshold would also apply to higher income tax rates on capital gains and dividends. (The President’s December 17 proposal would still have allowed higher rates to go into effect for capital gains and dividends for income in excess of $250,000/$200,000.)

Further, it is unclear whether or not any limit on deductions and exclusions is included in the deal taking shape now. This means that the proposal could save considerably less than half as much revenue as the President’s original, $1.4 trillion proposal.

In addition to this, lawmakers want to address the Bush-era estate tax cuts, which also expire tonight. The President has long proposed to make permanent the estate tax cuts that were in effect for one year, in 2009. CTJ has criticized this proposal because it asks only a tiny fraction of the wealthy to pay any estate tax. (CTJ’s figures show that only 0.3 percent of deaths in 2009 resulted in federal estate tax liability.)  There are reports that the deal taking shape would extend an even larger estate tax cut, one much closer to the estate tax cut that was in effect for 2011 and 2012.

CTJ’s most recent reports on other components of the New Year’s Eve tax deal taking shape are online at:

Capital Gains and Dividends
Alternative Minimum Tax (AMT)
EITC and Child Tax Credit
State-by-State figures on Bush tax cuts

Congress should reject any deal that extends more of the Bush income tax cuts or Bush estate tax cuts than President Obama originally proposed to extend. America would be better off if Congress simply does nothing and allows the Bush income and estate tax cuts to expire completely. This would merely allow the tax rules to revert to those in place at the end of the Clinton administration. Given the economic prosperity experienced at the of the Clinton years, it’s difficult to believe that this more fiscally responsible approach will have a significant adverse effect on our economy. Of course, Congress should act to stimulate the economy so that the private sector creates more jobs, but almost any measure would be more effective in accomplishing this goal than extending more of the disastrous Bush tax cuts for the rich.

Small Business Owners Push Back Against Anti-Tax Agenda

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For years, groups like the US Chamber of Commerce and the National Federation of Independent Business (NFIB) succeeded in portraying the consensus position of the “small business community” as staunchly favoring lower tax rates on top income earners and corporations. The tax debate surrounding the so-called “fiscal cliff” has exposed the myth that these groups actually represent small businesses and shows that many of these large national groups have very different interests at stake.

The biggest pushback in recent days against the anti-tax agenda represented by the Chamber and NFIB has come from groups of small business owners who are fed up with having the position of “small business owners” misrepresented. In recent days, thousands of business owners and executives have signed on to a letter calling for the expiration of the Bush tax cuts for those making over $250,000 and arguing that only a small fraction of the wealthiest small business owners would even be affected by allowing this to occur. In addition, many small business leaders have signed on to a letter calling for corporations to contribute more to reduce the deficit as part of the fiscal cliff deal. The letter also calls for an end to the offshore tax loopholes that give larger multinational corporations a tax advantage over small businesses.

The reason so many small business owners are raising their voices is because they believe that raising revenue is critical to stopping spending cuts in education, health care, and infrastructure that are crucial to building a strong economy. Backing this up, a poll of small business owners by the Small Business Majority found that, by a 2 to 1 margin, small business owners believed that spending cuts would do more harm to the economy than higher taxes on the wealthy. As Brian McGregor, owner of the Silver Dollar Saloon in Montana and a supporter of allowing the tax cuts for the wealthiest to expire, put it, “What my business needs is customers – not more tax cuts for the rich.”

The growing opposition of small business owners has not done much to change the position of NFIB and the Chamber, which continue to push for more tax cuts for the wealthy and corporations. This is not all that surprising, since both groups have historically been more interested in promoting the Republican Party than the real preferences of the small business community. In fact, during 2012 the Chamber spent over $32 million (98% of its total spending on electioneering communications) supporting Republican candidates, while the NFIB spent $4 million (100% of its total spending on electioneering communications) supporting Republican candidates. This is especially striking considering that less than half of small business owners identify as Republican.

The intransigence of the NFIB and Chamber has become even more clear as other big business backed groups like the Business Roundtable and Fix the Debt have begun calling for a fiscal cliff deal that includes revenue increases. To be fair, however, many critics suspect that the Business Roundtable and Fix the Debt groups messaging may have more to do with cutting a backroom deal to lower corporate taxes, than in protecting small businesses. In fact, one recent study using data from Citizens for Tax Justice found that the companies backing the Fix the Debt campaign could directly benefit to the tune of $134 billion if such a deal included a move to a territorial tax system, while at the same time further disadvantaging small businesses that do not have offshore earnings.

The more small business owners speak out for themselves, rather than allowing corporate-backed national organizations to speak for them, the more lawmakers will realize that small businesses demand robust government investments and are hurt when multinational corporations are allowed to escape paying their fair share in taxes.

A new report from Citizens for Tax Justice finds that the “Plan B” tax proposal that House Speaker John Boehner plans to put to a vote in the House of Representatives would allow the richest one percent of Americans to pay $36,000 less in federal income taxes, on average, than they would pay under President Obama’s most recent proposal. 

Under Plan B, the poorest three-fifths of Americans would pay more in federal income taxes, on average, than they would pay under the President’s latest plan.

Read the report

The latest tax proposals from Speaker Boehner and President Obama show that their respective positions on taxes have moved very slightly towards each other.

President Obama’s major proposals for the personal income tax would have, in their original version, saved $1.4 trillion compared to what would happen if Congress extended the Bush tax cuts and made no other changes to the tax code. As illustrated in the table on the following page, the President’s latest proposal, which became public December 17, would save 85 percent of that amount. Meanwhile, Speaker Boehner’s Plan B would save 24 percent of that amount.

Compared to current law (compared to what would happen if Congress does nothing), both of these proposals would lose trillions of dollars over the next decade.

Fiscal Chutes and Ladders - It's Funtaxic!

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Chutes and Ladders is more than simply a hilarious visual metaphor for the gargantuan decisions currently being deliberated in Washington. Indeed, CTJ is using this icon of family fun to help educate the American public about the historic and morally consequential political moment we are witnessing as the Beltway budget drama approaches its climax.

Fiscal Chutes and Ladders is educational fun... for the whole country!

View Full Size Version of Graphic

View the PDF Version


No Dancing on Grover's Grave

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A cynic might think it’s a little bit of theater we’re witnessing, political pantomime deliberately staged to make Republicans look like they’ve gone all reasonable and are willing to raise taxes.  Others see this week’s headlines as the meticulously orchestrated end game in a 30-year strategy laid out by Grover Norquist and his Americans for Tax Reform.  More likely it’s just a rush among journalists to tell a big story: Republicans are renouncing their fealty to Grover’s no-tax pledge and are ready to support tax hikes.

The media loves a good story, and this one is the stuff of drama. An awkward little man who rose to power as leader of an anti-government movement faces sudden mutiny, with his followers peeling off and his authority in question. In this story, Grover Norquist is part spurned lover and part emperor with no clothes.

We’re not buying it. Much as we love the idea of Grover losing his clout and credibility, there’s no evidence his followers (mostly Republicans, a few Democrats) have changed their minds about taxes. Even when they make noises about abandoning the pledge and embracing new revenues, they are nonetheless hewing to Norquist’s two-part pledge. Just listen to a few who’ve been making news with their allegedly new-found freedom:

Senator Bob Corker:I’m not obligated on the pledge.  I made Tennesseans aware, I was just elected, the only thing I’m honoring is the oath I take when I serve, when I’m sworn in this January.” But, “[my] proposal includes pro-growth federal tax reform, which generates more static revenue… by capping federal deductions at $50,000 without raising tax rates.

Senator Lindsey Graham: “I agree with Grover — we shouldn’t raise rates — but I think Grover is wrong when it comes to we can’t cap deductions and buy down debt…. I will violate the pledge, long story short, for the good of the country, only if Democrats will do entitlement reform.

Senator Saxby Chambliss: "Times have changed significantly, and I care more about my country than I do about a 20-year-old pledge…. If we do it (Norquist's) way, then we'll continue in debt." But (he tweeted), “I’m not in favor of tax increases. I’m in favor of significant tax reform 2 lower tax rates & generate additional revenue through job growth.

Rep. John Boehner: “….[R]aising taxes on the so-called top two percent – half of those people are small-business owners that pay their taxes through their personal income tax filing every year. The goal here is to grow the economy and to cut spending.  We’re not going to grow the economy if we raise tax rates on the top two rates.And, “[w]e're willing to put revenue on the table as long as we're not raising rates.

Rep. Tom Cole:  “I think we ought to take the 98 percent deal right now. It doesn’t mean I agree with raising the top two. I don’t.And, “I signed that pledge; I'm honored to do it. I don't think in this case we would be breaking it by making what are temporary tax cuts permanent....I want to make all of them permanent, quite frankly.

None of these Republicans characterized as leading the mutiny against Grover’s no-tax pledge is getting anywhere near raising taxes, in both senses that the pledge mandates.  It is often forgotten that support for making all the Bush tax cuts permanent amounts to another rate cut because by law, those rates are scheduled to all go up on January 1, 2013.  They may cap a deduction here or there, but that will be outweighed by the generous Bush era rate cuts they (and to a large extent, the President) promise for 2013.  And that’s exactly what the pledge they’ve all signed spells out:

ONE, oppose any and all efforts to increase the marginal income tax rates for individuals and/or businesses; and
TWO, oppose any net reduction or elimination of deductions and credits, unless matched dollar for dollar by further reducing tax rates.

Increasingly, too, the Republican House leadership is demanding revenue cuts. Where are the President’s cuts? What are the Democrats’ plans for entitlement reform? This is what Speaker Boehner is tweeting several times a day. And his lieutenant, Eric Cantor, remains clear his party is opposed to tax rate increases.

An organization like Americans for Tax Reform doesn’t spend  upwards of $24 million in one election cycle if it’s not serious about getting its way, and Grover Norquist is a serious man.  As he told Politico just this week:

“I want pro-taxpayer candidates to survive and thrive….. My goal is to have the Democrats also all take the pledge…. I'm not planning on losing the tax debate we're having right now, but the tax issue will be more powerful in 2014 and '16 than today.  It gets more powerful.”

Let’s don’t kid ourselves or help the deep pocketed anti-tax lobbying machine peddle more myths.  It’s a testament to Norquist’s thirty-year effort that four years into an historic economic crisis, a couple of closed loopholes looks like a win for the good guys.  It’s not a win. Let’s view it instead as a chink in the armor, though – and redouble our own efforts.

Image of Norquist courtesy Liberaland.

Election Day Polls Empower President, Congress To Raise Taxes

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According to the official exit polls on Election Day a combined 60 percent of voters support increasing taxes, with 47 percent supporting an increase in taxes on those making over $250,000 and 13 percent supporting a tax increase on everyone. Barely one third of voters think no one’s taxes should be increased. This support for higher taxes reinforces the fact that only small minority (21 percent) support the disastrous spending cuts-only approach to deficit reduction, as represented by the debt ceiling deal.

Making the voters' views even more clear, an election night poll by Hart Research found that 62 percent of voters said that they were trying to send the message that the Congress should make sure the wealthy pay their fair share in taxes. In addition, the Hart poll found that 73 percent of voters said that Medicare and Social Security benefits should be protected from cuts.

This is important: while lawmakers in DC have been focused on deficit reduction over the last couple years, most voters do not share their concern. In fact, 59 percent told pollsters on Election Day that unemployment was the most important economic issue facing the country, which is almost four times the percentage of voters that said the deficit was the most important economic issue.

The results of these Election Day polls mirror a plethora of public polling over the past couple of years on how to handle deficit reduction. Earlier this year, for example, a Washington Post-ABC News poll found that as many as 72 percent of Americans support increasing taxes on millionaires. Making the public preference clear, former Reagan official Bruce Bartlett compiled 19 different polls during the debt ceiling fight last year showing there is wide support among Americans for raising taxes to deal with the deficit.

Taken together, the Election Day polls once again reveal the substantial gap between the kinds of policies that the public would like Congress to pursue and the policies it’s actually pursuing. To start, the fact that the public is more concerned about the health of the economy than about deficit reduction should make Congress reverse course and actually increase government spending and investment, which is several times more stimulative to the economy than making the Bush tax cuts permanent, i.e. permanently cutting taxes. Second, Congress should recognize that to the extent that deficit reduction is needed over the long term, the public heavily favors a balanced approach that includes significant immediate revenue increases and spending cuts, rather than the spending cuts-only approach favored by Congress in recent years. Voters told Washington to get real about taxes because voters themselves are realistic about revenues. The message couldn’t be more clear.

Top Ten Tax Moments from the VP Debate

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The first and only Vice Presidential Debate of the election season between Vice President Joe Biden and Wisconsin Congressman Paul Ryan featured a spirited discussion over their competing visions for tax policy. While watching, we began to genuinely wonder if Biden had spent time reading Citizens for Tax Justice (CTJ) materials considering that time and again he made precisely the points CTJ has been making for years. Ryan, on the other hand, repeatedly misrepresented the tax system and the two tickets’ tax plans.

Below we breakdown the most important tax policy moments in the debate:

1. Biden Highlights the Regressiveness of Extending All the Bush Tax Cuts

While the presidential candidates largely ignored the Bush tax cuts in their debate last week, Biden put them front and center during the VP debate when he pointed out that Romney and Ryan are proposing the “the continuation of a tax cut that will give an additional $500 billion in tax cuts to 120,000 families” over the next ten years, compared to the Obama Administration plan for the Bush tax cuts.

Biden’s formulation here is a little confusing but not incorrect. Of course, President Obama proposes to allow the Bush income tax cuts to expire for income in excess of $250,000 for couples and in excess of $200,000 for singles, and only 2 percent of taxpayers would lose any portion of their Bush income tax cuts under this approach. The administration has stated that this would cost $849 billion less, over ten years, than extending the Bush income tax cuts for all income levels, while our own estimate is that it would cost $887 billion less over ten years. Pretty close.

Biden is focusing specifically on the part of this figure that would benefit the richest 120,000 families, apparently based on figures from the Tax Policy Center. Our own calculations essentially back up Biden’s point. We estimate that the richest taxpayers with incomes exceeding $2 million in 2013 (the richest 135,000 families in 2013) would receive about 57 percent of the income tax cuts that would otherwise expire under Obama’s approach, which comes out to $507 billion over ten years.

2. Ryan Promises the Mathematically Impossible

In defending Romney’s tax plan, Ryan reiterated their ticket’s commitment to “lower tax rates across the board” and to “close loopholes,” while simultaneously sticking to the “bottom lines” of not raising the deficit, not increasing taxes on the middle class or lowering the share of income that is borne by high-income earners. But Ryan is defending a plan that CTJ has found is mathematically impossible. Even if Romney and Ryan eliminated all the tax expenditures for wealthy taxpayers that they have put on the table, our analysis has found that their across-the-board tax cuts would still require them to give an average tax break of $250,000 to individuals making over $1 million, which would violate their pledge not to lower the share of taxes borne by high-income earners.

Ryan said during the debate that there are six studies showing that their plan is possible, but Biden correctly pointed out that even the studies Ryan cites conclude that the plan would require increasing taxes on taxpayers who do not have particularly high incomes.

3. Biden Calls Ryan Out for Taking Capital Gains Tax Breaks Off the Table

One of the major reasons that the Romney campaign’s tax plan would be incapable of eliminating enough tax expenditures to add up is that Romney has specifically said that he would keep the tax breaks for capital gains and stock dividends. During the debate, Biden noted that this shows the lack of seriousness in Romney’s loophole-targeting approach because Romney has exempted the “biggest loophole” of all - the “capital gains loophole.”  As CTJ pointed out in a recent report, ending the capital gains tax preference would tremendously improve fairness, raise revenue, and simplify the tax code in one fell swoop. 

4. Ryan and Biden Dispute the Definition of Small Businesses

Repeating Romney’s line on small businesses from the first presidential debate, Ryan claimed that Obama is going to raise taxes on small businesses and kill 710,000 jobs by doing so. The reality, however, is that only the 3 to 5 percent richest business owners (individuals who could hardly be called “small business” owners) would lose any of their tax breaks, and the job loss claims are complete malarkey.

5. Biden Takes on Romney and Ryan’s Commitment to Grover Norquist

During the first presidential debate, Romney reiterated his pledge to not raise a single penny in revenue, even if the revenue was raised as part of a deal that included $10 in spending cuts for every $1 in revenue increases. Biden took issue with this commitment saying that “instead of signing pledges to Grover Norquist not to ask the wealthiest among us to contribute to bring back the middle class, they should be signing a pledge saying to the middle class we're going to level the playing field.”

Biden is absolutely right that we need to reject the extreme anti-tax approach taken by individuals like Grover Norquist and instead embrace a balanced approach to deficit reduction. The question for Romney is when he will recognize that a balanced approach is not only what the American people want, but also what business experts support as well.

6. Ryan Misrepresents History of 1986 Tax Reform

Responding to the question of what specific loopholes he and Romney are proposing to close, Ryan attempted to dodge the question by arguing that they should not lay out specific loopholes they want to close because doing so would prevent them from following the model that allowed Ronald Reagan and Tip O’Neill to produce the 1986 tax reform. The reality, however, as recounted by CTJ Director Bob McIntyre – whose work was integral to the passage of the 1986 reform – is that Reagan’s Treasury Department released a detailed tax reform plan explicitly laying out exactly which tax expenditures the Administration would like to see closed. In other words, the 1986 tax reform experience actually proves the opposite of what Ryan is saying about vagueness being some kind of asset.

7. Biden Revives Romney’s 47% Remark

Continuing his efforts to upend tax myths during the debate, Biden took issue with Romney’s earlier statement that 47 percent of Americans aren’t paying their fair share, and he noted that many middle income people actually “pay more effective tax than Governor Romney in his federal income tax.” Biden was right to push back against the notion that any Americans are not contributing their fair share since, on average, any American’s share of total taxes is already roughly equal to their share of total income. In addition, CTJ has found that individuals making around $60,000 do in fact pay an effective federal tax rate of 21.3% on average, which is a lot compared to Romney’s tax rate of 14% in 2011.

8. Ryan Claims Obamacare Includes 12 Middle Class Tax Hikes

During the debate, Ryan asserted, “Of the 21 tax increases in Obamacare, 12 of them hit the middle class.” The reality, according to a CTJ analysis, is that 95 percent of the tax increases included in the healthcare reform legislation would be borne by either companies or households making over $250,000. Adding to this, Ryan’s specific point about the 12 tax provisions is mostly false because 4 of the 12 provisions are not really taxes at all.

9. Biden Stumbles on the Primary Cause of Great Recession

The only significant tax policy stumble for Biden came when he argued that Ryan helped create the Great Recession by “voting to put two wars on a credit card, to at the same time put a prescription drug benefit on the credit card, a trillion-dollar tax cut for the very wealthy.” The problem of course is that the Great Recession was due primarily to a financial crisis, not some sudden crisis in government spending and deficits.

While extraordinary increases in deficit spending and tax cuts for the rich during President George W. Bush’s presidency, (which Ryan did vote for), did not cause the recession, they certainly caused an explosion in the national debt. In fact, if continued, the Bush tax cuts and the cost of the wars will account for nearly half of the public debt by 2019.

10. Ryan Wrong on How Much Revenue Could Be Raised by Taxes on the Rich

In an attempt to discredit the idea that allowing the Bush tax cuts to expire for the wealthiest Americans will help fix the deficit, Ryan argued that “if you taxed every person and successful business making over $250,000 at 100 percent, it would only run the government for 98 days.” To start, the entire premise of this argument is bogus because the Obama administration is not proposing a revenue-only approach to deficit reduction; in fact it has already signed into law over $2 trillion in spending cuts. In addition, Ryan ironically failed to discern, even by his own calculations, that 98 days worth of government spending would be more than enough to close the projected budget deficits and would be more than enough to pay down the national debt in the coming years.

Debate Debrief: Romney and Obama Compare Tax Policies

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During the first presidential debate of this election season, President Barack Obama and former Governor Mitt Romney’s discussion focused primarily on what is arguably the most important issue of this election: tax policy. Over half of the debate was spent on the intricacies of tax policy, from the treatment of small businesses to the precise revenue cost of trillions of dollars in proposed tax cuts.  Here we offer some criticism and context.

Size of the Candidates’ Tax Cut Plans

Early in the debate Obama explained that Romney’s “central economic plan calls for a $5 trillion tax cut – on top of the extension of the Bush tax cuts.” Romney denied this, saying “I don’t have a $5 trillion cut. I don’t have a tax cut of the scale that you’re talking about.” Romney added that his plan would not “reduce the share of taxes paid by high-income people” and that it would “provide tax relief to people in the middle class.”

The truth is that Romney isn’t proposing a $5 trillion tax cut, he’s proposing to cut taxes by over $10 trillion over ten years. Romney proposes new tax cuts costing around $500 billion a year (according to the Tax Policy Center) on top of making permanent all the Bush tax cuts, which by themselves would cost $5.3 trillion over a decade.

Romney is proposing to make up some of the $5 trillion in additional tax cuts by closing loopholes, eliminating deductions and other tax expenditures, but he has kept his plan secret so far and has refused to name even a single tax expenditure he would eliminate or loophole he’d close.

An analysis by Citizens for Tax Justice found that even if millionaires were forced to give up all the tax expenditures that Romney has put on the table, his tax plan would still give a tax break of at least $250,000 on average for individuals making over $1 million. That is, he simply cannot back up his assertion that he is “not going to reduce the share of taxes paid by high- income people.” And if he really is going to make up the revenues we’ll lose to his rate cuts, taxes would have to go up for other taxpayers.

Throughout the debate, Romney referred to several studies showing that his plan is mathematically possible (a low standard to meet to be sure), but the reality is that the studies he’s referring to aren’t all actual studies, nor do they fully support his plan.

It’s important to note that while Romney’s tax plan is the height of fiscal irresponsibility, Obama himself is proposing to extend most of the Bush tax cuts, at a cost of $4.2 trillion over the next ten years. The President assured the audience that he wants to “continue the tax rates - the tax cuts that we put into place for small businesses and families.  But,” he continued, “for incomes over $250,000 a year that we should go back to the rates that we had when Bill Clinton was president,” that is, the pre-Bush tax cuts rate.

CTJ has analyzed Obama’s plan and found that extending 78 percent of the Bush tax cuts will lose far too much revenue in the long run. The President’s plan would extend the tax cuts for the first $250,000 a married couple makes. We also found that married couples making between $250,000 and $300,000 would still continue to enjoy, on average, 98 percent of the Bush tax cuts. Fewer than two percent of taxpayers would lose any part of the Bush tax cuts under Obama’s plan, so it’s hardly a bold proposal for reducing the deficit and restoring urgently needed revenues.

In other words, neither presidential candidate showed on Wednesday night that they have fully come to terms with the fact that the United States cannot afford continuing to hand out trillions of dollars in tax cuts.

Long Term Deficit Reduction Plans

At a Republican presidential debate over a year ago, Romney joined with all the other candidates in saying that they would reject any deal that raised tax revenues, even one that would include $10 in spending cuts for every $1 in additional tax revenue – ten times more in crippling spending cuts than tax increases. When pushed by the moderator during Wednesday’s presidential debate, Romney stood firm, saying that he had “absolutely” ruled out the possibility of raising additional revenue to reduce the deficit.

The Simpson-Bowles Commission plan to balance the budget, which Romney praised last night, however, requires a ratio of $1 in spending cuts to $1 in revenue increases (compared to the budget baseline that Obama and many members of Congress use). Ironically, by seemingly embracing Simpson-Bowles, Romney put himself to the left of Obama, whose own long term deficit reduction plan actually cuts fewer taxes and less spending than Simpson-Bowles. As Obama explained in the debate: “the way we do it is $2.50 for every cut, we ask for a dollar of additional revenue.”  (And he repeatedly points out, of course, that his health care legislation will slow the deficit’s growth by reducing Medicare costs.)

Neither candidate is acknowledging the elephant in the room. In the long-run, what they really have to do to fix the budget deficit is just to stop extending most or all of the Bush tax cuts, or find a way to pay for those parts they do extend.

The Committee for a Responsible Federal Budget, an organization “committed to educating the public about issues that have significant fiscal policy impact” and running several programs to address the budget deficit, issued a working paper last week calling for corporate tax reform that has no impact on the budget deficit.

The paper actually does a good job of laying out the issues and the options, explaining that a corporate tax rate reduction could be enacted without increasing the budget deficit so long as lawmakers choose to reduce or eliminate tax expenditures (tax loopholes and tax preferences) to offset the costs of lowering the rate.

But why would a deficit-hawk group not call for a more ambitious goal than simply avoiding an increase in the deficit? Doesn’t everyone agree that we should (eventually anyway) reduce the budget deficit? 

Part of the problem may be that there is a lot of misinformation about the corporate income tax. Citizens for Tax Justice has as fact sheet and a report explaining why Congress should enact a corporate tax reform that is revenue-positive (that raises tax dollars). They address some of the common fallacies about corporate taxes.

For example, corporate leaders and their lobbyists sometimes claim that the corporate tax is ultimately borne by American workers, who pay the price when the tax pushes corporations offshore. This can be disproven by the research that finds the vast majority of the corporate tax to be borne by the owners of corporate stocks and business assets and by the common sense observation that corporations would not bother lobbying Congress to lower their taxes if they did not believe their shareholders were the people ultimately paying them.

CTJ is not alone in believing corporations should contribute more. Last year, a letter we circulated calling for revenue-positive corporate tax reform was signed by 250 organizations, including national groups and state-based groups in every state, before being sent to every member of Congress. The letter explains,

Some lawmakers have proposed to eliminate corporate tax subsidies and use all of the resulting revenue savings to pay for a reduction in the corporate income tax rate. In contrast, we strongly believe most, if not all, of the revenue saved from eliminating corporate tax subsidies should go towards deficit reduction and towards creating the healthy, educated workforce and sound infrastructure that will make our nation more competitive.

This year, Americans for Tax Fairness, the campaign formed by several national organizations (including CTJ) to raise awareness about revenue issues, decided that one of its basic principles is that “any corporate tax reform should require the corporate sector to contribute more in federal income-tax revenue than it does now, not less.”

Business Experts Not as Anti-Government as You Think

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A new survey of 250 economists in the business community by the National Association for Business Economics released on Monday revealed their strong support for increasing fiscal stimulus in the short term and taking a balanced approach to deficit reduction (including revenue increases as well as spending cuts) over the long term. This agreement among business economists stands in direct contrast to many conservative lawmakers in Washington, who increasingly favor spending cuts in the short term and actually decreasing taxes over the long term.

Of the economists surveyed, 67 percent favored maintaining or even increasing the current level of fiscal stimulus in 2013. Moving in the opposite direction, Congress actually enacted $984 billion in spending cuts (known as sequestration) last year, which go into effect starting in 2013; a full three quarters of the economists polled outright oppose allowing those sequestration cuts to take effect.

Although a majority of the business economists did favor extending tax cuts in 2013 to help stimulate the economy (although there was no majority for making all the tax cuts permanent), the reason more of them favor preserving government spending is likely explained by the fact that government spending typically has a much greater positive impact on economic growth than tax cuts.

Turning to the long haul, a full 90 percent of those surveyed believe that Congress should take a balanced approach to deficit reduction, meaning a combination of tax increases and spending cuts. And while there is near universal consensus among these economists for tax increases, neither the Democratic nor Republican party platforms support increasing tax revenue as part of a balanced approach to deficit reduction. Both parties instead call for reducing revenue by trillions of dollars (compared to what our tax system would collect if the tax cuts were all allowed to simply expire).

While the business community is often portrayed as being hindered by budget deficits and higher taxes, this survey reveals that they actually favor higher budget deficits in the short term and higher taxes over the long term. It’s time Congress begins listening to the actual business community rather than the anti-tax activists who pretend to speak for them.

CTJ Testifies Before the Congressional Progressive Caucus about the Need for Revenue

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CTJ's legislative director testified before the Congressional Progressive Caucus on the role of revenue in addressing America's economic and fiscal problems.

Read the written version of the testimony, which explains in detail each point that he made today:

- Tax cuts are usually an ineffective tool to spur job creation.
Congress's devotion to tax cuts is making deficit-reduction impossible.
- The expiring tax cuts that help people truly in need are a tiny fraction of the overall package of tax cuts and are no reason to extend all of them.
- Most of the "grand bargains" being discussed to address the budget deficit (including the Simpson-Bowles plan) actually reduce revenue compared to current law (that is, compared to what would happen if Congress did nothing).
- The richest Americans can afford to pay more to support the society that made their wealth possible, and claims that the rich are already disproportionately taxed are untrue.
- One way to get the rich to pay their fair share is to get corporations to pay more taxes.

US Chamber Backed Study All Wrong on Tax Cuts

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A new study by Ernst and Young is grabbing headlines by purporting to show that President Obama’s plan to end most of the Bush tax cuts for the richest 2% of Americans would cause job losses over the long term. This study is highly suspect however because it makes methodological assumptions that are out of line with other independent studies, which actually show that  the expiration of the Bush tax cuts would lead to increased economic growth over the long term.

As the White House explains, the study assumes an entirely unrealistic drop in the labor supply by medium and high income earners due to higher tax rates. Their expected labor supply response is nearly 10 times higher than the non-partisan Congressional Budget Office (CBO) assumes when it makes similar estimates on labor supply effects

In addition, the Ernst and Young study makes the bizarre assumption that all of the additional tax revenue will be used for additional spending, rather than for deficit reduction. While it does not explain any reason for this assumption, the effect of it is to eliminate the possibility that the additional revenue will increase private investment by reducing the deficit’s “crowding out” effect.

When the non-partisan CBO performed a study in January 2012 on the economic effects of allowing the Bush tax cuts to expire using its much more robust assumptions, it found that the extension of all of the Bush tax cuts and other expiring measures would reduce Gross Domestic Product (GDP) by as much as 2.1 percent in 2022 and would reduce Gross National Product (GNP) by as much as 3.7 percent in 2022.

Building on this, Citizens for Tax Justice’s Bob McIntyre notes that even President George W. Bush’s own Treasury Department, which was “managed by Bush appointees who profess a deep affection for Bush’s tax-cutting policies,” found that over the long term extending the Bush tax cuts would have “essentially no beneficial effect on the U.S. economy at all.”

Ernst and Young’s reliance on a radical methodology, putting it out-of-line with even the Bush Administration’s Treasury Department, is not be much of a surprise considering that the study was paid for by conservative anti-tax groups like the US Chamber of Commerce and the National Federation of Independent Business. Both these groups have proven in the past that they are willing to distort the facts in order to protect the wallets of the country’s wealthiest corporations and CEOs.

Photo of US Chamber Logo via Truth Out Creative Commons Attribution License 2.0


Should Congress Just Go Home?

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If it wanted to, the United States Congress could easily solve the government’s long term fiscal gap by doing what it does best: nothing.

According to a new report from the non-partisan Congressional Budget Office (CBO), the United States federal government debt is projected to peak in 2015 and then drop substantially over the coming decades, all by itself if Congress can just sit on its hands and stop handing out tax breaks to individuals and corporations.

Unfortunately, Republicans are bent on extending all of the Bush tax cuts, which the CBO found earlier this year will add $5.4 trillion to the debt in the next decade alone.

And the Democrats proposals aren’t much better. President Obama’s proposal to extend the tax cuts for the first $250,000 a family makes and the first $200,000 a single person makes would actually result in an extension of 78% of the Bush tax cuts and would cost $3.5 trillion in the next decade. (This is still preferable to House Democratic Leader Nancy Pelosi’s proposal to extend the tax cuts for the first $1 million of income a family makes.)

Congress should, however, increase the budget deficit temporarily if the result will be greater economic growth. But extending the Bush tax cuts would provide very little boost in economic output (compared to proven measures like increased unemployment insurance, food stamps or other types of spending programs).

What Really Would Drive Us Off a Fiscal Cliff

The CBO looked at a few scenarios, including one called the “extend alternative fiscal scenario,” in which Congress extends tax cuts and repeals spending cuts. The result of this one would be the federal debt spiraling out of control, indefinitely. In contrast, CBO’s “baseline scenario,” the scenario in which Congress does nothing, leads to our public debt stabilizing (and slightly falling) after 2015.

Now, there are several people and organizations who’ve made a fetish of reducing the deficit and that focus on spending cuts as the path to a balanced budget. One of the most famous, of course, is Pete Peterson, who runs a foundation, organizes national tours and subsidizes the Committee for a Responsible Federal Budget all in the name of his definition of fiscal responsibility, which means cutting Social Security and Medicare, for starters.  Peterson recently contributed an astonishing $458 million to his own foundation, and hosted a recent Fiscal Summit which featured Bill Clinton, John Boehner, Tim Geithner, Paul Ryan and more journalists than we want to think about.

And indeed, much of the media has accepted this distorted vision of our fiscal situation. Consider  a recent news headline about the same CBO report: “US Risks Fiscal Crisis Without Budget Changes, CBO Says.” The CBO actually said the exact opposite.

Republican Speaker of the House John Boehner announced Tuesday that he will refuse to approve any increase in the federal debt ceiling without matching spending cuts — essentially threatening to cause the U.S. to default on its debt obligations. During the same speech, he also announced that he would advance a bill to extend all the Bush tax cuts — which would increase the national debt by hundreds of billions of dollars each year.

The announcement came two months after the Congressional Budget Office (CBO) determined that the federal budget deficit would fall to around $250 billion a year or lower for most of this coming decade if Congress enacts no new laws that increase it. CBO also found that the most significant step that Congress could take to increase the deficit would be extending the Bush tax cuts, which would add about $450 billion to $600 billion to the deficit each year.

This is exactly what Boehner called for on Tuesday, saying Congress should extend the Bush tax cuts for all taxpayers. Under Boehner’s proposal, this would be followed next year by an overhaul of the tax code that eliminates some tax loopholes and tax subsidies, but he made it clear that the tax code should raise no more revenue than it would if the Bush tax cuts were simply made permanent. This would lead to the deficit increase illustrated by the light blue bars in the graph above from CBO’s report.

Bush Tax Cuts Among the Least Effective Ways to Stimulate the Economy

In a sane world, lawmakers would focus on increasing employment until the economy has improved enough for the U.S. to tackle deficit reduction, and many economists agree that almost any measure would do more to stimulate job creation than making the Bush tax cuts permanent.

For example, the noted economist (and former adviser to John McCain) Mark Zandi has concluded that for every dollar of revenue the federal government would lose from making permanent the Bush income tax cuts, U.S. economic output would increase by only 35 cents. On the other hand, he finds that for every dollar the federal government spends on increased food stamps, work share programs, or unemployment benefits, U.S. economic output would increase by $1.71, $1.64, and $1.55 respectively.

Debt Ceiling Needs to Be Raised Because Tax Cuts Increased the Debt

The statutory debt ceiling, first enacted in 1917, was an attempt by Congress to make borrowing easier because lawmakers decided their previous process of approving each bond issued was unwieldy. Little did they know that future Congresses would not increase the ceiling when necessary. Remember, the national debt rises only because Congress already enacted spending increases or tax cuts that could not be paid for, so it’s pretty illogical for the same Congress to then refuse to borrow the money necessary to meet those obligations or even pay holders of existing U.S. debt. This would cause the much-feared default that would send markets into chaos.  

The debt ceiling is like a limit on your credit card – if you could set that limit yourself. What makes the Republican position so bizarre is that it would be as if you spent a thousand dollars on such a credit card and then decided to set your own credit limit at less than $1,000!

Boehner and his allies on the Hill have consistently refused to acknowledge this. For example, they demanded in 2010 that the Bush tax cuts be extended for two years for even the wealthiest taxpayers, increasing the national debt by over half a trillion dollars, along with other tax cuts. (Two thirds of the tax cuts in that “compromise” went to the richest fifth of Americans and a fourth went to the richest one percent.)  

Then, in 2011, House Republicans decried the size of the national debt and threatened to reject a needed increase in the debt ceiling unless federal spending was cut by an equal amount.

2011 Debt Ceiling Deal Worse than Useless

After months of negotiations, President Obama largely capitulated by agreeing to a deal that would cut spending by around $2 trillion but raise no revenue. That 2011 deal allowed the needed increase in the debt ceiling and put in place automatic across-the-board spending cuts on defense and non-defense spending that, it was believed, would encourage Congress to find a more well-thought-out alternative to reduce the deficit.

Boehner’s House Republicans have already tried to undo that deal. The budget plan developed by Republican budget chairman Paul Ryan and passed by the House would cut safety-net programs for the poor while further cutting taxes for the very rich.

Now Speaker Boehner calls for a repeat of the battles over extending the Bush tax cuts and increasing the debt ceiling.

Obama Would Extend “Only” 78 Percent of Bush Tax Cuts

The strange thing is that President Obama’s approach to the Bush tax cuts is not that far off from the GOP approach. While Boehner and other Congressional Republicans demand that all the Bush tax cuts be extended, the President and his allies in Congress propose to extend the Bush tax cuts for the first $250,000 a married couple makes, and the first $200,000 an unmarried taxpayer makes. This comes to about 78 percent of the cost of extending the tax cuts entirely. If anything, President Obama’s proposal would extend far too many of the Bush tax cuts.

Starving the Census in the House GOP Budget: Penny Wise, And Dumb

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House Ways and Means chair Paul Ryan’s budget proposal drew plaudits from some observers who didn’t notice its fundamental weakness: its utter failure to specify which tax “loopholes” it would close to pay for deficit reduction. As we’ve noted in the past, Ryan has a good reason not to disclose details on the tax side of his plan: they don’t add up. CTJ has shown that the Ryan plan’s promised top income tax rate of 25 percent would be insufficient to pay for federal spending at Reagan-era levels, let alone the current decade. 

Now, as details of Ryan’s plan emerge, it’s becoming clearer that its spending cuts are equally illusory, relying on alleged cost-saving measures that would likely cost more in the long term than they help right now. Case in point: Ryan’s plan to eviscerate the Census Bureau and eliminate its American Community Survey (ACS), an annual survey that provides a rapid-response supplement to the decennial Census.

As Businessweek notes, cuts to Census budgets in the past decade prevented Congress and the Obama administration from being able to quickly diagnose the scope of the financial sector’s collapse in 2007.  One expert observed, “The government saved $8 million, but how many trillions were lost as a result of not being able to see the crisis coming?”

Ironically, as the New York Times explains, the ACS itself was actually created as a sensible cost-cutting strategy, designed to provide more timely data than the decennial Census could.  Even the US Chamber of Commerce has vocally opposed further cuts to Census funding because it helps businesses large and small to inform their planning.  Which is why top conservative policy think tanks support the ACS, too.

An adequately funded Census Bureau is the best vehicle we have for finding a path to sustained economic growth for all of us; there is widespread agreement that without its data, we will be flying blind.

Senator Rand Paul: Champion of Secret Swiss Bank Accounts

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Remember the Tea Party? Well, freshman Kentucky Senator Rand Paul is living up to his reputation as the darling of the Taxed Enough Already movement that shook the 2010 elections. 

Rand Paul, son of Libertarian firebrand and GOP presidential candidate Ron Paul, is currently blocking the Senate’s ratification of an amendment to the US-Swiss tax treaty, apparently worried about the right of tax evaders to financial privacy. He says the language is too “sweeping” and might jeopardize US constitutional protections against unreasonable search and seizure. But as one former Treasury Department official said, Paul's move “smacks of protecting financial secrecy for those who may have committed criminal tax fraud in the US.”

The US and Swiss governments renegotiated their bilateral tax treaty as part of the 2009 settlement of the UBS case. That case charged the Swiss mega-bank UBS with facilitating tax evasion by US customers. Under the settlement agreement, UBS paid $780 million in criminal penalties and agreed to provide the IRS with names of 4,450 US account holders.

Before it could supply those names, however, UBS needed to be shielded from Swiss penalties for violating that country’s legendary bank-secrecy laws. The renegotiation of the US-Swiss tax treaty addressed that problem by providing, as most other recent tax treaties do, that a nation’s bank-secrecy laws cannot be a barrier to exchange of tax information.

Many tax haven countries were hiding behind their bank secrecy laws to deflect requests for account holder information, and the IRS and Justice Department have been investigating 11 Swiss financial institutions on criminal charges of facilitating tax evasion.

The Senate must ratify the treaty changes – which is normally a routine procedure.

By blocking the ratification, Senator Paul is holding up the exchange of information in the UBS case (and others) and hampering IRS efforts to crack down on tax evasion by Americans.

Tax evasion by individual taxpayers is estimated to deprive the US Treasury of as much as $70 billion per year (corporate offshore tax avoidance is estimated to cost the Treasury an additional $90 billion per year).

Given Senator Paul’s obvious concern about the deficit, he might have a hard time explaining to honest American taxpayers how he justifies protecting tax evaders with Swiss bank accounts as the deficit grows ever larger.

Photo of Rand Paul via Gage Skidmore Creative Commons Attribution License 2.0

A Missouri Legislator Takes On A Costly Loophole

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Missourians can write off up to $5,000 in federal income taxes paid ($10,000 for married couples) on their state income taxes. Missouri is one of only six states that offer this deduction and it cost the state about $400 million in 2011. Calling it a “costly tax code luxury that produces no noticeable public benefit,” the St. Louis Post Dispatch blasted the deduction in an editorial today.

The editors also note that State Representative Jeanette Mott-Oxford recently offered an amendment to House Bill 1661 which would eliminate the deduction entirely, and that her legislation would significantly offset a crippling budget deficit which is projected to exceed $500 million next year.

In the House floor debate over her amendment, Representative Mott-Oxford cited the Institute on Taxation and Economic Policy’s Topsy Turvy: State Income Tax Deductions for Federal Income Taxes Turn Tax Fairness on its Head. This 2011 report found that 83 percent of the benefit of the deduction goes to the top 40 percent of taxpayers in Missouri while those in the bottom 20 percent receive zero benefit from it.

In spite of its $5,000 cap (which makes Missouri’s deduction somewhat less irrational than other states’), treating federal income taxes as a deductible expense is costing the state eight percent of its income tax revenues and the figure will rise if federal income taxes on the wealthiest filers also rise, according to ITEP’s study.

Her legislation faces a daunting political gauntlet it’s not likely to survive, but Missourians should thank Rep. Mott-Oxford for pushing them closer to the day when this loophole is finally eliminated.

Americans Want Fair Taxes. When Will Washington Listen?

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According to a CNN/ORC poll, one of many polls released around Tax Day 2012, a solid 68 percent of Americans said the current tax system benefits the rich and is unfair to ordinary workers. While this result is consistent with past poll results, a shocking number of lawmakers in Washington seem indifferent to the public’s hunger for more progressive taxes.

For example, one modest step toward tax fairness is the Buffet Rule, which would impose a minimum tax, equal to 30 percent of income, on millionaires in order to ensure that wealthy investors like Warren Buffett or Mitt Romney do not pay a lower tax rate than middle income Americans. Despite the fact that the Buffett Rule is favored by an overwhelming 72 percent of the American public, it was defeated in the US Senate on Monday and will likely not even come up for a vote in the House of Representatives.

Another tax day poll by Reuters/Ipsos found that 60 percent of Americans believe that tax revenues should play some part in deficit reduction efforts, while only 22 percent believe that spending cuts alone are the solution. This poll also reflects Washington’s huge disconnect with the American public as last year’s deficit reduction deal resulted in trillions of dollars of spending cuts and not a cent of additional revenue.

Even in the arena of corporate tax reform lawmakers find themselves at odds with public sentiment. In its tax day polling, Gallup found that 64 percent of Americans believe that corporations pay too little in taxes, meaning that the public would clearly favor revenue-positive corporate tax reform. And yet Republican and Democratic leaders, including the President, are proposing revenue-neutral corporate tax reform instead.

Washington’s conservative intransigence on tax issues is not going unnoticed by the public. Grassroots movements are spreading in protest of the unfairness of our tax system and pushing for progressive change. Lawmakers will find it increasingly difficult to ignore their constituents, especially as it becomes clear that other types of deficit reduction proposals (cuts in Social Security, Medicare, services for children) are far less popular than progressive tax increases.

Progressive Caucus Budget: The Fairest and Most Responsible Budget Proposal in Congress

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On Monday, the Congressional Progressive Caucus (CPC) released its budget proposal, which would allow the expiration of a much larger portion of the Bush tax cuts than would expire under President Obama’s plan.

The CPC budget plan, which Citizens for Tax Justice and other organizations helped prepare, would also

—  end the tax preference for capital gains and stock dividends,

— enact the higher income tax rates for millionaires that were proposed by Congresswoman Jan Schakowsky,

— enact the President’s proposal to limit the value of tax deductions and exclusions to 28 cents for each dollar deducted or excluded,

—  end the rule allowing corporations to “defer” U.S. taxes on their offshore profits,

—  close tax loopholes for oil and gas companies,

—  enact a financial crisis responsibility fee (a bank tax).

These are just some of the reforms included in the CPC budget plan that make sense as tax policy and as ways to address the budget deficit.

Ending the tax preference for capital gains and stock dividends and simply taxing all income at the same rates is key to tax reform. (See a related post.) Ending “deferral” in the corporate income tax is a major reform necessary to end the tax incentives for U.S. corporations to shift jobs and profits overseas.

While President Obama’s budget plan would allow only the top two income tax rates to revert to their pre-Bush levels, the CPC budget would eventually allow some other rates to return to their pre-Bush levels.

There are currently six income tax brackets, and President Obama’s plan would allow the top two rates (the 35 and 33 percent rates) to return to their pre-Bush levels. The CPC budget would go further because it would (eventually) also allow the 28 and 25 percent rates to return to their pre-Bush levels, in 2017 and 2019, respectively.

This is more responsible than President Obama’s approach, which would extend 78 percent of the Bush tax cuts. Despite being more fair and responsible than extending all the Bush tax cuts, Obama’s approach would still manage to give significant tax cuts to the richest one percent and richest five percent.

Despite Claims, House "Centrist" Budget is No Simpson-Bowles Plan On Key Tax Issue

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A budget resolution held out as a “centrist” alternative to the Ryan budget plan is claimed to be based on the recommendations of the President’s fiscal commission (often called the Simpson-Bowles commission, after its co-chairs) but actually maintains the regressive capital gains break that would have been eliminated under the commission’s plan.

A recent report from CTJ finds that ending the tax preference for capital gains would raise more than half a trillion dollars over a decade and that 80 percent of the resulting tax increase would be borne by the richest one percent of taxpayers.

The plan proposed by the Simpson-Bowles commission in 2010 to reduce the budget deficit offered several alternatives to reform the tax code, all of which would eliminate the tax preference for capital gains. There is, in fact, a note under the table on page 29 of the commission’s plan saying each alternative, regardless of rates, “taxes capital gains and dividends as ordinary income.”

In stark contrast, the so-called centrist budget resolution that was introduced Monday specifically calls for "lowering individual and corporate income tax rates across-the-board with the top rate reduced to between 23 and 29 percent unless the top rate must be higher than 29 percent to offset preferential treatment for capital gains." (Italics added.)

The co-sponsors of this resolution include Reps. Jim Cooper (D-TN) Steve LaTourette (R-OH), Kurt Schrader (D-OR), Charlie Bass (R-NH), Mike Quigley (D-IL) and Tom Reed (R-NY).

Tax Reform Requires Taxing All Income at the Same Rates — as Reagan’s Did

It is virtually impossible for Congress to pass a fundamental tax reform that sweeps away tax loopholes and tax subsidies, and does so in a progressive way, without eliminating the tax subsidy that is most targeted to the rich — the capital gains tax preference.

The last major tax reform, signed into law by President Reagan in 1986, did exactly this, resulting in a personal income tax that applied the same rates to all types of income. This greatly simplified taxes and eliminated the incentive to engage in tax shelters to convert other types of income into capital gains in order to take advantage of lower income tax rates.

Simpson-Bowles Plan Was Poor Policy Even Before House “Centrists” Inserted Capital Gains Tax Preference

Even though it would have ended the capital gains tax preference, the Simpson-Bowles commission’s plan was deeply flawed and unfair for many other reasons. Chief among them, it relied on spending cuts to meet two-thirds of its deficit-reduction goal and relied on new revenue to meet just one third of that goal.

When the Simpson-Bowles plan was made public, CTJ criticized the fact that it would close tax loopholes and tax subsidies but would use most of the resulting revenue savings to reduce tax rates rather than reducing the budget deficit (which was the point of the commission, after all).

Another major problem with the plan is its call for a “territorial” tax system, which the “centrist” House budget resolution echoes. A “territorial” tax system is a euphemism for exempting the offshore profits of U.S. corporations from the corporate income tax.

Photo of Barack Obama meeting with Alan Simpsons and Erskine Bowles via White House Creative Commons Attribution License 2.0

Everything You've Heard on the News about Obama's Tax Proposals Lately Is Wrong

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The Tax Policy Center (TPC) recently published figures showing that for the vast majority of taxpayers, Obama’s proposal to extend most of the Bush tax cuts would provide benefits that far exceed the tax increases he proposes. Just 6.5 percent of taxpayers would pay more in taxes in 2013, even by a very broad definition of “tax increase.” However, several news stories cited a separate set of figures published by TPC showing that if you put aside Obama’s proposed extension of most of the Bush tax cuts, 27.3 percent of taxpayers would pay more in 2013 under Obama’s tax proposals. This figure has caused some confusion and is, frankly, misleading.

First, the Bush tax cuts do expire at the end of 2012 under current law, so any extension of those tax cuts are, in fact, new tax cuts that reduce what Americans will pay. (Remember, Congress decided during the Bush years and again in 2010 to temporarily cut taxes, but never decided to permanently cut taxes.)

Second, the tax increases that Obama does propose would be trivial for most taxpayers. The relevant tax increases involve proposals to close tax loopholes for corporations and other businesses. Some middle-income and low-income taxpayers own stocks in corporations or interest in businesses that might be affected, but the effects would be trivial for those who are not rich. So, to take an example, when President Obama proposes to close tax loopholes for oil companies, TPC attributes the resulting tax increase to stockholders, a group than includes some middle-income or even a few low-income people. (It is nonetheless true that most corporate stocks and business assets are owned by high-income people, who would therefore bear most of the tax increase.) 

For example, if you look at TPC’s figures that ignore Obama’s proposed extension of the Bush tax cuts, you see that 26.4 percent of those taxpayers in the middle fifth of the income distribution would get a “tax increase” in 2013 — but the average tax increase for this 26.4 percent is just $70. Note that the average tax change for all taxpayers in the middle fifth of the income distribution would be a tax cut of $40 — and again, this would happen only if one ignores the extension of most of the Bush tax cuts.

For the vast majority of taxpayers, the benefits of Obama’s proposed extension of most of the Bush tax cuts are much larger than any indirect tax increases they would face from closing business tax loopholes. If you look at TPC’s figures that do include Obama’s proposed extension of most of the Bush tax cuts, you see that only 4.2 percent of those taxpayers in the middle fifth of the income distribution would face a tax increase, and the average tax increase for this 4.2 percent is only $76. (These would be people who don’t benefit from the extension of the Bush tax cuts, but do own a small amount of corporate stock.) The average tax change for all taxpayers in the middle fifth of the income distribution would be a tax cut of $1,133.

Two Sources of Confusion: Baselines and Small, Indirect Tax Increases

So the first part of the confusion stems from the fact that TPC publishes figures in two different ways. To use wonky terms, TPC provides one set of figures that compares the effects of Obama’s tax proposals to the “current law baseline,” which means, well, what the current law actually says is going to happen. And current law says the Bush tax cuts expire at the end of 2012. TPC provides a separate set of figures that compare Obama’s tax proposals to a “current policy baseline,” a hypothetical scenario that assumes that all of the Bush tax cuts are made permanent, even though that has never actually happened. (It’s unclear why we should use the term “current policy” to describe proposals that some lawmakers want to enact, but which Congress has not enacted.)

The second part of the confusion stems from the fact that TPC assumes that closing tax loopholes for multinational corporations, oil companies and other businesses will result in indirect tax increases on the owners of these businesses, which, to a very small extent, includes a few moderate-income taxpayers. These indirect tax effects may be real, but most people don’t think that this as a reason to leave in place tax loopholes for major profitable corporations and other businesses.

CTJ Report: Ryan's Budget Cuts Income Taxes for Millionaires by at Least $187,000

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House Budget Committee Chairman Paul Ryan has introduced a budget plan that, if implemented, would reduce revenues so significantly that they would be inadequate to pay for the federal spending under the Reagan administration, let alone the spending required in the years ahead.  The Ryan budget would provide income tax cuts for millionaires averaging at least $187,000 in 2014. The plan would also reduce corporate income taxes and would increase the (already considerable) incentives for corporations to shift profits and jobs overseas.

Each of these three problems is described in detail in a new report from Citizens for Tax Justice. Read the full report.


The Case of the Missing $96 Billion in Corporate Taxes

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The latest monthly statement by the Treasury Department contains a startling revelation: the amount that Treasury expects to collect in corporate taxes in 2012 has been slashed by more than 28 percent, from $333 down to $237 billion.

With such a dramatic revision, one might expect that lagging corporate profits or a sudden economic disruption is to blame. In reality however, corporate tax revenue continues to limp in spite of the fact that corporate profits have rebounded to record highs.

If corporate profits are not behind this $96 billion drop in expected corporate tax revenue, then what is?

The Wall Street Journal’s David Reilly suspects that there are two critical drivers: the offshoring of more profits through overseas entities by multi-national corporations; and the continuation of extravagant corporate tax breaks for accelerated depreciation of assets like equipment. Last month, the Congressional Budget Office (CBO) came to the same basic conclusion, explaining that corporate tax breaks and loopholes played an important role in driving the corporate tax rate to a 40 year low in 2011.

In order to prevent the continued decline of the corporate tax, Congress and the President should enact revenue-positive corporate tax reform, rather than their current revenue-neutral approach. Right now, political leaders of all stripes are proposing merely to eliminate some tax breaks but continue or even expand others and possibly reduce the statutory rate. With the federal deficit growing every day, asking profitable U.S. companies to pay something closer to the statutory tax rate is a reasonable (not to mention popular) approach.

Chart from is from the Wall Street article "U.S. Tax Haul Trails Profit Surge"

President Obama's fiscal year 2013 budget plan would cut taxes by $4.1 trillion over ten years. A brief report from CTJ explains that most of this cost results from his proposal to make permanent 78 percent of the Bush tax cuts, which would reduce revenues by $3.5 trillion over a decade. The budget plan does include some good proposals that, together, would raise $1.1 trillion over a decade. Of course, these revenue-raising proposals don't come close to offsetting the costs of the tax cuts.

Read the report.

First Thoughts on President Obama's Budget Proposal

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We are still analyzing the President's latest budget plan, which was released today, but there are a few things we can say right now.

Unfortunately, President Obama has once again proposed to make permanent the vast majority of the Bush tax cuts. The administration manipulates baselines to pretend that allowing the expiration of a portion of the Bush tax cuts (which are already scheduled to expire under current law) raises revenue. The budget plan would actually make permanent 78 percent of the Bush tax cuts at a cost of $3.4 trillion over the next decade.

The budget plan includes other tax provisions, including about $1 trillion in tax increases and half a trillion in tax cuts. Of course, this means that the budget plan would not come close to raising enough revenue to pay for the parts of the Bush tax cuts that would be extended.

In some ways this budget plan is an improvement over President Obama's previous budget plans. For example, while the President would still extend the Bush income tax cuts for the first $250,000 of income for married couples and the first $200,000 of income for unmarried taxpayers, his previous budget plans had partially extended the tax cut for stock dividends even for incomes in excess of those amounts. His decision this time around to allow stock dividends received by the rich to be taxed just like any other income is a step in the right direction.

Certain questions remain to be answered. For example, the Buffett Rule is sensible in concept but it’s unclear how the administration would implement it. The budget document says that the President “is proposing that the Buffett rule should replace the Alternative Minimum Tax.”

It’s unclear that the Buffett Rule could raise enough revenue to offset the cost of repealing the AMT. Even if it did, that would seem to mean that no new revenue would be produced because repeal of the AMT would cancel out the revenue effect of enacting the Buffett Rule.

Another area where more detail is needed is corporate tax reform. The administration is said to be planning a more detailed approach to overhauling the corporate income tax in a way that is revenue-neutral.

The administration should not bother attempting the overhaul the corporate income tax unless this would help resolve one of the biggest challenges we have — which is raising revenue to pay for public investments.

House Republicans Try to Enshrine Idea that Tax Cuts Pay for Themselves

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House Republicans passed a bill earlier this month to force Congress’s non-partisan tax analysts to assume that tax cuts cause less revenue loss (or even increase revenue) because they improve the economy so much.

The Pro-Growth Budgeting Act of 2011 would require Congress’s Joint Committee on Taxation (JCT), the non-partisan organization that estimates the revenue impacts of tax proposals, to include the economic feedback effect of tax cuts into their revenue estimates. Republicans call this “dynamic scoring” and often call the estimating process in use now “static scoring.” The truth is that JCT currently does take into account the behavioral effects of tax changes, but not any effects on the overall size of the economy, which usually would be small and nearly impossible to predict accurately.

The real point of the bill is to give some sort of respectability to an idea that no mainstream economists believes in — that tax cuts can partially pay for themselves or can even increase revenue. For example, Senate Minority Leader Mitch Connell is fond of claiming that the Bush tax cuts did not lead to any decrease in revenue.

As Citizens for Tax Justice’s Bob McIntyre points out, even the Bush Administration Treasury, which was packed with “appointees who profess a deep affection for Bush’s tax-cutting policies,” found in 2006 that extending the Bush’s tax cuts would have essentially no beneficial effect on the economy over the long term, and would certainly not pay for themselves.

In addition to being wrong, the House’s rewrite of the revenue estimating process is also wildly unfair. It explicitly exempts appropriations bills from dynamic scoring, which means that any positive economic impact of increased spending or negative impact of cutting spending would be ignored while tax cuts are assumed to benefit the economy.

Based on this, Bruce Bartlett, a former Republican Treasury official, worries that the bill is another step toward creating “a smokescreen to incorporate phony-baloney factors into revenue estimates to justify unlimited tax cutting.”

Photo of House Republicans via Republican Conference  and Creative Commons Attribution License 2.0

New Polls Show Growing Sentiment that Wealthy and Corporations Don't Pay Enough Taxes

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A new Washington Post-ABC News poll shows that only nine percent of Americans believe the tax system works for the middle class, with 68 percent saying it actually favors the wealthy. The survey shows a public overwhelmingly convinced that our tax system is unfair and that taxes should be raised on wealthy Americans.

The belief that the tax system is unfair has surely been fueled by the recent revelation of presidential candidate Mitt Romney’s super low 14% tax rate on his $21 million income. In fact, the same poll found that 66 percent of the public generally – and even a near majority of Republicans! – believe that Romney is not paying his fair share in taxes.

Not surprisingly, then, Americans overwhelmingly support increasing taxes on the wealthy, according to this poll, with 72 percent saying that taxes should be increased on millionaires. Of course, time and time again polls have shown the public’s robust support for progressive taxation.

A Growing Gap Between Small and Big Business

In related news, a nationwide survey released by the American Sustainable Business Council, Main Street Alliance and Small Business Majority shows that small business owners are fed up with how our corporate tax system favors big corporations at the expense of small businesses.

Indeed, 9 out of 10 small business owners said that big corporations use loopholes to avoid taxes that small businesses have to pay, with three quarters of the small business owners noting that their business is harmed by such loopholes. The same survey found that 67 percent of small business owners believe big corporations pay less than their fair share.

Even when small and large busineses agree that they want more tax handouts from Congress, they're talking about very different things, according to a new Bloomberg (subscription only) poll.  Asked what tax changes would help them most, advisors to smaller businesses prioritize things like reducing payroll taxes on employers and making permanent the deduction for self-employment. Big business priorities included 100 percent expensing (a.k.a. bonus depreciation) of equipment and complete overhaul of the corporate tax code – including a reduced tax rate.

These studies are more reason corporate lobbyists and their patrons in Congress should stop pretending they’re all about small business. They’re not.

Op-Ed: Corporations Should Pay More Taxes, Not Less

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Citizens for Tax Justice Director, Bob McIntyre, writes in The the Hill's Congress Blog today:

....Just as Ronald Reagan and a bipartisan Congress did in the Tax Reform Act of 1986, we should crack down on wasteful, often harmful corporate tax subsidies. The 1986 reforms curbed useless tax breaks for oil companies, public utilities, defense contractors and a wide array of corporate special interests. It rewrote the way we tax multinational corporations to make it harder for them to avoid their U.S. tax responsibilities by moving their U.S. profits to foreign tax havens. And by doing so, it made our economy more productive and increased corporate tax payments by more than a third.

Indeed, if just the 280 corporations that CTJ analyzed in our 2011 study had paid the full 35 percent corporate tax rate on their U.S. profits over the 2008-10 period (instead of only half that much), they would have paid an additional $223 billion in corporate income taxes.

Read the full essay here.

CBO Says Budget Outlook Will Improve Dramatically If Congress Simply Stops Passing Tax Cuts

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On Tuesday, the Congressional Budget Office reported that the federal budget deficit will fall from $1 trillion this year to less than $300 billion over the next several years — but only if Congress can resist enacting budget-busting laws like another extension of the Bush tax cuts, which would more than double the projected deficit.

Budget experts have long known that our deficit would be largely under control if Congress would simply stop extending the Bush tax cuts. But this might be news to anyone who listens to lawmakers insisting that public services must be cut dramatically to balance the budget.

What these lawmakers really mean, but never say, is that public services would need to be slashed to pay for a further extension of the Bush tax cuts — despite the lack of any evidence that these tax cuts have helped America.

The CBO report shows that extending the Bush tax cuts through the next decade would cut revenues by $4.6 trillion over the next ten years, and cost an additional $0.8 trillion in interest payments on the national debt — thus adding a total of $5.4 trillion to the national debt!

In the face of these frightening numbers, Republicans in Congress want to extend all of the Bush tax cuts. The Democrats are not much better. President Obama has proposed to extend about 81 percent of the Bush tax cuts, and most Congressional Democrats have followed his lead. 

Even organizations that have the ostensible purpose of promoting a balanced federal budget fail to see that Congress could help the budget situation dramatically by simply refusing to pass any more tax cuts. For example, take this statement about the CBO report from the Committee for a Responsible Budget:

The good news is that under current law assumptions, the debt would become more manageable in the medium term. The bad news is that these policy assumptions are politically unrealistic, suboptimal, and not a long-term fix.

Why would the so-called “Committee for a Responsible Budget” first acknowledge that the government will approach budget balance if Congress does nothing, and then insist that Congress has to pass laws that take us off that path? What’s so “suboptimal” about allowing the Bush tax cuts to expire?

Their argument is that the economy will suffer if the tax cuts expire at the end of this year. The Republicans in Congress make a much more extreme claim, which is that the economy will suffer if any portion of the tax cuts ever expires.

None of this is supported by evidence. Expiration of the Bush tax cuts would allow taxes to return to the levels in place at the end of the Clinton years. If anyone is worried about tax policies that are “suboptimal” for the economy, they should not fear the tax rates that existed during the boom years that Clinton presided over. If we need further short-term stimulus next year, then there are far better, fairer and less costly ways to achieve it.

Sometimes, lawmakers and others claim they worry that low- and middle-income people will suffer if they have to pay Clinton-era tax rates again.

This is absurd. A fact sheet from CTJ shows who would benefit from another extension of the Bush tax cuts. The folks who are struggling the most in America today, the poorest fifth of taxpayers, would receive just 1.1 percent of the tax cuts in 2013. The bottom three-fifths of taxpayers would receive just 13.4 percent of all the tax cuts.

On the other hand, the richest five percent of taxpayers would receive 47.2 percent of the tax cuts, and the richest one percent alone would receive 31.3 percent of the tax cuts.

It’s reasonable to argue that the parts of the Bush tax cuts that go to low-income Americans should be made permanent, because they help people who truly need help. These include, for example, the provisions that expand the Earned Income Tax Credit and the refundable part of the Child Tax Credit.

But low-income tax breaks represent only a small part of the cost of overall Bush tax cuts. So Congress could and should extend those parts of the tax cuts that go to people who need them without busting the budget. If Congress instead sends President Obama another bill extending all or most of the Bush tax cuts, then he should get out his veto pen.

"Super Committee" Undone by Devotion to Tax Cuts

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The six Democrats and six Republicans on the “Super Committee,” which is officially called the Joint Select Committee on Deficit Reduction, have conceded that they cannot agree on an alternative to the $1.2 trillion in deficit reduction that will occur automatically under existing law.  

As the result of this summer's deficit standoff, Congress and the President agreed to these automatic cuts, to take effect starting in 2013, if the Super Committee was unsuccessful in forging a deficit reduction plan that both parties in Congress could support.

For months, Republicans and Democrats have gone through cycles of offering plans that they claimed would reduce the budget deficit, but which would actually increase the deficit by extending all or most of the tax cuts first enacted under President George W. Bush and which are currently scheduled to expire at the end of 2012.

Even if the Super Committee did come up with a way to reduce spending or raise revenue by $1.2 trillion or $3 trillion or $4 trillion, it would make little sense if coupled with an agreement to extend tax cuts that cost even more than this, particularly when those tax cuts are heavily aimed at the rich.

The Democrats have not always presented a coherent view on this point. The plan released by President Obama in September would cut taxes far more than it would raise them. As we said back then:

The tables in the back of the President’s 80-page plan quietly remind us that the total cost of making permanent the Bush tax cuts would be $3.867 trillion over the next ten years, but the President says he will “raise revenue” by making permanent “only” $3.001 trillion of these tax cuts. We certainly applaud the President for refusing to extend the $866 billion of these tax cuts that would go exclusively to those with adjusted gross incomes in excess of $250,000, but it’s difficult to call this deficit reduction.

Setting aside the $866 billion that the President proposes to “raise” by not extending that part of the Bush tax cuts, the net effect of the other tax provisions in the plan (excluding the parts used to help pay for his proposed new jobs provisions) is to raise only $259 billion over the next decade. That means that, overall, the President is proposing more than $2.7 trillion in deficit-increasing tax cuts through fiscal 2021! The cost of these tax cuts is even greater when accounting for the additional interest payments on the national debt that will result.

And just to set the record straight, the cost of the Bush tax cuts is actually larger than that. The administration’s cost figures were based on a budget window that begins in 2012, when the Bush tax cuts are already in effect and thus have no cost.

If extended through 2013 and beyond, these tax cuts would cost $4.4 trillion over the 2013-2022 period ($5.4 trillion counting the additional interest payments that will result because of the increase in the national debt). Almost half of these tax cuts would go to the richest 5 percent of taxpayers, and only about six percent of these tax cuts would go to the bottom 40 percent of taxpayers.

The last proposal offered by the Democrats on the Super Committee, according to media reports, would have raised an outrageously low $400 billion in revenue over ten years but would have left the question of the expiring Bush tax cuts for another day. This was something the Republicans on the committee could not accept.

Last year, Congressional Republicans demonstrated that they would not accept any bill that extended most, but not all, of the Bush tax cuts. During the Super Committee negotiations they appeared willing to raise a few hundred billion dollars by closing tax loopholes that mainly benefit working class Americans if they could make permanent and even expand the Bush tax cuts at a cost of over $4 trillion. Now they seem to be signaling that they will not accept any bill that is supposed to reduce the deficit unless it actually increases the deficit by extending the Bush tax cuts.

Both parties have tied themselves into knots over taxes that they will find difficult to untangle, but that matters little because if Congress simply does nothing (and that, frankly, is one thing it excels at) the Bush tax cuts will expire at the end of 2012 and one of the greatest causes of the budget deficit will be behind us.

We would like to think that Congress can now step away from its obsession with deficit-reduction plans that actually increase the deficit and turn its attention to the most pressing concern Americans have right now: jobs.

There is ample evidence that the Bush tax cuts have failed miserably to help the economy in the ways promised by their proponents. It’s time for Congress to focus on job creation measures that do not involve tax cuts for the rich.

House Rejects Balanced Budget Amendment that could Double Unemployment during Recessions

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A report from Macroeconomic Advisers, one of the most respected economic forecasting firms, concludes that unemployment would rise from 9 percent to 18 percent in 2012 if Congress had to cut spending to comply with the type of constitutional balanced budget requirement that Republicans and some Democrats tried but failed to pass today.

Most mainstream economists agree that the last thing the federal government should do during a recession is cut spending. Reducing government jobs, or cutting government programs that maintain consumer spending in a way that indirectly creates jobs, is the last thing we need when the economy is already contracting. But that’s exactly what would happen under a balanced budget requirement.

Recessions often cause budget crunches because they reduce revenues (because fewer people and businesses are generating income and paying taxes) and increase government spending (because more people receive unemployment insurance and other benefits). These automatic reductions in taxes and increases in spending can stabilize the economy to an extent. But a balanced budget requirement would make it far more likely that Congress would respond to a recession-induced budget crunch by slashing unemployment insurance and other programs that help offset the economic contraction.

That’s why Macroeconomic Advisers found that if Congress had to cut spending to balance the budget in 2012, another 15 million people would become unemployed and economic growth would drop from an expected 2 percent to negative 17 percent.

Such a proposal would seem too outrageous to even be discussed seriously —  except that a majority of the House of Representatives just voted for it. (The measure thankfully did not receive the two-thirds vote requires for approval of a constitutional amendment.)

The version considered today would not take effect for five years, but it’s important to remember that even the most conservative deficit-reduction plans discussed today would not result in a balanced budget for decades. And America will undoubtedly face recessions in the future when the balanced budget requirement would be in effect.

Citizens for Tax Justice has joined 275 other national organizations on a letter to members of Congress blasting the proposed balanced budget amendment as, to borrow the term used by Macroeconomic Advisers, “catastrophic.”

And just in case you were wondering, the balanced budget amendment considered today was the less extreme of the two versions that have been discussed lately. The version supported by anti-tax activist Grover Norquist would require approval by two-thirds of both chambers of Congress to pass any revenue increase, ensuring that efforts to balance the budget during recessions would definitely be done entirely through spending cuts and have the effects described above. Of course, the fact that a proposal is slightly less extreme than the one preferred by Grover Norquist is no indication that it’s a great idea.

Many lawmakers have apparently decided that they would address difficult fiscal problems with what seems like a simple answer. A rule making Congress balance the federal budget every year probably sounds reasonable to many people until they learn of the horrific consequences. Lawmakers have no such excuse, because they and their staffs are quite aware of mainstream economic research, which this recent report only reaffirms.

Make no mistake; those lawmakers who voted today for the balanced budget amendment have voted to destroy millions of jobs during a recession.

Bizarre "Study" Claims Congress Can Raise Revenue by Repealing the Tax on Millionaires' Estates

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A “study” claiming Congress can raise revenue by repealing the estate tax, which was criticized at length by Citizens for Tax Justice in 2009, has been updated to provide a “solution” for the budget deficit.

Anyone who is not familiar with tax debates might be wondering, quite reasonably, how repealing a tax could increase revenue. The answer is, of course, that it can’t.

One claim made in these reports, which are commissioned by the American Family Business Foundation, is that extremely wealthy people will simply spend away their fortunes if they know they will be subject to the estate tax after they die, but they will invest those fortunes if they know they will be untaxed after they die. In the latter scenario, their argument goes, the increased investment will boost the economy and result in increased profits and incomes, which in turn would lead to increased tax payments.

The reports ignore the fact that extremely wealthy people will save and invest most of their money in any event because there’s not much else they can do with it. In our 2009 report, we put the question this way:

Can extremely wealthy people really spend away their millions on expensive dinners and cruises? That’s a lot of dinners and cruises. In 2004 (the last year before the amount of estates exempt from the tax was increased), 72 percent of estate taxes were paid on estates worth more than $3.5 million. And 61 percent of estate taxes were paid on estates worth over $5 million… Let’s say you had this sort of money and you wanted to keep your estate from being taxed by the federal government. What would you do? You can’t put it in stocks or bonds or even a savings account. You can’t buy fancy houses, because they would become part of your estate. Even if you buy expensive cars or yachts, those would be part of your estate as well (even if they lose some of their value before you die).

You would have to spend your entire estate on caviar or cruises or cocaine or something that won’t be around after you die. It’s unclear whether anyone can eat away, cruise away, or snort up their nose $5 million.

This is just one of the many bizarre conceptual problems with the claims that estate tax repeal would result in increased revenue. For more, read the CTJ report.

New from National Priorities Project & CTJ: The Cost of the Bush Tax Cuts for the Rich

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The National Priorities Project, working in partnership with Citizens for Tax Justice, has unveiled a new website that presents a running tally of the cost of the Bush tax cuts for the richest five percent, who now receive almost half of the total tax cuts. The cost is also broken down for the richest one percent and the next richest 4 percent.

As the Joint Select Committee on Deficit Reduction (aka "Super Committee") considers drastic cuts in public investments and services that working people depend on, the amount of revenue lost due to tax cuts for the rich cannot be ignored. As CTJ has said for years, we will never have the revenue necessary to invest in the American people until these tax cuts are allowed to expire.

See the website: www.costoftaxcuts.com

CTJ's Statement on President Obama's Jobs and Deficit Plan

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Obama’s Plan a Massive Tax CUT Despite GOP Claims of “Largest Tax Hike in Modern History”

While House Republican Leader Eric Cantor’s staff and others have called President Obama’s jobs and deficit plan the “largest tax hike in modern history,” the unfortunate truth is that it actually cuts taxes overall and increases the deficit.

There is much to like about the plan, as explained below. Citizens for Tax Justice applauds President Obama’s vow yesterday to, in his words, “veto any bill that changes benefits for those who rely on Medicare but does not raise serious revenues by asking the wealthiest Americans or biggest corporations to pay their fair share.”

Unfortunately, however, President Obama’s proposals would ultimately reduce taxes far more than raise them, compared to current law.

The tables in the back of the President’s 80-page plan quietly remind us that the total cost of making permanent the Bush tax cuts would be $3.867 trillion over the next ten years, but the President says he will “raise revenue” by making permanent “only” $3.001 trillion of these tax cuts. We certainly applaud the President for refusing to extend the $866 billion of these tax cuts that would go exclusively to those with adjusted gross incomes in excess of $250,000, but it’s difficult to call this deficit reduction.

The President’s claims that he is raising revenue are based on the common, but misleading, practice of comparing a given proposal to an alternative “baseline” that assumes Congress has already increased the deficit enormously by making permanent the Bush tax cuts. By this logic, we do not see what stops the President from comparing his plan to a baseline that assumes Congress repealed the federal income tax, in which case his plan would “raise revenue” even more successfully.

Setting aside the $866 billion that the President proposes to “raise” by not extending that part of the Bush tax cuts, the net effect of the other tax provisions in the plan (excluding the parts used to help pay for his proposed new jobs provisions) is to raise only $259 billion over the next decade. That means that, overall, the President is proposing more than $2.7 trillion in deficit-increasing tax cuts through fiscal 2021!

The cost of these tax cuts is even greater when accounting for the additional interest payments on the national debt that will result.

Revenue could be raised by closing corporate tax loopholes, but unfortunately the President’s plan calls for a reform of the corporate income tax that is “deficit-neutral.” We believe that most, if not all, of the revenue-savings resulting from closing corporate tax loopholes should go towards deficit-reduction or job creation and public investments, rather than paying for more breaks for corporations. (See one-page fact sheet on why corporate tax reform can be “revenue-positive.”)

There are some good ideas in the President’s tax proposals that would raise revenue compared to current law and that would ask those whose incomes have grown the most in recent years to pay something closer to their fair share. This includes his proposal to limit deductions and exclusions for the wealthy, which we estimate would affect only 2.3 percent of taxpayers. (See related report.) Certainly Congress should pursue these types of tax provisions and loophole-closing measures.

But ultimately, our nation is going to need significantly increased revenues to pay for essential public programs and services. Starting off with a gigantic tax cut that makes 80 percent of the Bush tax cuts permanent, as Obama proposes, only digs our deficit hole deeper — and makes big reductions in Social Security and Medicare even more likely.

Eating Spaghetti with a Knife and How a GOP Rep is Trying to Escape The No-New-Tax Pledge

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Our contempt for Grover Norquist’s no-new-taxes pledge is no secret, and it seems that at least one member of Congress is willing to come out and admit he shares the feeling. Nebraska Rep. Jeff Fortenberry signed the no-new-taxes pledge in 2004, but now says he regrets the move.

He says, “A while back, I had notified the organization that I had taken that pledge when I ran for office and upheld that my first term in office but realized that this type of pledge can constrain creative policy thinking, so I asked not to be associated with it any longer."

Ouch.  Poor Grover!

Responding to Fortenberry’s snub, a spokesperson from Norquist’s group bristled, “One does not promise to be pro-life for two years, or pro-Second Amendment for one year. One is pro-life, pro-Second Amendment or pro-taxpayer as long as one is in office. Or not.”

This pathological inflexibility defines the pledge mentality and hurts our democracy. It’s chilling that even when legislators abandon the pledge after recognizing it for the ideological straightjacket it is, they are never fully released from it.  Isn’t that how cults work?

Completely taking tax increases off the table is no way to govern.  Pledges thwart the important debates and conversations that make our political system work, the current Washington gridlock offering a case in point. Rep. Fortenberry is setting an example for his GOP colleagues, going so far as to say Warren Buffett might even be right about taxing millionaires.  We’ll see if his stance helps open up our debates.

Pledging to spending cuts as the only budget balancing tool is like agreeing to eat a bowl of spaghetti with only a knife; it doesn’t work and it makes you look foolish.

Photos via Steve Rhodes & Republican Conference via Creative Commons Attribution License 2.0

Pelosi Picks Three Tax Fairness Champions for Deficit "Super Committee"

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House Democratic Leader Nancy Pelosi today appointed members to fill the three seats allotted to her for the 12-member “super committee” created under the recent debt deal.

Last December, all three voted against the “compromise” that extended the Bush tax cuts entirely, even for the richest Americans, for two years. All three also received high scores from CTJ’s legislative report card during the previous administration for opposing President George W. Bush’s regressive tax cuts.

Pelosi’s appointees are Xavier Becerra of California, James Clyburn of South Carolina, and Chris Van Hollen of Maryland.

This move by Pelosi provides needed reassurance to advocates of tax fairness. The six Republican members of the super committee have all taken Grover Norquist’s infamous “no new taxes” pledge. The Senate Democrats appointed to the committee have a more mixed record on taxes (see related post.)

Photo via Campus Progress Creative Commons Attribution License 2.0

Half of Deficit Reduction Could Come from Spending Cuts -- and That Half Is Done

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Super Committee Should Either Focus Entirely on Revenue, or Simply Allow Automatic Sequestration to Go into Effect

Numerous surveys show that large majorities of Americans want Congress to address the deficit with a combination of spending cuts and tax increases. The first half of deficit reduction accomplished under the newly enacted debt deal will be entirely through spending cuts. This means that the second half of the deficit reduction — which is to be determined by a Congressional “super committee” — should be accomplished entirely by increased revenue. Responsible members of the super committee should walk away from any deal that falls short of this goal.

The super committee has many options to increase revenue, particularly by eliminating or reducing subsidies provided through the personal income tax and corporate income tax to business and wealthy investors. As CTJ director Bob McIntyre explained to the Senate Budget Committee in the spring, these tax subsidies cost a billion dollars a day.

If the super committee cannot agree on such revenue-raising measures, they should do nothing. The $1.2 trillion in automatic spending cuts that would result from the super committee’s failure to reach agreement are not the worst possible outcome. Half of the automatic spending cuts would come from defense spending (which has increased by 70 percent since 2001). If the super committee comes to an agreement that avoids the automatic cuts but lacks revenue increases, the consequences could be far worse. For example, the committee could choose to focus cuts instead on public services that working Americans rely on in order to protect powerful defense contractors.

Further, President Obama and responsible members of Congress will have another opportunity to take an anti-deficit stance at the end of 2012, when they can demand that the Bush tax cuts will either expire for the rich or expire entirely. The Bush tax cuts expire under current law at the end of 2012, and proponents of the tax cuts have no power to extend them without the support of President Obama and the Democratic leadership in the Senate.

The Budget Control Act

The Budget Control Act, signed into law last week to raise the debt ceiling, reduces the deficit and lifts the ceiling in two stages. First, caps on discretionary spending (both defense and domestic) are in effect and will save $900 billion over ten years. Second, a Congressional “super committee” of six Senators and six Representatives, divided evenly by party, must by Thanksgiving come up with measures to save between $1.2 trillion and $1.5 trillion over ten years. Whatever plan is approved by a majority of the committee could then be passed by a simple majority in the House and Senate and sent to the President.

If this process fails (or fails to save as much as $1.2 trillion) then automatic triggers will go into effect that sequester $1.2 trillion of spending (or the difference between what the super committee’s plan saves and $1.2 trillion) over ten years. The spending sequestered would be divided evenly between domestic and defense.

Republican Super Committee Members Pledge No Taxes. Will Democratic Members Start with Compromise?

There is no responsible way for Democratic members of the super committee to “compromise” without convincing Republicans members to violate their pledge. The United States is one of the least taxed countries in the industrial world. (Only Mexico and Chile collect less taxes as a share of their economy.)

The Democrats generally seem vastly more likely to cave on their core principles, given their recent agreement to raise the debt ceiling without any guarantee of increased revenues.

It’s true that Congress has a very difficult time providing immediate solutions when the political parties have irreconcilable worldviews. But there is a process to resolve that, and it’s called an election. And this process will work if voters know which lawmakers prioritize tax breaks for corporations and wealthy investors, and which lawmakers prioritize Medicare, Social Security, education and the other public services that working Americans rely on.

Photo via Gage Skidmore and
The White House Creative Commons Attribution License 2.0

S&P Report Cites Bush Tax Cuts as a Reason for Downgrade

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At the end of last week, Standard & Poor’s (S&P), one of the three major credit rating agencies, downgraded the credit worthiness of the United States for the first time and specifically stated that allowing the Bush tax cuts to expire for the wealthy would justify a return to the highest possible rating.

S&P’s report says that its “upside scenario,” which could allow the rating to be upgraded to “stable” “incorporates $950 billion of new revenues on the assumption that the 2001 and 2003 tax cuts for high earners lapse from 2013 onwards, as the Administration is advocating.”

S&P: The Broken Clock

Of course, S&P is right that allowing the Bush tax cuts to partially expire for the rich (at least) would improve our fiscal situation. But S&P’s accurate observation on this point is akin to the broken clock giving the correct time twice a day.

It’s worth pointing out that this is one of the rating agencies that convinced an awful lot of people that mortgage-backed securities were perfectly safe in the run up to the economic collapse that triggered bank bailouts by the Bush administration. Investors seemed entirely unconvinced by the report on Monday, when they traded in stocks and bought up the very Treasury bills that S&P claims now carry some risk of default. Some observers have even suggested that S&P’s downgrade is a threat to prod Congress and the Administration to undo the stricter regulations on credit rating agencies that were enacted as part of the Dodd-Frank financial reform.

Perhaps the most damning indictment of S&P’s report is the $2 trillion mistake that the Administration identified, which S&P responded to by simply changing the rational for its downgrade from an economic one to a political one. S&P told the Administration that the $2 trillion mistake did not substantially alter its conclusion. But as observers have noted, the report makes clear that ending the Bush tax cuts for the rich (which would only save $950 billion) would alleviate the need for the lower rating.

Stating the Obvious: Congress Is Dysfunctional and Held Hostage by the Tea Party

All that being said, the report’s conclusions about America’s politics are correct, if rather obvious. “The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed,” the report admonishes. “The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy.”

Of course Congress is less effective than ever. In fact, it’s utterly dysfunctional. No legislation of any significance can be passed in the Senate without a supermajority of members in support, which has not been the case historically (contrary to what many believe). As a result, President Obama’s proposal to extend the Bush tax cuts entirely for all but the richest two percent failed to pass last year despite support from a majority of the House and a majority of the Senate.

Now Republicans have established that they will vote against any increase in the debt ceiling (which is comparable to refusing to pay a credit card bill after you knowingly made half your purchases on it) unless they receive major policy concessions that most Americans do not support.

Tea Party lawmakers are willing to hold the legislative process hostage. In fact, the Republican Senate leader now uses the words “hostage” and “ransom” to describe the party’s legislative strategy regarding debt ceiling negotiations. House Republican Whip Eric Cantor responded to S&P’s report by exhorting his party to hold firm against any proposal to raise revenue.

Despite the many shortcomings of S&P, last week’s downgrading of the U.S.’s credit rating ultimately is the Tea Party Downgrade.

Democrats on Super Committee Excel at Compromise, Unfortunately

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vote machine.jpg

The three Democratic Senators appointed by Harry Reid to sit on the “super committee” established under the debt deal voted for the President’s disastrous budget compromise in December of 2010 that extended the Bush tax cuts for another two years.

Sending these three in to negotiate with members who passed an anti-tax litmus test to get there is worrying.

How did the three perform on other tax votes? Senators John Kerry and Patti Murray have a record of voting against costly and regressive tax cuts, while Senator Max Baucus has a mixed record. 

Baucus actually received a failing score on CTJ’s legislative report card during the Bush years because of his support for many regressive tax cuts.  On the other hand, Senator Baucus led the charge in 2010 to end the Bush tax cuts for the rich.

All three of these Senators deserve credit for voting last year to extend the Bush tax cuts only for those earning below $250,000, which was, at least, better than the Republican proposal to extend the tax cuts entirely.

If these are the Senators charged with holding the line against no-revenue-no-way Republicans, then they’re going to need some reinforcements.  


CTJ Statement on Debt Ceiling Deal: Obama Breaks His Promise Again

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The so-called “Budget Control Act” that President Obama signed into law this week to increase the federal debt ceiling and reduce the federal budget deficit marks the second time the Obama administration has capitulated on tax policy to the most extreme elements in Congress, those who are least in touch with the American people and most willing to risk economic disaster to get their way.

While our political leaders should be doing all they can to boost consumer demand and create jobs, the administration and Congress have instead agreed to slash public services without guaranteeing any increase in revenue.

To be sure, a revenue increase could result from the process established under this deal, despite Republicans’ claims to the contrary. But anti-tax lawmakers have already demonstrated that they will risk everything — including economic catastrophe — to block any and all revenue increases. As a result, we believe the only hope for a balanced approach depends on President Obama finding the courage (which he has lacked so far) to allow all of the Bush tax cuts to expire at the end of 2012.

Read the full statement.


All Cuts, No Revenues: Both Parties Abandon "Balanced Approach" in Debt Ceiling Proposals

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Lawmakers have made one important decision this week as the debt ceiling negotiations come down to the wire: the wealthy should not have to sacrifice even a dime of their tax cuts or loopholes to reduce the deficit.

Both Democratic Majority Leader Harry Reid and Republican Speaker of the House John Boehner have proposed plans to cut hundreds of billions in spending on government programs (from food safety to college tuition assistance) in order to raise the debt ceiling, without requiring any revenue be generated through ending tax loopholes or tax cuts for the rich.

Boehner’s plan requires an immediate $1.1 trillion dollars in spending cuts over the next 10 years in order to raise the debt ceiling this year, and would also require that we find another $1.8 trillion in cuts in order to raise the debt ceiling again in 2012.

The proposed spending cuts would place a such a harsh additional burden on lower income families that the usually mild mannered Bob Greenstein, Director of the Center on Budget and Policy Priorities, pointed out that Boehner’s plan was “tantamount to a form of ‘class warfare’” and that “it could well produce the greatest increase in poverty and hardship produced by any law in modern US history.”

The new push by both parties for a spending-cuts-only approach stands in great contrast to President Obama’s Monday night address to the nation, which called for a more ‘balanced approach.’

What makes this change in approach even more self defeating is the fact that the anti-tax ideologues have long since lost the public. In fact, well over 19 polls in just the last few months show that the public overwhelmingly favors increasing taxes generally, with larger percentages supporting raising taxes on just the wealthier individuals.

Even after extracting a pound of flesh from Democratic lawmakers, anti-tax forces may still not be satisfied. These groups are pushing for nothing short of passage of the ‘Cut, Cap, and Balance Act,’ hoping to hold the US economy hostage to force through their radical and economically disastrous plan.

The ridiculousness of the absolute anti-tax forces has become especially clear in light of their unwillingness to repeal egregious tax loopholes, such those given to oil and gas companies, hedge fund managers, and many others.

Ironically, the purpose of these extreme cuts is to reduce the ongoing budget deficits, but in fact all of the plans under serious consideration by Democratic and Republican leaders would actually INCREASE the deficit. The problem is that lawmakers simply cannot make up for the outrageous $5.4 trillion cost of extending all of the Bush tax cuts.

Though things are not looking good, hopefully Democratic lawmakers will stand up and not let themselves be blackmailed into accepting ludicrous cuts to spending while large loopholes and tax cuts for the rich remain in place.

Photo via The White House Creative Commons Attribution License 2.0

Anti-Tax Forces Have Lost the Public. Will the White House Fight or Cave?

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Recent polling makes clear that most Americans do not agree with the Tea Party-backed members of Congress who believe the only “concession” they should make in deficit negotiations is to prevent a calamitous default on U.S. debt obligations. The question is, will the White House use this advantage and demand a balanced approach, or will it back down again to anti-tax, anti-government lawmakers who are outside the mainstream of public opinion?

More polling has been released indicating that a large majority of Americans want Congress to address the federal budget deficit with a combination of tax increases and spending cuts. The latest polling also shows that 82 percent of respondents understand that failure to raise the debt ceiling will do serious harm to our economy and far more respondents blame Republican leaders than Obama for being unwilling to compromise.

Last week, the Republican leadership in the Senate began pushing a proposal that would allow the President to raise the debt ceiling after symbolic but meaningless votes, with no guarantee of spending cuts. There has been talk of adding some amount of spending cuts to that plan to make it more palatable to Tea Party-backed lawmakers, but it’s unclear whether they can be satisfied with any compromise.

Republicans in the House have taken a particularly extreme stance. On Tuesday they passed the “Cut, Cap, and Balance” Act that would allow the U.S. to default on its debt obligations unless the U.S. amends the constitution to bar budget deficits, require a two-thirds supermajority of both chambers of Congress to approve any tax increase, and shrink the government to a level not seen in most of our lifetimes.

Meanwhile, the “Gang of Six” U.S. Senators who have been negotiating for months behind closed doors on deficit reduction finally released the outlines of a plan this week, although it’s not clear how or whether it could affect the negotiations over the debt ceiling.

Citizens for Tax Justice released a statement blasting the “Gang of Six” plan because it would reduce revenue by $1.5 trillion compared to current law, and because it includes a “territorial” tax system that would exempt corporate profits that are earned offshore, or simply shifted offshore into tax havens.

Unfortunately, the deal President Obama has been negotiating is even worse in the sense that he has proposed to extend $4.7 trillion worth of tax cuts and only raise $0.7 trillion in new revenue through tax increases, compared to current law. Republican leaders, who want to extend all the Bush tax cuts, would reduce revenue even more, as explained in a statement released by CTJ last week.

As of this writing, several media outlets are reporting that the White House is negotiating a deal with Speaker Boehner, possibly one with massive cuts in public services but no guarantee of any revenue increases.

We hope the reports are wrong, and we hope that we won’t see a repeat of the last major “compromise” that marked a capitulation to anti-tax lawmakers whose views were out of sync with the American people.

President’s and GOP’s Positions Both Include Greater Tax Cuts than Spending Cuts

It’s hard to say what will happen with the necessary increase in the federal debt ceiling. But one thing is clear: Almost anything that the President and the Congress can possibly agree upon will not reduce projected budget deficits. Instead, it will increase them.

A new fact sheet from Citizens for Tax Justice explains the problem that both sides want to extend all or most of the expiring Bush tax cuts. And neither side has proposed spending cuts or tax increases large enough to offset the tremendous cost of such an extension.

Read the fact sheet.

Photos via Rusty Darbonne and Talk Radio News Creative Commons Attribution License 2.0

Anti-Tax Lawmakers Cry Uncle in Debt Ceiling Talks?

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Republican Senate Leader McConnell's Plan Would Avoid Forcing the Spending Cuts that He Knows Are Highly Unpopular

On Tuesday, Senator Mitch McConnell (R-KY) offered a convoluted proposal in which a bill to raise the debt ceiling would be passed by Congress — requiring Republican and Democratic votes — followed by subsequent meaningless votes that would allow many lawmakers, even a majority of lawmakers, to pretend that they disapprove of the increase in the debt ceiling and lay the blame on President Obama.

McConnell's proposal is for the Congress to enact a bill allowing the President to increase the debt ceiling in incremental steps and giving Congress a chance to pass subsequent bills blocking each of those incremental increases. Of course, the President would veto any of these subsequent bills preventing an increase in the debt ceiling.

In fact, subsequent bills to prevent the President from raising the debt ceiling may not even pass the Senate, which is controlled by Democrats. Of course, Senators of either party could hypocritically shift from approving the first bill to give the President this power to supporting a subsequent bill to take this power away from the President. Such shiftiness is to be expected in Congress today.

After the initial bill is passed to give the President the power to increase the debt limit, it's possible that no one will pay any attention to subsequent votes on bills related to the debt ceiling. Votes on bills that don't pass usually do not generate much of a buzz. For example, it's not obvious that the public remembers when Senate Republicans and a few Democrats filibustered a full extension of the Bush tax cuts for 98 percent of taxpayers last year. 

The Retreat

Earlier this year GOP leaders threatened to block any increase in the debt ceiling unless it came with spending cuts equal at least to the amount by which the debt ceiling would be increased, $2.4 trillion. Of course, failure to raise the debt ceiling would cause an unprecedented default by the U.S. on its debt obligations and send the financial markets into a tailspin.

Last week, the President proclaimed his desire to agree on a larger decrease in the deficit, of $4 trillion over ten years, including savings from Social Security and Medicare.

As talks proceeded the White House pushed for an agreement that would achieve just one fourth of the $4 trillion in deficit reduction from revenue increases and the other three fourths from spending cuts. This offer seemed wildly tilted to the anti-tax lawmakers, especially given that the U.S. is one of the least taxed countries in the industrialized world.

Over the weekend, Republican House Speaker John Boehner gave up on such an ambitious deal even though it would have been so skewed towards his priorities. Boehner said he wanted to find agreement on a smaller deficit reduction deal and a short-term increase in the debt ceiling, which the President opposes. That prompted Senator McConnell to make his offer, which essentially gives up any attempt to force cuts in spending in return for an increase in the debt ceiling. 

See related article: The Real Reason GOP Leaders Want to Give Up the Debt Ceiling Fight: The Public Opposes Deficit-Reduction by Cutting Spending Alone

Photo via Gage Skidmore Creative Commons Attribution License 2.0

Senator McConnell's convoluted proposal for lawmakers to raise the debt ceiling while avoiding the blame (see related article) shows that GOP leaders are trying desperately to escape a trap. On one side are anti-tax ideologues like Grover Norquist and his group, so-called Americans for Tax Reform, who have organized a "no new tax pledge" signed by many lawmakers.

On the other side is the American public, which has made clear that it prefers any reduction in the budget deficit to include a mix of spending cuts and revenue increases.

Bruce Bartlett, a Republican who worked for President Reagan and the first President Bush, presents a long list of polls showing support among Americans for raising taxes to deal with the deficit. Here's just a sample of the polls he cites:

A June 9 Washington Post/ABC News poll found that 61 percent of people believe higher taxes will be necessary to reduce the deficit.

A May 13 Bloomberg poll found that only one third of people believe it is possible to substantially reduce the budget deficit without higher taxes; two thirds do not.

A May 12 Ipsos/Reuters poll found that three-fifths of people would support higher taxes to reduce the deficit.

An April 29 Gallup poll found that only 20 percent of people believe the budget deficit should be reduced only by cutting spending; 76 percent say that higher taxes must play a role.

An April 22 New York Times/CBS News poll found that 72 percent of people favor raising taxes on the rich to reduce the deficit. It also found that 66 percent of people believe tax increases will be necessary to reduce the deficit versus 19 percent who believe spending cuts alone are sufficient.

An April 20 Washington Post/ABC News poll found that by a 2-to-1 margin people favor a combination of higher taxes and spending cuts over spending cuts alone to reduce the deficit. It also found that 72 percent of people favor raising taxes on the rich to reduce the deficit and it is far and away the most popular deficit reduction measure.

A March 15 ABC News/Washington Post poll found that only 31 percent of voters support the Republican policy of only cutting spending to reduce the deficit; 64 percent believe higher taxes will also be necessary.

See the rest of the polling that Bartlett cites on his blog.

Photo via Talk Radio News Creative Commons Attribution License 2.0

Will GOP Leaders Push U.S. Towards Default by Blocking Revenue Increases?

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Republican leaders in the House and Senate have threatened to allow the U.S. to default on its debt obligations unless the President agrees to cut trillions from public services to reduce the budget deficit.

The federal budget deficit is a problem, but the timing and method of the GOP leaders approach are potentially disastrous. Deficit reduction should be timed to occur largely after we have recovered from the recession so that there is enough private spending and investment taking place to partially offset cuts in public spending.

The method of deficit reduction is even more critical. Republican leaders have insisted that we reduce the deficit entirely by cutting spending and not by raising tax revenue. This is illogical because clearly raising a dollar of taxes has the same effect on the deficit as cutting spending by one dollar.

Even more importantly, the U.S. is one of the least taxed countries in the industrial world, as explained in a report released last week by Citizens for Tax Justice. The report finds that all the other OECD nations except Chile and Mexico have higher taxes as a percentage of GDP than the U.S. The U.S. is clearly undertaxed and a revenue increase is the obvious answer to our deficit problem.

Photo via Talk Media News Creative Commons Attribution License 2.0

Where's the Evidence that GOP Leaders Are Reasonable about Revenue?

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As Republican leaders met President Obama today to attempt to come to some agreement on raising the debt ceiling and reducing the deficit, the media has reported that Republicans are open to increasing revenue — but the details consistently seem to disprove this claim.

The New York Times reports that

"The president’s renewed efforts follow what knowledgeable officials said was an overture from [Republican House Speaker] Boehner, who met secretly with Mr. Obama last weekend, to consider as much as $1 trillion in unspecified new revenues as part of an overhaul of tax laws in exchange for an agreement that made substantial spending cuts"

But the article then goes on to say

"At a news conference on Thursday, Mr. Boehner, of Ohio, told reporters that “everything’s on the table, except raising taxes” on the American people, but he added that a tax overhaul that would close breaks and lower rates was part of the discussion."

The Times reporters fail to notice that closing loopholes and lowering rates, with a result that does not "raise taxes," is a description of revenue-neutral tax reform, which obviously does nothing to help reduce the budget deficit. How is this progress in negotiations over the deficit?

Last week, the Times ran an article with the headline, "2 Republicans Open the Door to Increases in Revenue." The article explained that Senator John Cornyn (R-TX) said he was willing to close tax loopholes, but went on to say that any tax changes must be "revenue neutral," meaning any reduction or elimination of tax loopholes must be accompanied by reductions in tax rates or some other type of tax cut so that the total amount of revenue would not increase.

The article also quoted Senator John McCain as saying he was open to some unspecified "revenue-raisers" but then also quoted him as saying, “The principle of not raising taxes is something that we campaigned on last November, and the result of the election was that the American people didn’t want their taxes raised and they wanted us to cut spending.”

In other words, the Times article is about one senator who is definitely not open to revenue increases and another who says nothing coherent at all about them.

Yesterday, the Washington Post added to the confusion by informing us that Eric Cantor, the House Republican Majority leader "signaled a new openness to raising taxes— at least for selected special interests."

The article also quoted Cantor as saying, "But listen, we’re not for any proposal that increases taxes, and any type of discussion should be coupled with offsetting tax cuts somewhere else.”

In other words, Cantor is not open to raising taxes overall and therefore not open to raising revenue, which is the only way any tax changes would help reduce the deficit.

Republican leaders appear to be sticking to an ideological position opposing any increase in tax revenue. It's a position that defies common sense in a country that is taxed far less than other industrial countries, and it's a position that is opposed by large majorities of Americans in swing states. Why the press is trying to present GOP leaders as more reasonable is anyone's guess.

Photo via Speaker Boehner Creative Commons Attribution License 2.0

New Report from CTJ: U.S. One of the Least Taxed Developed Countries

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Revenue Increase the Obvious Answer to Budget Deficits

Some members of Congress are threatening to allow the U.S. to default on its debt obligations — and send financial markets into a tailspin — unless the President agrees to large, sudden cuts in the budget deficit without any increase in tax revenue. But the most recent data reveal that the U.S. is already one of the least taxed countries in the developed world. Only two OECD countries have lower taxes as a share of gross domestic product (GDP) than the United States.

Read the report.

Most Extreme Balanced-Budget Amendment Ever Moves Forward in the House

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Last Wednesday, the House Judiciary Committee approved H.J.Res 1, the newest incarnation of the potentially disastrous balanced-budget amendment. As passed out of committee, the balanced-budget amendment is more extreme than versions proposed in the past, as it would not only require that government outlays equal receipts, but would also limit spending to about 16.7 percent of gross domestic product and require a 2/3’s majority for any increase in revenue.

In its comprehensive rebuke of the balanced-budget amendment, the Center on Budget and Priorities (CBPP) explains that the amendment has potential for “serious economic harm,” as it would force cuts in automatic stabilizers like unemployment insurance during recessions when they are needed most. It’s precisely for this reason that more than 1,000 economists, including 11 Nobel laureates, signed a statement in 1997 opposing the balanced-budget amendment that Congress nearly approved that year.

The spending cap would require catastrophic cuts to government services even when the country is economically prosperous. The amendment would cut spending to 18 percent of the previous year’s GDP, which is typically about 16.7 percent of the current year’s GDP.

As CBPP explains, the required cuts would go well beyond those in Rep. Paul Ryan’s plan and be more on the scale of the much more extreme Republican Study Committee’s plan, which includes cutting in half the Medicaid, Supplemental Nutrition Assistance Program (SNAP, formerly food stamps), and Supplemental Security Income programs, just to name a few, on top of dramatic cuts to Medicare and Social Security.

Fortunately, passage of the amendment is no easy task. It requires a 2/3’s majority of both chambers of Congress and ratification by 3/4’s of the states. A test vote in the Senate on a resolution expressing support of a balanced-budget amendment in March garnered only 58 of the 67 votes required, showing that proponents of the amendment may have an uphill fight. On the other hand, the 1997 amendment came within one vote of approval in the Senate.

Radical anti-tax and Tea Party groups believe they can change this equation by pushing the amendment as part of their new “Cut, Cap, Balance” plan, which calls on lawmakers to require the passage of the amendment as a condition for increasing the debt ceiling. In fact, conservative groups are pushing Congressional Republican’s to hold off having a vote on the amendment, knowing that the threat of the debt ceiling vote is their best opportunity to pass it.

Lawmakers need to stand up to these groups who are attempting to hold our economy hostage (by not raising the debt ceiling) in order to pass a radical budget amendment as a Trojan Horse for draconian service cuts.

Former Republican Senator Judd Gregg recently commented, “Lord save us from the well intentioned and those who are trying to score political points or raise money” by pursing this form of “conservative misdirection.”

CTJ Figures Used in Budget Debate Show Ryan Plan Would Give Huge Tax Cut to Millionaires

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conrad ctj chart.gifOn Wednesday, May 25, Senator Kent Conrad, chairman of the Senate Budget Committee, delivered comments on the Senate floor about the budget, the deficit and why he rejects the House budget plan from Rep. Paul Ryan.

Senator Conrad cited new figures from Citizens for Tax Justice showing that taxpayers with income exceeding a million dollars would enjoy an average tax cut of at least $192,500 in 2013 if Congressman Paul Ryan's budget plan was enacted. Taxpayers with income exceeding $10 million in 2013 would get an average tax cut of at least $1,450,650 under the Ryan plan.

Conrad explains the obvious math that a deficit problem isn't solved by reducing revenues, and that it especially makes no sense to reduce revenues by cutting taxes for the super rich. His graphic illustrates the analysis CTJ provided. The Senate ulitmately voted against the House plan 57-40.

Watch Senator Conrad's remarks below:

On Wednesday, U.S. Senators and Representatives received a letter from 250 organizations, including organizations in every state, calling on Congress to close corporate tax loopholes and use the revenue saved to address the budget deficit and fund public investments.

The 250 non-profits, consumer groups, labor unions and faith-based groups call for a corporate tax reform that raises revenue. This differs sharply from calls by President Obama and Treasury Secretary Geithner for “revenue-neutral” corporate tax reform. The Obama administration is expected to release a plan for “revenue-neutral” corporate tax reform sometime in the near future.

As the letter explains, “Some lawmakers have proposed to eliminate corporate tax subsidies and use all of the resulting revenue savings to pay for a reduction in the corporate income tax rate. In contrast, we strongly believe most, if not all, of the revenue saved from eliminating corporate tax subsidies should go towards deficit reduction and towards creating the healthy, educated workforce and sound infrastructure that will make our nation more competitive.”

Read the letter.

Citizens for Tax Justice has called for revenue-positive tax reform in a recent op-ed in USA Today, a report explaining why Congress can raise more revenue from corporations, and in CTJ director Bob McIntyre's recent testimony before the Senate Budget Committee.

Obama Blasts Ryan Budget Plan

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In his speech on Wednesday addressing the budget deficit, President Obama skewered the House Republicans’ budget plan as painting “a vision of our future that’s deeply pessimistic.” He pointed out that if enacted, the budget proposed by House Budget Committee Chairman Paul Ryan would mean

- "A 70 percent cut to clean energy. A 25 percent cut in education. A 30 percent cut in transportation."

- "Cuts in college Pell Grants that will grow to more than $1,000 per year."

- Typical 65-year-olds would spend nearly $6,400 more annually on health care.

- Medicare would be turned into a voucher, and "if that voucher isn’t worth enough to buy insurance, tough luck – you’re on your own."

- 50 million would lose health insurance, resulting from Medicaid cuts and the repeal of the health care reform law.

- A trillion dollars in tax breaks for the rich (the extension of the parts of the Bush tax cuts that Obama wants to see expire).

"There’s nothing courageous about asking for sacrifice from those who can least afford it and don’t have any clout on Capitol Hill," President Obama said of the Ryan budget plan.

Ryan’s Goal Is to Shrink Government, Not the Deficit

A report last week from CTJ explains that Ryan’s budget actually reduces revenue, compared to current law and compared to Obama’s proposed budget, which makes it pretty obvious that deficit reduction is not its real motivation. The Ryan plan would essentially make permanent the level of taxation enacted under President Bush and then overhaul the tax system to eliminate loopholes and put the revenue saved towards rate reductions.

The result would be that the highest rates for individuals and corporations would be just 25 percent, and tax revenue collected would equal just between 18 and 19 percent of GDP. To put this in perspective, note that spending was about 21 percent of GDP under President Reagan – and that was before the baby-boomers were retiring, before health care costs had climbed so dramatically, and before we became engaged in multiple conflicts in the Middle East.

The Ryan plan does not spell out in any detail what the resulting tax system would look like – and there’s a specific reason for this. Last year, when Congressman Ryan presented a detailed plan that would allow people to pay income taxes at a top rate of 25 percent, Citizens for Tax Justice found that the plan would cut taxes, on average, for the richest ten percent and raise taxes, on average, for all other income groups. Remarkably, the plan would also lose $2 trillion over a decade.

Even President Obama’s Approach Could Be Dramatically Improved

While President Obama’s approach is vastly more responsible and reasonable than the House Republicans’ plan, it still doesn’t do enough to raise revenue. President Obama would allow the Bush tax cuts for the rich to expire and wants to limit tax expenditures, which are the equivalent of spending but administered through the tax code.

Like his fiscal commission, Obama says he wants an overall deficit reduction plan that cuts spending by two dollars for every one dollar of new revenue. But given that we are one of the least taxed countries in the developed world, at very least that ratio should be reversed. To be sure, much of the new revenue should come from cutting what amounts to spending programs implemented through the tax code, as the President argues.

But it’s unclear exactly what he means when he says he wants to raise $1 trillion in new revenue. If he aims to raise $1 trillion compared to the “current policy baseline,” which assumes that the Bush tax cuts are extended forever, that is mostly accomplished by allowing the tax cuts for the richest two percent to expire, as he has already proposed.

But surely more Americans than just the richest two percent can afford to pay more, especially if budget reform is going to involve “shared sacrifice,” as President Obama says. And surely we can do more than just allow part of the Bush tax cuts to expire, which will happen anyway if Congress does absolutely nothing.

Finally, the President reiterated his call for corporate tax reform to make our businesses "more competitive." Frankly, what we need is to make our businesses pay more in taxes, particularly our corporations. Even Bush's Treasury concluded in a 2007 report that the share of profits paid in taxes is lower on average for U.S. corporations than corporations of other developed countries. To not even attempt to get more revenue overall from our corporate tax system is incomprehensible.

Any rational proposal to balance the federal budget would rely on a mix of spending reductions and revenue increases. But, as explained in a new CTJ report, the House Republican budget plan relies on draconian spending cuts and actually reduces revenue.

The plan is motivated not by a desire to balance the budget but rather by the ideological goal of reducing the size of government to something that would be unrecognizable to Americans today.

The plan’s author, House Budget Committee Chairman Paul Ryan, is intentionally vague about his plans to overhaul the tax system. That may be because his previous attempt to explain how he would reduce the top income tax rate to 25 percent made it clear that the result would be a big tax increase for all income groups except the richest ten percent.

Read the report.

CTJ Op-Ed in USA Today Calls for Revenue-Positive Corporate Tax Reform

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A USA Today op-ed written by CTJ's Steve Wamhoff argues that we should approach corporate tax reform the way President Reagan did in 1986. He closed enough tax loopholes to raise new revenue from corporations, even while lowering the corporate tax rate.

Read the op-ed

Grover Norquist Attacks Republicans for their Insufficient Extremism

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Grover Norquist, President of Americans for Tax Reform and leader of the anti-tax movement, is used to getting his way, at least when it comes to politicians from conservative parts of the country. Many conservative lawmakers have signed ATR's "Taxpayer Protection Pledge" which is a promise to oppose tax increases in any and all circumstances.

But these are not normal times, and Norquist's grip on conservatives may be loosening, one finger at a time. The country faces a long-term budget crisis that requires long-term solutions. But most of the debate so far has been over the GOP's proposals for immediate cuts in discretionary spending that will slow down our economic recovery without doing much to address the long-term problem. Something has to change.

In this environment, lawmakers are more willing to consider spending cuts and revenue increases than they were before. Towards the end of last year, a majority of the members of the President's fiscal commission voted in favor of a plan to slash spending and dramatically overhaul the tax system in a way that would raise some revenue. The three Republican Senators on the commission voted in favor of the plan, and Grover Norquist naturally disapproved.

In reality, the fiscal commission's plan was outrageously conservative. CTJ and other observers objected that it relied on spending cuts for two thirds of the deficit reduction while relying on increased revenue for just one third. But for Republican lawmakers, supporting even one dollar of new revenue can incite the wrath of Norquist and raise the specter of a primary challenge.

Now a "gang of six" Senators — three Republicans and three Democrats — has been meeting and talking about deficit reduction in a way that would involve reducing spending and increasing revenue. The Republicans include Mike Crapo and Tom Coburn (Senators on the fiscal commission who voted in favor of the plan) and Saxby Chambliss. It seems likely they will propose something similar to the commission's plan.

The Republican members of the gang of six certainly don't champion tax increases in the traditional sense, but are willing to consider raising revenue through eliminating tax expenditures, that is, government spending through the tax code. Senator Coburn has been especially forthcoming. He's even written OpEds about particular tax expenditures, like the subsidy for ethanol, that need to be cut.

Of course, anti-tax crusader Norquist has criticized the negotiations as a "transparent attempt to hike taxes," which he says violates the taxpayer protection pledge that the three Republicans have signed.  In a thoughtful and carefully-worded letter, the three responded to Norquist that they were working to "protect taxpayers, not special interests."

An article in Politico went so far as to say Norquist's threat has been "a nonfactor" inside the bipartisan talks. That's not a good sign for someone in the business of scaring politicians into an extreme and rigid ideology.

CTJ Op-Ed: Sorry, Newt. You Never Balanced the Budget

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An op-ed by CTJ director Bob McIntyre that ran in several newspapers this week refutes Newt Gingrich's recent claim that the government shutdown of 1995 led to a balanced budget. McIntyre writes:

In a Feb. 27 article in the Washington Post, Gingrich argues (a) that Republicans did not cause the government shutdown and (b) that the shutdown was a brilliant tactical move by Republicans. The shutdown, he says, led inexorably to the 1997 "Balanced Budget Act," which he claims produced the federal budget surpluses we enjoyed from fiscal 1998 to 2001.

Gingrich's insistence that he deserves none of the blame, but all of the (supposed) credit for the 1995 government shutdown is humorous, and I thank him for the laugh. Not so funny is Gingrich's cockamamie theory that the so-called 1997 "Balanced Budget Act" and its companion bill, the "Taxpayer Relief Act," led to the budget surpluses that began in 1998...

Read the op-ed

The budget outline released by President Obama this week, just like last year’s proposal, includes about $3.5 trillion in tax cuts over ten years. Most of that cost comes from his $3.1 trillion proposal to make permanent most of the Bush tax cuts, which would cost 81 percent as much as extending all the Bush tax cuts.

The President’s budget outline does include several laudable provisions to raise revenue, but not nearly enough to offset the costs of the proposed tax cuts.

The net effect of the tax proposals in the budget plan would be to reduce federal revenue by $2.8 trillion over ten years, compared to what would happen if the Bush tax cuts simply expired (as they will under current law if Congress does nothing).

Read the report.

CTJ Responds to State of the Union Address

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During his State of the Union Address last week, President Obama called on Congress to "get rid of the loopholes" in the corporate tax and "use the savings to lower the corporate tax rate for the first time in 25 years — without adding to our deficit."

If the President means that all of the revenue raised by closing tax loopholes should be used to pay for a reduction in the corporate tax rate, then this is the wrong approach.

A report released earlier that day by Citizens for Tax Justice explains several reasons why corporate tax reform should be revenue-positive, not revenue-neutral. Despite what corporate CEO’s and many politicians claim, U.S. corporate taxes are already lower than the corporate taxes imposed by the countries that we compete with. Surveys show that most Americans want large corporations to pay more, not less, in taxes. The arguments lobbyists make to try to justify reducing U.S. corporate taxes — arguments related to “competitiveness” and alleged “double-taxation” of corporate income — don’t add up. The last major corporate tax reform, which was enacted under President Ronald Reagan at a time when corporate loopholes were out of control, as they are again today, resulted in a 34 percent net corporate tax increase.

House Budget Chairman Paul Ryan gave the Republican response to President Obama's State of the Union address, speaking at length about what he sees as the need for greater cuts in government spending.

Anyone interested in learning what sorts of changes Congressman Ryan has in mind can look to the detailed "Roadmap for America's Future" that he proposed last year.

Ryan's "Roadmap" would reduce Social Security benefits and partially privatize the program, replace Medicare and Medicaid with gradually declining subsidies for private health insurance, and dramatically slash other types of non-military spending.

CTJ's report on the tax proposals in Ryan's "Roadmap" found that they would raise taxes on average for the bottom 90 percent of taxpayers, slash taxes on average for the richest 10 percent of taxpayers, and lose $2 trillion over a decade.

House GOP Changes Rules to Facilitate Tax Cuts that Increase the Deficit

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On Wednesday, House Republicans voted to replace the chamber's "pay-as-you-go" or PAYGO rules with a new set of rules called "cut-as-you-go" that is based on the belief that government spending contributes to budget deficits but tax cuts, no matter how huge, do not.

CTJ sounded the alarm back in November, in an op-ed that explained how this would increase the (already significant) incentives for Congress to do all sorts of spending through the tax code at a time when lawmakers need to move in the opposite direction and close special tax breaks and loopholes.

PAYGO requires that the cost of any increase in mandatory spending or any new tax cuts be offset either with spending cuts or some sort of tax increase. Cut-as-you-go requires that the costs of increases in mandatory spending be paid for by cuts in other mandatory spending. Under cut-as-you-go, the House is not required to offset the cost of tax cuts, and it cannot offset the costs of increased spending by raising taxes.

Equally outrageous is that cut-as-you-go would allow the fast-track procedure known as "reconciliation" to approve tax cuts that increase the deficit. (Remember that reconciliation is the procedure that Republicans called a power grab when Democrats used it to enact part of health care reform.)

The reconciliation procedure was created to facilitate the enactment of laws that would help balance the budget, but in the early 2000s the rules were changed by the Republican Congress that went on to use reconciliation to increase the deficit with the Bush tax cuts. When Democrats took back Congress, they reinstated a more traditional PAYGO rule that barred the use of reconciliation for laws that increase the deficit.

It's important to remember that Republican lawmakers generally believe, or claim to believe, that tax cuts either pay for themselves or actually cause revenues to increase. Senate Republican Leader Mitch McConnell said over the summer, "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." This idea has been thoroughly debunked by every credible economist who has ever given it a moment of thought, and yet it remains at the heart of the Republican philosophy.

Cut-as-you-go also explicitly exempts any and all costs associated with the repeal of health care reform. Because the health care reform law reduced the deficit, the repeal of it would, of course, increase the deficit. In fact, the Congressional Budget Office just found that repeal will increase the budget deficit by $230 billion over the first decade and more in the years after that. The House GOP's cut-as-you-go rule allows the chamber to ignore this cost.

Of course, cut-as-you-go may have more symbolic and political importance than any real impact on what laws get passed. Just like PAYGO, cut-as-you-go will be waived by a House that doesn't want to be bound by it. Reconciliation matters mostly in the Senate, because it gets around the bizarre super-majority requirement in that chamber, and the Senate is controlled by Democrats. (In the House, bills always just need a simple majority of votes to pass.)

Also, when the Democrats controlled Congress, they put two types of PAYGO in place. One was in the procedural rules of each chamber, and the other was in law (statutory PAYGO). Cut-as-you-go only replaces PAYGO in the House rules and is not itself a law. Statutory PAYGO, which is unaffected, still requires the administration to automatically cut spending to offset any increases in mandatory spending or tax cuts that are not paid for.

But cut-as-you-go will make it incredibly easy for the House Republicans to approve huge tax cuts that seem, on the surface, appealing to the general public. Even if such tax cuts do not become law during this Congress, they present a huge problem for lawmakers who are trying to take responsible positions on taxes. House Republicans will have absolutely no incentive to tell the public what the real fiscal impact of these tax cuts will be. Cut-as-you-go will also make it much less likely that the House could approve even modest improvements in essential programs, since these improvements could not be funded by the elimination of tax loopholes (of which there are plenty).

Report from CTJ: Compromise Tax Cut Plan Tilts Heavily in Favor of the Well-Off

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(Includes state-by-state figures)

A new report from CTJ finds that the compromise tax plan agreed to by President Obama and congressional Republicans would provide more than a quarter of its tax cuts to the best-off one percent of all Americans. That’s almost double the share of the tax cut that the President proposed to give the highest earners.

At the same time, the new tax plan would reduce taxes, and increase the budget deficit, by $424 billion in 2011 alone. That’s 40 percent more in tax cuts than the $301 billion tax cut the President had earlier proposed.

Read the report.

House Democrats voted in a closed-door caucus meeting on Thursday to not take up the compromise deal, which also includes a 13-month extension of expanded unemployment benefits, until changes are made to the tax provisions. Meanwhile, the Senate is debating the compromise today.

Under the compromise plan:

- The wealthiest one percent would get an average tax cut in 2011 of almost $77,000 compared to current law (under which all of the tax cuts enacted since 2001 are scheduled to expire). That’s almost triple the $29,000 tax cut that President Obama proposed to provide to the top one percent.

- Meanwhile, the lowest-income fifth of all taxpayers, those making less than $20,000 a year, would get a smaller tax cut than the President earlier proposed. This is because the GOP-inspired, 2 percent temporary reduction in the payroll tax in the compromise plan offers low-income workers a considerably smaller payroll tax reduction than the President’s proposal to extend his “Making Work Pay” payroll tax cut. The Making Work Pay payroll tax cut entirely eliminated the 6.2 percent worker payroll tax on the first $6,450 in earnings ($12,900 for couples).

The payroll tax cut agreed to by the President and GOP leaders would also provide considerably less economic stimulus “bang for the buck” than the President’s earlier proposal, because it is largest for high earners, who are less likely to spend their payroll tax savings. The compromise payroll tax cut would cost an estimated $112 billion in 2011, double the $57 billion dollar cost of the President’s earlier proposal. But we estimate that $112 billion in added borrowing would stimulate only an extra $18 billion in consumer spending compared to the President’s earlier payroll tax cut plan.

Tax Extenders Study Would Signal Commitment to Both Tax Reform and Deficit Reduction

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The Senate “compromise” tax bill unveiled last night has dropped an important provision that would have required the JCT and GAO to evaluate whether the so-called “tax extenders” are fulfilling their intended purposes.  This provision was included in both the House-passed version of the extenders, and in the Senate version that Finance Committee Chair Max Baucus introduced just one week ago.  Adding this study back into the bill would be a small but meaningful step that would signal Congress’ interest in tax reform, deficit reduction, and general government efficiency.

The “tax extenders” package consists of about 50 expiring tax provisions – costing nearly $30 billion each year – that Congress has repeatedly extended on a temporary basis.  These tax breaks, or “tax expenditures,” are designed to encourage everything from railroad track maintenance to coal mine safety, but Congress has no idea whether they’re actually accomplishing these things at a reasonable cost.  Rather than using the extenders repeated expiration as a chance to review their effectiveness, Congress routinely extends them at the last minute without any serious analysis (just as it seeks to do this year as part of a larger bill seeking to extend all of the Bush tax cuts).  The JCT/GAO study, which until last night appeared to be closely wedded to the tax extenders package, would have filled this analytical void by examining each tax extender using ten different criteria designed to reveal whether they are effective in achieving their intended purposes.

While the White House continues to express concern that major changes to the compromise tax bill could unravel any bipartisan agreement, the addition of the tax extenders study is a modest, commonsense change that should not divide lawmakers along party lines.  Indeed, the extenders study could actually broaden the base of support for the Senate compromise bill.  In explaining the importance of the study, both the House-passed bill and the bill introduced by Senator Baucus last week cite the effect these provisions have on the “escalating public debt,” and the way in which these tax breaks complicate the tax code for individuals and the IRS.  Adding this study back into the bill could signal to both deficit hawks and tax reform advocates that these tax provisions will not be allowed to continue unless very good reasons can be found to justify their existence.

In addition to widespread support for the study in the House, and apparently within the Senate Finance Committee, the sentiment behind the JCT/GAO study has also picked up significant support among outside groups.  Eric Toder of the Tax Policy Center, the Center for American Progress, and a dozen other national groups have said that the study would be very useful in informing future debates over extending these provisions.

While not mentioning the tax extenders study specifically, President Obama’s Chief Performance Officer, the GAO, the Pew-Peterson Commission on Budget Reform, the OECD, and numerous, other, groups, have also cited the need for additional evaluation of tax breaks.  The tax extenders study would be an important step forward in conducting these evaluations.

CTJ's Statement on the Unbalanced Deficit Plan Rejected by President's Fiscal Commission

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The President's fiscal commission rejected a deficit-reduction plan that CTJ and others found to be seriously unbalanced. The plan was supported by 11 of the 18 commission members, but the rules of the commission specified that a plan could not be approved without a super-majority of 14 of the 18 votes. House and Senate leaders had promised to bring to the floor any deficit reduction plan that was approved by the commission, which they are now not obligated or likely to do. 

The plan could still, unfortunately, influence lawmakers in the future. It relies on cuts in public services for two-thirds of the deficit reduction it strives for, while relying on increased revenues for only one-third. In fact, the plan claims it would somehow “cap” federal revenue at the arbitrary level of 21 percent of the economy. As a result, the plan relies far too much on cuts in public services that will be impossible to make without adversely affecting Americans — including those with very modest incomes.

As CTJ's statement on the plan explains, part of the problem is the commission’s approach to closing tax loopholes. The plan makes bold proposals to close tax loopholes, but unfortunately uses most of the resulting revenue to lower tax rates! Since the goal of this commission is to reduce the budget deficit, it’s hard to fathom why lowering tax rates would be on its agenda at all.

Read CTJ's full statement on the deficit plan.

On Wednesday, the co-chairs of the President's fiscal commission put forth a series of options to reduce the long-term federal budget deficit by $3.8 trillion over ten years. The vast majority of the savings would come from cuts in public investments rather than from closing tax loopholes and reforming the tax system.

This makes little sense, given that the United States is one of the least taxed countries in the developed world. A new report from Citizens for Tax Justice explains that the most recent data from the Organization for Economic Cooperation and Development (OECD) show that the U.S. is the third least taxed country of the 27 OECD countries for which data are available.

Read the report.

New Report from CTJ: Douglas Holtz-Eakin Peddles Myths about the Bush Tax Cuts

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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.


Senate Continues Battle Over Bill on Jobs, "Extenders," and Loophole-Closers

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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.


Be Informed and Take Action on Tax Day

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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.


Obama Budget Continues to Delay Taking a Closer Look at Tax Breaks

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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 Second Coming of Pete Peterson

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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.

House Approves Bill to Close "Carried Interest" Loophole, Crack Down on Offshore Tax Cheats

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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.

New CTJ Report Calls for Review of Spending Programs Buried Within the Tax Code

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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

New CTJ Report on President Obama's Revenue Proposals

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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.

House and Senate Approve Final Budget Resolution

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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.

Thank Congress for Adopting a Budget that Moves Towards Obama's Reform Agenda

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The U.S. House of Representatives and the U.S. Senate both approved budget resolutions on April 2. The Coalition on Human Needs is asking people who care about reforming health care, improving education and reducing poverty to thank their members of the House and Senate if they voted in favor of the budget resolutions that passed. (The House passed its budget by a vote of 233-196, and the Senate passed its version by 55-43.)

Click here to see how your Representative and Senators voted. If any of them voted in favor, click here to send them a note thanking them.

The basic thrust of many of the tax policies embodied in the budget resolutions mirror the President's proposals. Both resolutions assume the extension of the Bush income tax cuts for everyone except taxpayers with incomes above $200,000 (or $250,000 for married couples). Taxpayers above these thresholds are affected by the top two income tax rates, which would revert to 36 and 39.6 percent. Both resolutions would extend the "AMT patch," a measure that increases the exemptions from the Alternative Minimum Tax to ensure that most taxpayers are not affected by it.

On certain key issues (like the estate tax) the Senate made some poor choices that will hopefully not be reflected in the final budget resolution the House and Senate will have to approve sometime after they return from their recess on April 20. For more details, see last week's Digest articles on the federal budget.

Budget Resolutions Approved by House and Senate

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The U.S. House of Representatives and the U.S. Senate both approved budget resolutions on Thursday that move Congress a step closer to enacting President Obama's agenda, without being quite as bold or explicit as the budget outline released by the President in late February. Both resolutions would spend about $3.5 trillion in 2010 and include non-binding, but important, provisions affecting spending and revenues in years after that. As lawmakers from both chambers leave Washington for their spring recess, behind-the-scenes negotiations will likely pave the way for a House-Senate conference to take place upon their return to iron out the differences between the two resolutions. On some key issues like estate tax and health care, the House has made wiser choices that will hopefully be maintained in the final budget resolution.

The basic thrust of many of the tax policies embodied in the budget resolutions mirror the President's proposals. Both assume the extension of the Bush income tax cuts for everyone except taxpayers with incomes above $200,000 (or $250,000 for married couples). Taxpayers above these thresholds are affected by the top two income tax rates, which would revert to 36 and 39.6 percent. Both resolutions would extend the "AMT patch," a measure that increases the exemptions from the Alternative Minimum Tax to ensure that most taxpayers are not affected by it. (The chambers differ on the extent to which the costs of the AMT patch will have to be offset with revenue-raising measures in the future.)

The resolutions do not follow the President's proposals on certain issues. For example, President Obama proposed that the income tax cuts aimed at working families and included in the recently-enacted stimulus bill be made permanent. The resolutions would make some of these permanent, like the expansion in the child tax credit and the American Opportunity Tax Credit for higher education.

But they would not make permanent the Making Work Pay Credit, one of Obama's signature tax policies. Neither do they include any specific language to create a "cap and trade" program to reduce greenhouse gas emissions, which, in the President's proposal, would produce the revenue needed to offset the costs of the Making Work Pay Credit and other energy initiatives.

Similarly, the resolutions do not include language laying out how Congress will pay for health care reform. (The President's budget outline included a reduction in the benefits of itemized deductions for the rich to partially fund health care reform.)

None of this means that Congress will not act on these proposals of the President's. The resolution includes language allowing for deficit-neutral legislation in these areas without specifying how money will be spent or how it will be raised.

Congress's next important test involves settling the differences between the House and Senate resolutions. When it comes to revenues raised to pay for health care or revenues raised from the estate tax, hopefully the choices made by the House will be maintained in the final budget resolution. See the following Digest articles for more.

Estate Tax: Senate Approves a Break for Millionaires that Leader Reid Calls "So Stunning, So Outrageous"



Reconciliation for Health Care Reform: House Moves to Stop Senators' Obstruction of Measures with Majority Support



House GOP's Alternative Budget: Poor Pay More, Rich Pay Less, Stimulus Repealed and Government Shrinks









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 last week 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. The Center on Budget and Policy Priorities released a report this week finding that about 99.7 percent of estates would be untouched by the tax under this proposal.

Incredibly, 51 Senators voted to approve an 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 puts the Senate on record as supporting a $10 million exemption for married couples and a 35 percent rate.

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."

Remarkably, both the Republican Senators and the "moderate" Democratic Senators who voted for this expanded break for families with millions of dollars to pass on to their heirs were largely the same Senators who claim to be concerned about budget deficits and the costs of the President's proposals to help working families.

The actual consequence of the amendment is unclear for several reasons. First, the amendment was written to be "deficit-neutral," meaning that if Congress wants to pass actual legislation to cut the estate tax, they would have to find a way to raise enough revenue to replace those billions lost. Some of the Senators who voted for the amendment would oppose a cut in the estate tax if it is deficit-financed (which any estate tax cut is likely to be). Second, the Senate then adopted (by a vote of 56 to 43) a confusing amendment creating a point of order AGAINST any estate tax cut if the Senate did not also provide some new tax cut, costing the same amount of money, for people earning less than $100,000. Whether that condition could be met is an open question.

Sorting through this confusing jumble of stated intentions and caveats will hopefully become unnecessary. The conferees crafting the final budget resolution should leave out the Senate's ludicrous cut in the estate tax.

Unlike the Senate budget resolution, the House resolution includes "reconciliation" instructions that would protect a bill from the filibuster that can thwart legislation in the Senate even if it has majority support. It is understood that the reconciliation procedure would be used to enact health care reform.

Opponents of the President's agenda have been surprisingly effective at casting as unfair the procedure that would allow legislation to be enacted by a majority vote in both chambers. The media has in many cases uncritically quoted lawmakers who feel it would be partisan and divisive to allow the Senate to approve a bill with only 59 out of 100 members voting in favor.

Some have complained that reconciliation is only to be used for deficit-reduction, but 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. Even putting that aside, it's not clear that the original purpose of reconciliation is any more important than the original purpose of the Senate filibuster, which was originally used only on rare occasions but has turned into a 60-vote requirement to pass any bill introduced in the Senate.

It's true that there are rules limiting what sorts of measures can be enacted through the reconciliation process. (Provisions that have no quantifiable budget impact in the next few years may be impossible to pass through reconciliation.) But the limits imposed by a potential filibuster may be greater. Whether health care reform happens at all hinges on whether or not Congress can raise the revenue to pay for it. Hopefully, bipartisan agreement can be found on how to do that. But Congressional leaders would be smart to leave themselves the option of reconciliation in case such consensus proves elusive.

When anti-tax activists and lawmakers complain that Congress and the President are pursuing policies that will cause taxes to be too high, the first question anyone should ask is: Compared to what? What exactly is the alternative to allowing the Bush tax cuts to end (at least for the rich) and finding new ways to raise revenue?

This week the House GOP showed us what the alternative is and it's frightening. On Wednesday, the ranking Republican on the U.S. House of Representatives' Budget Committee, Congressman Paul Ryan (R-Wisc.), released a budget plan which he argues is a more fiscally responsible alternative to the budget outline proposed by President Obama and the similar budget resolutions approved by both chambers last night. His proposal is apparently an update of the plan that House GOP leaders introduced last week and is different in some key respects.

The revised House GOP budget plan would move towards cutting and privatizing Medicare, convert Medicaid into limited block grants to states, and even cut Social Security benefits for some retirees. The plan would deeply cut the relatively small amount of government spending devoted to non-military, non-mandatory programs by refusing to adjust the budgets of these programs for inflation and population growth for five years. The House GOP plan would repeal the recently enacted economic stimulus law (the American Recovery and Reinvestment Act of 2009, or ARRA) a year before its expiration at the end of 2010.

A report from Citizens for Tax Justice compares the income tax proposals in the House GOP plan to the income tax proposals in the House Democratic plan in 2010, and finds that:

  • Over a third of taxpayers, mostly low- and middle-income families, would pay more in taxes under the House GOP plan than they would under the House Democratic plan in 2010.
  • The richest one percent of taxpayers would pay $75,000 less, on average, in income taxes under the House GOP plan than they would under the Democratic plan in 2010.
  • The income tax proposals in the House GOP plan, which is presented as a fiscally responsible alternative to the Democratic plan, would cost over $225 billion more than the Democratic plan's income tax policies in 2010 alone.

Read the report.

Yesterday, the Republican leadership in the U.S. House of Representatives released the outlines of a tax and spending plan that they argue is a more fiscally responsible alternative to the budget outline proposed by President Obama and the similar budget resolutions working their way through the House and Senate.

A new report from Citizens for Tax Justice compares the income tax proposals in the House GOP plan to the income tax proposals in the President's plan and finds that:

  • Over a fourth of taxpayers, mostly low-income families, would pay more in taxes under the House GOP plan than they would under the President's plan.
  • The richest one percent of taxpayers would pay $100,000 less, on average, under the House GOP plan than they would under the President's plan.
  • The income tax proposals in the House GOP plan, which is presented as a fiscally responsible alternative to the President's plan, would cost over $300 billion more than the Obama income tax cuts in 2011 alone.

Read the report.

This week, Citizens for Tax Justice updated its recent report on the tax proposals in the President's budget outline to include estimates of the proposals' impacts on different income groups in every state. The new state figures examine the proposed cuts compared to current law and also compared to the baseline that the Obama administration uses in presenting its budget figures. The figures show that, whichever baseline is used, the vast majority of families in every state will get a significant tax break.

Read the report. (State-by-state figures are in the final appendix.

President Obama Should Expand Government Performance Reviews to Include Tax Expenditures

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Citizens for Tax Justice called uponPresident Obama this week to stand by his message of transparency by finally making "tax expenditure" performance reviews a regular part of the OMB's evaluations of government effectiveness.

Simply put, tax expenditures differ from the rest of the tax code in that they focus on encouraging a specific activity or rewarding a particular group of people, rather than on trying to improve the efficiency, simplicity, or fairness of our tax system.Since tax expenditures are usually enacted with primarily non-tax goals in mind (e.g. encouraging investment, encouraging research and development, encouraging home ownership, etc.) it is important that the government make an effort to gauge their effectiveness in achieving those goals.

But despite calls from the GAO, past Congresses, and outside experts in favor of subjecting tax expenditures to regular performance reviews, the most comprehensive performance measure currently in place, the OMB's Program Assessment Rating Tool (PART), continues to focus narrowly on only traditional spending programs.

Encouragingly, language in the President's recently released budget blueprint suggests that a more comprehensive approach for evaluating the government's performance will be used under the Obama Administration (see. pp.39).It's hard to see how anything approaching true comprehensiveness could ignore the hundreds of billions of dollars the government directs toward programs administered via the tax code.Hopefully, the brief language addressing performance reviews that was included in this blueprint is the first signal that an end is coming to the free-ride thus far enjoyed by tax expenditures.

Read the full statement from CTJ

New Report from Citizens for Tax Justice: President Obama's First Budget Proposal

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On February 26, President Obama sent to Congress the blueprint for what could be one of the most progressive federal budgets in generations. The budget calls for national health care reform, expanded education funding, a program to reduce global warming, and several improvements in human needs programs. As a new report from Citizens for Tax Justice explains, it would make the tax code considerably more progressive, and close a number of egregious tax loopholes.

There is, however, a flaw in the budget proposal: It does not raise enough revenue to pay for public services. Instead, its net effect is to cut taxes dramatically.

Opponents of the President have attempted to argue that the budget proposal calls for tax increases that could sink the economy, but this complaint is plainly unfounded. President Bush and his allies in Congress were adamant that lower taxes would lead to an explosion of prosperity, and they enacted tax cuts in 2001, 2002, 2003, 2004 and 2006. Some allies of the former President argue that Congress is now insufficiently focused on tax cuts, but this view seems bizarre and incredible given the sad economic facts all around us.

Indeed, one might reasonably conclude that we could safely allow most of the Bush tax cuts to expire at the end of 2010, as they are scheduled to under current law, without any concern about how this will impact the economy. But President Obama actually proposes to keep most of the Bush tax cuts. Obama's largest proposed tax cut is to re-enact 80 percent of the Bush tax cuts that are scheduled to expire at the end of 2010. Most of this reflects re-enacting the Bush income tax cuts for married couples with incomes below $250,000 and others with incomes below $200,000 (or put another way, for about 98 percent of taxpayers), and permanently reducing the Alternative Minimum Tax (AMT). In addition, Obama proposes to re-enact close to half of the Bush estate tax cut.

On top of re-enacting most of the Bush tax cuts, the Obama budget includes a number of additional tax cuts for families and individuals. (These would be extensions of temporary tax cuts included in the recently passed stimulus law.) It also proposes some questionable business tax cuts.

Partially offsetting its tax-cut proposals, the Obama budget proposes some significant revenue-raising provisions. These include a cap-and-trade program to reduce carbon emissions, a limit on the benefits of itemized deductions for high-bracket taxpayers, and a number of corporate and high-income loophole-closing measures.

Read the Report

Special Alert about President Obama's Budget Proposal

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Special Alert about President Obama's Budget Proposal from Our Friends at the Coalition on Human Needs:

  • Learn about this transformational budget during a FREE webinar this Thursday, March 5 at 2pm eastern time (more details below)
  • Organizations that wish to support and build upon President Obama's priorities please SIGN a statement online. Read statement here.

FREE Webinar:

President Obama's Budget:
The Path to Rebuild and Renew America Now


Thursday, March 5, 2:00 - 3:00 p.m. eastern time

Register: www.bostonconferencing.net/chn

(Once registered you will receive instructions on how to log in, and explanatory budget materials via email. To participate, you need to be at a computer.)

This webinar will show how the President's budget would invest in health care, renewable energy, education, and more, laying a new foundation for growth that benefits us all. The budget makes an important - make that historic - down payment on renewing opportunities for Americans to join the middle class and be protected from poverty. The webinar will describe the transformational choices in the budget - a long-term plan to pay for the investments we need by raising revenues from those who can afford to pay and by cutting waste in the military and elsewhere. And it will describe a new campaign to support the President's responsible budget priorities - a campaign that needs your help.


  • Human Needs Choices in the Budget:
    Deborah Weinstein, Executive Director, Coalition on Human Needs
  • Environmental Priorities:
    Ivan Frishberg, Political Director, Environment America
  • The Campaign - Rebuild and Renew America Now:
    Alan Charney, Program Director, USAction
  • Donald W. Mathis, Moderator, President and CEO, Community Action Partnership

There will be time for questions!

This webinar is co-sponsored by organizations including the Coalition on Human Needs, ACORN, AFSCME, Center for Law and Social Policy, Citizens for Tax Justice, Community Action Partnership, Environment America, Food Research and Action Center, Friends Committee on National Legislation, Health Care for America Now, Jewish Council for Public Affairs, National Association of Social Workers, National Immigration Forum, National Women's Law Center, NETWORK: a National Catholic Social Justice Lobby, Public Education Network, RESULTS, United States Students Association, USAction, Wider Opportunities for Women, and YWCA USA (list in formation).

President Obama's First Budget: Not Perfect, But a Massive Improvement Over the Recent Past

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Revised March 4, 2009

On Thursday, President Obama sent his budget blueprint to Congress. While many of the details remain to be seen, it's the most progressive budget we've seen in years. It's also a more honest budget than the last administration ever proposed. For example, it doesn't pretend that the Alternative Minimum Tax (AMT) will expand its reach to tens of millions of additional taxpayers (which Congress never allows), and it includes the cost of the Iraq and Afghanistan wars instead of pretending that they will end this year.

It goes a long way towards making the tax system fairer and more progressive. The tax portion of the budget would allow the Bush tax cuts to expire for the very rich and includes revenue-raising provisions that are progressive, environmentally friendly and which, in some cases, would make the tax code simpler.

But the budget blueprint does muddle the cost of extending the Bush tax cuts for all but the top 2 percent of individual taxpayers by using a baseline that assumes the Bush tax cuts have already been made permanent, when in reality they are scheduled to expire at the end of 2010. (In other words, the Obama administration is using a baseline that assumes John McCain won the presidential election and his allies swept both chambers of Congress and were able to enact his tax policies!)

Continuing the Bush tax breaks for 98 percent of taxpayers and providing AMT relief will cost $2.6 trillion over the 10-year budget period. That's a steep price to pay for tax cuts that have not delivered their promised benefits. As the budget moves through Congress, we hope that the goal of long-term deficit reduction will prevail and the Bush tax breaks will be reduced even more. This could mean, for example, further raising the rates on capital gains and scaling back the cut in the estate tax. These changes would help move us towards the day when the government actually collects enough revenue to pay for the services it provides.

In addition to extending a lot of the Bush tax cuts and providing AMT relief, the President's budget would also provide around $770 billion in additional tax breaks targeted to working class people, plus over $70 billion in tax cuts for business. These are offset with several revenue-raising provisions, including a "cap and trade" program to limit carbon emissions, cleaning up the international tax system and eliminating loopholes for energy companies and other corporations.

These provisions are all included in the tax portion of the budget proposal. Other parts of the proposal include other revenue-raisers. For example, the budget includes a new provision that would limit the benefit of itemized deductions so that they could not reduce taxes by more than 28 percent (instead of, say, 35 percent for people rich enough to be affected by the 35 percent income tax rate). This provision would raise revenue to offset new health care spending.

This budget may not be perfect, but it does take several steps to find revenue to invest in our future and support working class families.

Next week, CTJ will provide a more detailed analysis of the President's budget and its tax provisions.

The Coming War Over the Federal Budget

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The President's Fiscal Responsibility Summit

Expect to see some drama next week around the federal budget. First, on Monday, President Obama will convene a "Fiscal Responsibility Summit" with Congressional leaders and others to "to send a signal that we are serious" about the long-term deficits faced by the federal government, focusing on entitlement programs. Obama has been sending signals that he is open to any and all ideas about how to get the federal budget back under control once our economy is back on track. Which is alarming, because a lot of ideas floating around out there are incredibly bad.

For one thing, the supporters of the Bush tax cuts still fail to acknowledge that those tax cuts account for about half of the federal debt piled up by the Bush administration before the financial crisis. Pretty much all of the Republican leaders in Congress claim to be deeply concerned about the deficit, but none have waivered in their commitment to the policies that have created much of it.

Another problem is the focus on entitlements. Medicare faces a crisis, which is the crisis of exploding health care costs that we can only contain by reforming the entire health care system. Exploding health care costs are, many analysts have concluded, the single largest cause of long-term federal budget deficits.

But several right-wing policy advocates have made a cottage industry out of claiming that Social Security must be slashed in order to save America. The most notorious is Peter Peterson, the trillionaire who has set up a foundation to promote his version of "fiscal responsibility" and who apparently has been invited to the summit. CTJ director Robert McIntyre lambasted Peterson back in 1994 in a column in the American Prospect, saying, "Along with tax cuts for the rich, he explicitly endorses tax increases for the poor and the middle class as well as sharp reductions in what average families receive from the government."

McIntyre's criticism is mild compared to the assessment progressives give Peterson today. "Peterson, who made his fortune on Wall Street," writes Robert Borosage, "never raised a word about the dangers of hyper-leveraged finance houses gambling other people's money. He never expressed qualms about the leveraged buyout artists who were using debt finance to rip apart companies. He didn't fund an all-out effort to stop Bush from raiding the Social Security surplus to pay for tax cuts for the rich. But now he wants folks headed into retirement who have already prepaid a surplus of $2.5 trillion to cover their Social Security retirements to take a cut or work a few years longer to cover the money squandered on bailing out banks, wars of choice abroad and tax cuts for the few."

The President's Fiscal Year 2010 Budget Proposal

The drama won't end at the President's Fiscal Responsibility Summit. The President is also expected to release the outlines of his budget proposal next week, and it could contain some very important tax proposals. During his presidential campaign, Obama proposed to extend the Bush tax cuts (which mostly expire at the end of 2010) for all taxpayers except those with incomes above $200,000 (or $250,000 for married couples). CTJ calculated that this would essentially mean that the Bush tax cuts are extended for all but the richest 2.5 percent of taxpayers. It would also cost well over a hundred billion dollars a year, and that's before you add the cost of Obama's promised reform of the Alternative Minimum Tax or his other tax proposals. Meanwhile, he also pledged to repeal the Bush tax cut early for those taxpayers with income above the $200,000/$250,000 threshold, but he has hedged on that promise in recent months.

Obama also campaigned on promises to close some tax loopholes (like the carried interest loophole and loopholes enjoyed by the oil and gas industry) and clean up other parts of the tax code. It will be interesting to see what components of his campaign promises are included in his budget proposal.

Interestingly, the administration has stated that it will not engage in the same gimmicks used by the previous administration to conceal the true size of the budget deficit. For example, the Bush administration always assumed that the Alternative Minimum Tax (AMT) would be allowed to extend its reach to tens of millions of additional taxpayers, which of course made the budget appear more balanced than it truly was, even though everyone knew that Congress would enact a "patch" every year to prevent the AMT from expanding its reach. So this budget process may be more transparent than any we've seen in years.

CTJ Report: Principles for Progressive Taxation During a Recession

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The debate over taxes has become somewhat confused since the recession reared its head. Discussions of how Congress should go about matching federal revenues to federal spending have been replaced with arguments over how much and how quickly to increase the budget deficit. Most economists agree that now is not the time for Congress to focus entirely on balancing the federal budget, but what exactly does that mean? Is any increase in the federal budget deficit a good thing right now? And if increasing the budget deficit is acceptable, should we stop worrying about whether anyone is paying their fair share of taxes?

Of course not. As a new paper from Citizens for Tax Justice explains, revenues should usually be raised to cover (at least roughly) government spending, and it should be raised in a progressive way. There are some exceptions for the unusual circumstances we face today, but they are limited.

For example, using deficit-financed government spending to boost the incomes of low-income families can lead to an immediate boost in consumption that helps businesses get through this downturn without being forced to lay off staff or shut down. This can help reduce the severity of a recession. This benefit could outweigh the costs of increasing the national debt, so long as any deficit-financed spending is temporary.

But if Congress turns to deficit-financed measures that mainly increase the incomes of the wealthy -- like reducing capital gains taxes -- the effects on the economy will be very minimal and will not justify the resulting increase in the federal budget deficit and national debt.

In the long-term, taxes must be raised to a level sufficient to pay for federal government services. That must mean repealing most of the Bush tax cuts (or perhaps allowing them to expire at the end of 2010).

There are some lawmakers who seem to think that repealing the Bush tax cuts would be detrimental to the economy. But this simply makes no sense. The economy thrived at the end of the Clinton years, when taxes were higher, and sank severely at the end of the Bush years, after 8 years of lower taxes. This should tell us that lower taxes, overall, are not the answer to saving the economy.

Read the report: http://www.ctj.org/pdf/gophousetaxplan20080707.pdf

Representative Paul Ryan (R-Wisc.), the ranking Republican on the House Budget Committee, introduced legislation on May 21 that would cut Social Security benefits and create private accounts, end Medicare as it is currently structured, dramatically reduce the revenues available to fund federal public services, and radically reduce the fairness of the federal tax system.

A new report from CTJ shows that the tax provisions in this legislation would increase taxes on the poorest four-fifths of taxpayers while slashing taxes on those at the top of the income scale. The upper-income tax cuts would far outweigh the tax increases on everyone else, with a net annual reduction in federal revenues of $286 billion if the plan were in effect this year.

Hill Update

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Last week, Congress left for its Memorial Day recess having completed some important work but leaving a lot more for the summer weeks ahead. Among the issues we've been following:

- The tax "extenders" bill which includes extensions of tax cuts for business and energy and a few new tax cuts like an improvement in the Child Tax Credit for poor families.

Status: Passed by House.

The House passed its version of this bill (H.R. 6049) last week. As explained in a CTJ report, the President has threatened to veto the bill mainly because the House had the audacity to include revenue-raising provisions to offset the costs and prevent an increase in the budget deficit. This bill contains some provisions, like the extension of the Research and Experimentation Credit and a tax break for offshore financial services, that are not good policy, but the White House supports all of those.

One of the revenue-raising provisions would delay a 2004-enacted law that has not even gone into effect yet. The soon-to-take-effect law is designed to make it easier for multinational corporations to take U.S. tax deductions for interest payments that are really expenses of earning foreign profits and therefore should not be deductible. Under the House bill, implementation of this tax break (the new "worldwide interest allocation" rules) would be delayed until 2019, raising about $30 billion over ten years.

The second revenue-raising provision would crack down on the use of offshore schemes that private equity fund managers use to avoid taxes on deferred compensation, raising about $24 billion over ten years.

Democratic leaders in the Senate would like to pass an extenders bill that does not increase the budget deficit, so they are considering whether to have the Finance Committee consider a bill or simply bring the House-passed bill right to the floor of the Senate.

- The farm bill.

Status: House and Senate voted to override President's veto. Provisions targeting the tax gap were not included in final version.

There was hope that this long-fought-over legislation would include provisions that target the "tax gap" (the difference between taxes owed and taxes actually paid). None of these provisions were included in the final bill (H.R. 2419), which instead raises some revenue by reducing the ethanol tax credit and making other changes related to agriculture.

The White House had opposed a revenue-raising provision that the House attached to its version of the farm bill passed back in July of last year. Initially proposed by Rep. Lloyd Doggett (D-TX) and endorsed by Citizens for Tax Justice, this provision would raise $7.5 billion over ten years by stopping foreign corporations with subsidiaries in the U.S. from manipulating international tax treaties to avoid taxes. The Senate passed a farm bill in December that had its own revenue-raising provisions. The largest was a provision that would reduce tax avoidance schemes by codifying what is known as the "economic substance doctrine," which basically means taxpayers will not obtain tax benefits from transactions that were entered into mainly to avoid taxes. Citizens for Tax Justice advocated for this measure (although calling for a stronger version of it).

The House Ways and Means Committee chairman Charles Rangel (D-NY) had proposed a different revenue-raising provision that would require credit card issuers to report payments made by cardholders to merchants. The Senate wanted to raise revenue by requiring brokers of publicly traded securities to report the basis of a security in a transaction to ensure that capital gains taxes are paid fully. Another version of the bill included the two revenue-raisers that are now part of the House extenders bill.

- Emergency supplemental spending bill.

Status: The House approved a version with a surcharge for the very rich while the Senate approved a version without the surcharge.

On May 15, the U.S. House of Representatives took votes on amendments to an emergency supplemental spending bill to fund military operations in Iraq and Afghanistan, to improve veterans' education benefits and to extend unemployment insurance benefits to get jobless Americans through difficult times.

The House actually voted down the war funding. One amendment that was approved would improve the educational benefits available to veterans by increasing them to match the highest public university tuition in a given recipient's state and providing a monthly housing stipend.

This improvement in veterans' education benefits would cost about $52 billion over ten years. To offset this cost, the legislation includes a small surtax on those who have most enjoyed the benefits of living in and doing business in America. The surtax of 0.47 percent (just under half a percent) would apply to adjusted gross income (AGI) over a million dollars for married couples and over half a million dollars for other taxpayers.

Figures from Citizens for Tax Justice show that in 2007 only 0.3 percent of taxpayers were rich enough to be affected by such a tax. Moreover, the sacrifice asked of them is tiny, equal to about 7 percent of their Bush tax cuts.

The Senate then passed a version that included the war funding, the improved veterans' educational benefits and extended unemployment insurance benefits, but no surcharge on the very rich. Democratic leaders in the House could try to pass the Senate version or pass a different version and send it back to the Senate. Meanwhile, the White House wants a "clean" supplemental without any increased domestic spending or tax increase.

- Military tax benefits bill.

Status: Approved unanimously by House and by voice vote by the Senate.

This bill, H.R. 6081, spends a relatively small amount of revenue on tax breaks for military personnel and veterans. Of particular note are two of the revenue-raising provisions in the bill. One would close the loophole used by Kellogg Brown & Root (KBR), the former subsidiary of Halliburton, to avoid paying Social Security and Medicare taxes for the Americans it employs to work in Iraq. This provision, which is a victory for tax fairness, was earlier proposed as legislation offered by Senator John Kerry (D-MA) as reported in the Digest. Another revenue-raising provision in this bill would make it harder for wealthy Americans to escape federal taxes by leaving the country and giving up U.S. citizenship.

- Congressional Budget Resolution (S Con Res 70).

Status: The House and Senate passed different versions. The conference agreement is expected to come up for a vote sometime after the recess.

As explained in a CTJ report, the resolution approved by the House offered more responsible tax provisions in a number of areas.

Most importantly, the House budget plan used "reconciliation instructions" that would make it easier to pass a bill to provide relief from the Alternative Minimum Tax (AMT) without increasing the deficit. Any further increase in the national debt is likely to be borne, in the long-run, by the middle-class, so it would be unfair to take on debt to provide AMT relief, which mostly benefits families that are relatively wealthy. The Senate plan, unfortunately, did not use this approach because the Senate assumed that an AMT patch will be deficit-financed.

The conference agreement that has been worked out would create a point of order in the Senate against legislation that increases the deficit by over $10 billion during any year covered by the budget resolution. As with the pay-as-you-go (PAYGO) rule, this point of order can be waived by 60 votes. The conference agreement also assumes that Congress will extend several of the Bush tax cuts for the middle-class, but it unfortunately includes in this category a cut in the estate tax that can only help families owning estates worth several million dollars. Of course, the budget resolution does not raise taxes or cut taxes and is not legislation, but a blueprint for Democratic leaders in the House and Senate. Most spending and tax decisions are likely to be put off until a new president takes office.

New CTJ Report: House Budget Plan Deals with Tax Policy More Responsibly than the Senate Plan

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Citizens for Tax Justice has released a new report explaining that the budget resolution approved by the House of Representatives last week deals with tax policy in a more responsible way than the version approved by the Senate. The differences between the two resolutions must be ironed out by a House-Senate conference committee that will negotiate a final version to be approved by both chambers.

The resolution approved by the House offers more responsible tax provisions in a number of areas.

First, the House budget plan uses "reconciliation instructions" that would make it easier to pass a bill to provide relief from the Alternative Minimum Tax (AMT) without increasing the deficit. Any further increase in the national debt is likely to be borne, in the long-run, by the middle-class, so it would be unfair to take on debt to provide AMT relief, which mostly benefits families that are relatively wealthy. The Senate plan, unfortunately, does not use this approach because the Senate assumes that an AMT patch will be deficit-financed.

Second, the House plan does not emphasize cutting the estate tax the way the Senate plan does. CTJ's data shows that the estate tax now affects fewer than 1 percent of estates. The Senate decided, however, to cut the estate tax for these few, wealthy families and to finance this tax cut with surpluses that may never materialize.

Third, the House plan would not cut taxes on better-off Social Security recipients. Such a tax cut, which the Senate plan includes, would only benefit those seniors who are well-off.

The House-Senate conference committee that takes up the budget resolutions should reject the choices that the Senate has made with regard to taxes and choose the more responsible path set by the House of Representatives.

Budget Debate Turns into a Tax Fight

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The House and Senate both passed their budget resolutions on Thursday. The Senate budget plan (S. Con. Res. 70) was approved by a vote of 51 to 44, while the House budget plan (House Con. Res. 312) was approved by a vote of 212 to 207.

All 100 Senators showed up Thursday for what is often called "vote-a-rama," an avalanche of amendments that members offer each year to the budget. These amendments generally are not binding, but they put Senators on record as supporting or opposing key tax and spending policies. Lawmakers often offer them to force the opposing party to take votes that might be politically difficult.

Slashing the Estate Tax and Other Tax Cut Promises

The budget resolutions project surpluses in fiscal years 2012 and 2013, although the math used to project these surpluses is questionable. Senator Max Baucus (D-MT) offered an amendment which was adopted by a vote of 99-1 and which shows that the Senate intends to spend this "surplus" on extending parts of the Bush tax cuts that he describes as focused on the "middle-class." While these do include keeping the lowest income tax rate at 10 percent and keeping the $1,000 child credit, they also include a cut in the estate tax to benefit families with estates worth several million dollars.

The amendment, while not binding, puts the Senate on record as supporting a change in the estate tax that is understood to involve freezing in place the estate tax rules that are scheduled to take effect in 2009 (an exemption of $3.5 million per spouse and a top estate tax rate of 45 percent). Under current law, the estate tax rules get more generous each year until the estate tax disappears entirely in 2010, and then in 2011 revert to the rules that were in place during the Clinton years.

CTJ's recent figures on the estate tax show that it affected less than one percent of estates during 2005 and 2006. And those estates were subject to an exemption of $1.5 million per spouse. Now the exemption is $2 million and in 2009 it will be $3.5 million.

Throughout the day on Thursday, Democrats in the Senate used a strategy of countering Republican amendments to provide new deficit-financed tax breaks with very similar amendments that were equally regressive but deficit-neutral.

Alternative Minimum Tax

For example, Senator Arlen Specter (R-PA) offered an amendment that would have repealed a change in the Alternative Minimum Tax (AMT) that was enacted in 1993. The 1993 law increased the AMT for some relatively well-off taxpayers, to correspond with increases in the ordinary income tax. The Specter amendment therefore would cut the AMT from its current level for those well-off taxpayers, and this cut would be deficit-financed. Before members were allowed to vote on this, the body voted on an amendment offered by Senator Kent Conrad (D-ND) to do the exact same thing except with the costs offset. The Conrad amendment didn't specify just how those costs would be offset, and neither amendment would be binding. But apparently enough Senators felt that they would be credited with voting to "do something" about the AMT if they voted for the Conrad amendment, which was approved 53 to 46, instead of the Specter amendment, which failed, 49-50.

(The amendment by Senator Specter seems to be part of a long-term strategy by the Republicans to convince opinion leaders and the public that the expanding reach of the AMT is due to policies enacted during the Clinton administration. To find out why that is NOT the case, read the post on our blog that addressed this last year.)

More Estate Tax

A similar pattern played out in more ominous ways when the Senate turned its attention back to the estate tax. Senator Jon Kyl (R-AZ) offered an amendment that would slash the estate tax further than the Baucus amendment would. The Kyl amendment would have put the Senate on record in support of raising the estate tax exemption to $5 million, or $10 million for married couples, and lowering the top rate to 35 percent. As the Center on Budget and Policy Priorities points out, this would cost about 77 percent as much as fully repealing the estate tax. Before members were allowed to vote on this, a vote was held on an amendment offered by Senator Ken Salazar (D-CO) to make the exact same changes, but with the costs offset in some unspecified way.

Slashing the estate tax any further than it already has been would be an entirely unwarranted boon for America's richest families and is bad policy even if it is done in a deficit-neutral way. If less than one percent of estates were affected by the estate tax when the exemption was $1.5 million, as CTJ has found, it's very hard to imagine why the exemption would need to be raised to $5 million.

Disturbingly, the Salazar amendment got 13 more votes this year than an identical amendment offered by Senator Ben Nelson (D-NE) last year. While the Salazar amendment failed this year, it failed by a vote of 38 to 62, whereas last year it failed 25-74.

Even more disturbing, the Kyl amendment -- the amendment to slash the estate tax WITHOUT offsetting the costs -- nearly passed, with a vote of 50-50. This vote is a signal to organizations working on tax fairness that we must redouble our efforts to educate lawmakers and the public about the extremely regressive effects of repealing or greatly reducing the estate tax.

Social Security

As he has in the previous couple years, Senator Jim Bunning (R-KY) offered an amendment to repeal the tax increase on Social Security benefits that was enacted in 1993. Bunning decided to offset the costs in his amendment with across the board cuts in discretionary spending. His amendment failed, 47-53.

The federal government began taxing a portion of Social Security benefits in 1984, and increased the amount that can be included in taxable income to a maximum of 85 percent in 1993. The idea was to treat Social Security benefits more like other retirement income, such as pensions and IRA distributions. For most retirees, the vast majority of Social Security benefits are income that has never been taxed. Most beneficiaries still pay no federal income taxes on their benefits, but above certain income levels benefits gradually become taxable. For the best off, 85 percent of benefits must be included in taxable income.

Repealing the 1993 provision would do nothing to help the majority of Social Security beneficiaries. Nonetheless, the Democrats offered an alternative amendment that would make the same change as Bunning's amendment, but which also called for some unspecified offsets. That amendment was approved 53-46.

Meanwhile, in the House of Representatives...

Over in the House, the Republicans offered an alternative budget resolution that would make the Bush tax cuts permanent and eventually repeal the AMT. These measures would be paid for with large cuts in Medicare, Medicaid, and other programs, while increasing defense spending. This alternative failed, 157-263.

The Democrats' budget resolution in the House was approved by a vote of 212 to 207. One way the House version differs from the Senate version is the use of what is called "reconciliation." A budget resolution can include "reconciliation instructions" that instruct the relevant committees to write legislation to meet some fiscal goal, and this legislation could be passed in the Senate with only a simple majority of votes rather than the usual 60 needed to overcome a filibuster.

This year, the House plan includes reconciliation instructions to produce a couple revenue-neutral bills. One would delay a scheduled reduction in payments by Medicare to doctors while another would provide another year of relief from the Alternative Minimum Tax (AMT), without increasing the budget deficit. Negotiations that will take place in conference will determine whether reconciliation instructions will survive in the final budget resolution.

Yesterday, the House and Senate budget committees both approved their respective versions of the federal budget resolution for fiscal year 2009 on party-line votes. Just as happened last year, both versions assume that the Bush tax cuts will expire at the end of 2010 or that, if they are extended, they will be subject to pay-as-you-go (PAYGO) rules. This means that the costs of any tax cut extension would have to be offset with increased taxes elsewhere or cuts in spending, so as to avoid an increase in the federal budget deficit. The House signaled that is it more committed to PAYGO, however, by including procedural protections for legislation to offset the costs of providing another year of AMT relief.

While the budget document is not binding and merely spells out the tax and spending goals of Congress, it can provide for procedural rules that may make certain legislation affecting the nation's fiscal health easier or more difficult to pass. For example, the budget resolution could include what are called "reconciliation instructions" that would instruct the relevant committees to write legislation to meet some fiscal goal, and this legislation could be passed in the Senate with only a simple majority of votes rather than the usual 60 needed to overcome a filibuster.

Republicans demanded that the reconciliation process be used to extend the Bush tax cuts without offsetting the costs. While budget resolutions are not law and cannot, by themselves, raise taxes, Republican lawmakers have taken to claiming that the resolution includes the largest tax increase in history since it does assume an extension of the Bush tax cuts. They made this same claim last year.

Senate Ready to Cave on PAYGO and Alternative Minimum Tax; House Says 'Not So Fast'

While the Republicans want to use the reconciliation process to increase the budget deficit, the House Democrats want to use it to keep the deficit under control. Their budget plan includes reconciliation instructions to produce revenue-neutral legislation that would delay a scheduled reduction in payments by Medicare to doctors and revenue-neutral legislation that would provide another year of relief from the Alternative Minimum Tax (AMT).

Congress will surely provide another "patch" to the AMT this year, meaning a temporary extension of the increase in exemptions that keep most people from having to worry about the tax. The question is whether it will be paid for or deficit-financed, as was the patch enacted at the end of last year.

Last year the House did pass a bill that would have paid for an AMT patch mainly by closing tax loopholes that allow managers of buyout funds to pay taxes at lower rates and shelter their income in offshore tax avoidance schemes. In the Senate, that bill did get the votes of all the Democrats (except the Presidential candidates, who were campaigning) but could not overcome the filibuster by Republicans. If such a bill was offered this year under the reconciliation process to protect it from a filibuster, its chances of passage would be greatly increased.

Despite this, many Senate Democrats are insisting that they not pursue the matter. Senate Finance Committee chairman Max Baucus was quoted by Congressional Quarterly saying, "think to cut to the chase, this Congress is not going to pay for AMT. I think it's a waste of time to have AMT paid for."

Senate Budget Committee chairman Kent Conrad (D-ND) told BNA that "My strong preference would be to have it offset. That was clearly not the will of the body last year and in our soundings, it's clearly not the will of the body this year."

Senate Democrats Plan to Spend "Surplus"

The budget resolutions project surpluses in fiscal years 2012 and 2013. Whether these surpluses will actually materialize is highly debatable. The budget assumes no more expenditures on Iraq beyond the $70 billion requested by the President. Further, the budget "baseline" used by the Congressional Budget Office, which assumes that the Bush tax cuts will expire at the end of 2010 as laid out under current law, does project a surplus in 2012 and 2013, but only if the Social Security surplus is included in the calculation. The Social Security surplus was not meant to be spent on other programs. It's not remotely clear that Congress can produce a surplus that does not include Social Security.

Nevertheless, Democrats in the Senate are planning to offer an amendment much like the one adopted last year that would show that the body intends to spend that "surplus" on extending parts of the Bush tax cuts that they describe as geared towards the "middle-class." While these do include the 10 percent rate and the child credit, they also include a cut in the estate tax to benefit families with estates worth several million dollars.

President Threatens Vetoes Over Small Differences in Spending

The Senate version calls for $18 billion above what the President has requested in discretionary spending (spending that must be approved each year) while the House version calls for about $22 billion over the President's request. This difference is relatively minor since the entire amount of discretionary spending requested by the President for fiscal year 2009 is $992 billion, and discretionary spending only accounts for around a third of all government spending. Nonetheless, the White House has signaled that the President is ready to veto bills that spend more on these programs than he has proposed, as he did last year. This raises the possibility that Congress could simply rely on continuing resolutions to keep the government running until the next president takes office.

New CTJ Report: Bush's Proposal to Slash Human Services Reveals the True Cost of His Tax Cuts

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President Bush's proposed budget plan for fiscal years 2009 through 2013 envisions huge cuts in education, health, environmental and other programs. Most observers believe that such budget cuts are too draconian to ever be implemented. After all, Congress has rejected many of them before. However, as a new report from CTJ explains, they should be taken very seriously in one important sense: They are exactly the sort of public service reductions that would be necessary if the Bush tax cuts are extended.

The Bush administration concedes that the budget deficit will top $400 billion for fiscal year 2009, but claims the deficit will be reduced thereafter. The President continues to assert, as he did last year, that following his plans will lead to a balanced budget in fiscal year 2012. It is therefore informative to examine how public services would be different in 2012 if Congress followed his advice.

Under the Bush budget proposal, federal spending on veterans' benefits would be 9 percent lower in 2012, as a percentage of the economy, than in 2008. Education and social services would be a fifth lower, natural resources and environmental programs over a fourth lower, transportation a third lower and community development over 62 percent lower. Medicare spending in 2012 would be 9 percent lower than in 2008, as a percentage of the cost of maintaining current services.

Meanwhile, the President proposes to make permanent his tax cuts, which expire at the end of 2010. In 2012, according to the administration's own numbers, those tax cuts will cost $249 billion, which is just over the $229 billion he wants to cut from domestic programs in that year. So his promise to "balance" the budget in 2012 even while his tax cuts are extended clearly involves a trade of massive reductions in public services in return for tax cuts.

The reality is that the President's tax cuts are actually more expensive than this, and there are many more problems with his budget projections, as explained in the CTJ report.

DON'T DO IT! Some Senators Consider Borrowing Billions Instead of Paying for AMT Reform

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It has been reported in several news outlets that Senate Finance Chairman Max Baucus (D-MT) was unable to get a majority of his committee's members to agree, at a meeting Wednesday, on how to pay for a temporary fix for the Alternative Minimum Tax (AMT). As a result, some Senators have suggested that they should waive the pay-as-you-go (PAYGO) rules that were reinstated at the start of this session and which are supposed to prevent Congress from expanding the national debt.

The Bush tax cuts increased the number of people subject to the AMT and the Republican-led Congress never permanently indexed for inflation the exemptions that keep most of us from having to pay it. As a result, 23 million taxpayers (17 percent of all taxpayers) will pay the AMT for 2007 if Congress makes no change to the law.

Not Worth Breaking the Bank

But the AMT is not exactly the greatest threat right now to the average American. Even if Congress does nothing (which is extremely unlikely) around 60 percent of the AMT would still be paid by the richest 5 percent of taxpayers. In other words, if there was ever a good reason to borrow billions of dollars and have to pay it back with interest, this is not it.

Several Measures Would Be Good Policy AND Could Pay for AMT

That is especially true because there are plenty of options that Congress can pursue to offset the cost of temporarily or permanently fixing the AMT. For starters, Congress could scale back the Bush tax cuts for the wealthiest people, who are reaping most of the benefits.

Congress could also close the loophole for "carried interest" paid to billionaires who run investment funds, and who are currently allowed to pay a lower tax rate than their secretaries. Several hundred organizations signed a letter in early September urging Congress to close this loophole. Congress could also crack down on tax avoidance associated with offshore schemes, stock options and misreporting of business income, and limit tax breaks for the deferred compensation of millionaire executives.

Early this year CTJ pointed out that one simple solution would be to close the loopholes within the AMT itself for capital gains and dividend income.

It's expected that a bill to "patch" the AMT for one year will be introduced in the House by Ways and Means Chairman Charles Rangel in the coming weeks and will likely include some combination of revenue-raising provisions to offset the cost. Rangel has, however, said members of the House may also disagree over how to do so. (Rangel also plans to introduce a larger bill to repeal the AMT entirely, and offset the costs, but that may not be acted upon until next year.)

Deficits Are Not a Progressive Solution

Congress should not waive PAYGO. The more money we borrow, the more we have to pay to make interest payments. Currently nine cents of every dollar we send to Washington goes just to interest payments -- just to pay for the privilege of borrowing. Besides that, budget deficits can endanger vulnerable families since the public services they depend on are often targets of cuts whenever conservative politicians decide it's time for "deficit-reduction" measures.

Rep. Obey Proposes Progressive Surtax to Fund Iraq War

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In 2003, then-Speaker of the House Republican Denny Hastert argued for the first major tax cut during a war in U.S. history, saying, "Nothing is more important in the face of war than cutting taxes." During that year, the centerpiece of President Bush's tax cut plan was enacted, the low 15 percent rate for capital gains and dividends. In 2005, this break cost about $92 billion and three fourths of it went to the richest 0.6 percent of taxpayers. Instead of asking Americans to make a sacrifice, the President guaranteed Americans that our economy depended on deficit-financed tax cuts aimed at the wealthy.

Four years later, has anything changed? On Tuesday, Congressman David Obey (D-WI), chairman of the House Appropriations Committee proposed a surtax to raise $145 to $150 billion a year to pay for the war in Iraq. Under his proposal, low- and middle-income taxpayers would see a two percent increase in their federal income tax bills, while wealthier people would see a 12 to 15 percent increase.

"Some people are being asked to pay with their lives or their faces or their hands or their arms or their legs," Obey told the Washington Post. "If you're going to ask for that, it doesn't seem too much to ask an average taxpayer to pay 30 bucks for the cost of the war so we don't have to shove it off on our kids."

Even though such temporary taxes have been used to fund wars in the past, the anti-tax establishment pounced immediately. White House press secretary Dana Perino said, "Well, we've always known that Democrats seem to revert to type and they are willing to raise taxes on just about anything. There's no need to increase taxes." When asked to compare the President's refusal to fund an expansion of SCHIP with his willingness to spend hundreds of billions of deficit-financed dollars on the Iraq war, she called the Democrats "completely irresponsible" for wanting to raise taxes to pay for children's health care and the war.

In other words, the White House's fun-house mirror version of fiscal realities has not changed since the outset of the war. In their eyes, the responsible thing to do is have tax cuts and a war that are both deficit-financed, while paying for these things would be "completely irresponsible."

Meanwhile, Congress just raised the limit on the amount of debt the federal government can rack up for the fifth time since Bush took office.

President's Reckless Tax and Fiscal Policies Force Congress to Raise National Debt Limit... Again

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A new short paper from Citizens for Tax Justice examines the debt accumulated under President Bush in light of the Senate Finance Committee's vote to raise the national debt ceiling again. President Bush has added $3 trillion to the national debt so far, despite inheriting a balanced budget when he took office in 2001. Since then, Congress has been forced to raise the statutory limit on the total amount the federal government is allowed to borrow four times - in 2002, 2003, 2004 and 2006.

On Wednesday the Senate Finance Committee approved legislation to raise the debt limit a fifth time, to an unprecedented $9.815 trillion, to prevent the federal government from defaulting on its debts and being unable to borrow any more. In contrast, when Bush took office, the debt limit was $5.950 trillion - $3.9 trillion less than the new amount.

What has caused the budget deficits over the past six years? The largest cause is the cuts in federal income taxes enacted by President Bush and Congress. The total cost of the Bush tax cuts, including interest on the money borrowed to finance them, has been just over $1.4 trillion so far - about half of the total increase in the national debt under Bush so far.

Congress Passes Budget that Revives PAYGO

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Yesterday, Congress passed the final budget resolution for fiscal year 2008 which foresees $2.9 trillion in spending, including $954 billion for annually appropriated programs. This is $21 billion more than requested by the President's plan, which was criticized by many Democrats and advocates for short-changing human needs services.

PAYGO Rule Revived, But Plans to Waive It for Some Tax Breaks

The effect of the budget resolution on future tax cuts is a little confusing to people who are not budget experts. The budget revives the "pay-as-you-go" rule, or PAYGO, which creates a point of order in the Senate against new entitlement spending or tax breaks that are not paid for. (This can be waived with 60 votes.) At the same time, the budget does assume that Congress will agree to waive PAYGO to spend $180 billion over 5 years on extending some of the Bush tax breaks that are being called middle-class tax breaks (even though they include estate tax reduction for very large estates).

Also in the $180 billion tax cut package are extensions of the child credit, marriage penalty relief, the 10 percent tax rate and a one-year "patch" for the Alternative Minimum Tax (which essentially extends the exemption that keeps most people from paying for the AMT for another year). (Click here for a list of all the Bush tax cuts.) This tax break language originated in the Senate at the behest of Finance Committee chairman Max Baucus (D-MT). The budget plan projects that if Congress followed PAYGO for the next five years, a surplus of $156 billion would appear in fiscal year 2012, but the tax breaks in that year alone would whittle that surplus down to $41 billion.

A "trigger" provision applies to the House, which adds another point of order (besides PAYGO) against tax breaks if the surplus is not still projected to appear a couple years into this five-year period. The Senate was adamant that this provision should not apply to them, apparently because they want to vote for tax breaks regardless of whether there is a surplus that can be used to pay for them. Even if the surplus appears in 2012, it is calculated to include the Social Security surplus, which was never intended to be used to finance tax breaks and should not be seen as money available for that purpose.

Resolution Does Not Raise Taxes

Republican opponents of the budget resolution have been quick to say that it raises taxes. As CTJ has pointed out, the resolution does not raise a cent of taxes but says that any tax cut must be paid for under PAYGO. (Even Baucus's extension of "middle-class" tax breaks would require a waiver of PAYGO). The Republicans are complaining because when they held the majority in Congress they structured their tax breaks to expire after 2010. They know they cannot extend them without increasing the federal budget deficit, which PAYGO is geared to prevent.

Most Responsible Budget in Years

PAYGO is one reason why this is the most responsible budget we've seen in six years. The President has no role to play in the budget plan because it's a resolution (not a law) that Congress uses to set the overall spending level and to create procedural rules that will guide them as they craft bills to meet the targets spelled out in the resolution. However, the administration has threatened that the President may veto individual spending bills that implement the higher spending goals.

The Myth of the "Biggest Tax Increase in History"

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Critics of the budget resolutions recently passed by the U.S. Senate and House of Representatives are claiming that these budget plans include the "biggest tax increase in history." The truth is that they don't raise a single cent in taxes.

Citizens for Tax Justice released a response to these claims today explaining that the real cause of angst among these critics is the pay-as-you-go (PAYGO) rules that Congress wisely has decided to revive to prevent the federal government from digging itself into deeper debt.

Recently Passed Budget Resolutions Do Not Increase Taxes Despite Accusations of "Biggest Tax Increase in History"

"The President's allies in Congress understand that they have no serious plan to balance the budget while also extending their cherished tax cuts," said Robert S. McIntyre, director of Citizens for Tax Justice. "That's why they want to exempt their new tax cuts from the PAYGO rules. In other words, what they really want is the biggest deficit increase in history."


House Approves Budget Resolution

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Like the Senate Version, It's More Responsible Than the President's Budget

The U.S. House of Representatives approved a budget resolution Thursday that would require any extension of the Bush tax cuts, which expire at the end of 2010, to be offset with new revenues or spending cuts to avoid increasing the deficit. Like the Senate version, this budget resolution includes pay-as-you-go (PAYGO) rules and is supposed to balance the budget by 2012 (at which point it claims to produce a surplus of $153 billion). The plan is not perfect. Like the Senate version and the budget proposal offered by the President, this "balanced budget" projection includes the Social Security surpluses, which are really supposed to be counted separately from other revenues as explained in last week's Digest.

Nonetheless, the House should be commended for passing a budget that shrinks deficits and does not assume that tax cuts will be extended without being offset, as the President's budget does. Republicans are trying hard to portray the budget plan as a tax increase because it requires extension of the tax cuts to be paid for. The tax cuts enacted over the past six years (when Republicans controlled the House, Senate and White House) were written to expire at the end of 2010, so any extensions will in fact be new tax breaks. Prohibiting new tax breaks or new spending that is funded by increased borrowing is a common sense reform that helped balance the federal budget in the 1990s.

Senate Democrats' Budget Plan Would Block Tax Cuts if Not Paid For

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The Senate Budget Committee approved a plan Thursday that would allegedly bring the budget into surplus by 2012. The resolution would also require any extension of the Bush tax cuts or reform of the Alternative Minimum Tax (AMT) to be paid for. The budget resolution is the blueprint for spending and revenues in fiscal year 2008 and also sets goals for a five-year period. The resolution revives a PAYGO requirement, meaning any new entitlement spending or new tax cuts must be offset with either increases in revenue or cuts in spending. The Bush tax cuts were specifically written to expire in 2010 so the baseline used by the Congressional Budget Office also assumes a 2010 expiration. By retaining this assumption and reviving PAYGO, the resolution would force Congress to either let the tax breaks expire in 2010 or come up with money to offset whatever parts of the tax breaks they want to extend.

The budget resolution would allow discretionary programs (programs for which Congress must approve funding each year) to receive $16 billion more than the President's proposed budget in fiscal year 2008. But the President's proposed discretionary funding level is actually a $10 billion cut below what would be needed to keep up with inflation, so the Senate Budget Committee is only suggesting a very modest increase in spending. The budget resolution would also allow for an expansion of the State Children's Health Insurance Program (SCHIP)... if Congress finds a way to pay for it.

Is Requiring a Balanced Budget the Same Thing as Hiking Taxes?

The proposal has been criticized by opponents like the ranking Republican on the Senate Budget Committee, Judd Gregg (R-NH) (who did not oversee any budget improvement during his time as the Budget Chairman). Gregg claims that the proposed resolution is dodging important decisions by not specifying where the extra revenues for SCHIP expansion and other initiatives will come from, but budget resolutions under the Congressional process established in 1974 are not supposed to instruct the appropriations committees or the tax-writing committees exactly what to do. Rather, the resolution is to only provide the overall spending and revenue goals for the committees. Gregg and others are also saying that any requirement that tax cuts be paid for is a tax increase that must be opposed. This logic seems to favor increasing the national debt, and the interest payments on it, indefinitely or making massive (and politically unlikely) cuts in services Americans currently depend on.

In Search of a Free AMT Fix The critics also have attacked the proposal's assumption that revenue will be needed to "fix" the AMT only for two years, when no one really thinks Congress will allow the AMT to revert to current law and start reaching tens of millions of taxpayers. But this is actually consistent with the desire to stick to PAYGO. Any change from current law (and the AMT will reach tens of millions more people under current law) that loses revenue must be offset to avoid increasing deficits. Perhaps the first step in countering these criticisms would be for Congress to fix the AMT in a budget-neutral manner as proposed by Citizens for Tax Justice. The House Democrats will present their budget propsal next week.

Congress Begins to Consider Reform of the AMT

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Earlier this week, the House Ways and Means Subcommittee on Special Revenue Measures held its first hearing this year on the Alternative Minimum Tax (AMT), which is supposed to ensure that extremely wealthy people pay some minimal amount of taxes regardless of what loopholes they enjoy. But unless Congress acts, the AMT will soon affect some households who are upper-middle income but not super-rich. This is because the exemptions that shield most people from the AMT have never been permanently indexed for inflation, and because the Bush tax breaks changed the regular income tax calculation but not the AMT.

Congress has enacted temporary "patches" in recent years that extended the exemptions and increased them to keep up with inflation, but continuing this process would cost over $250 billion over the next four years. This cost would have to be offset if Congress is to stay within the PAYGO rules revived by the Democrats in the House shortly after they took control of Congress. The problem is that Republicans are responding to the situation by proposing to repeal the AMT entirely without paying for it, which could cost well over a trillion dollars over a decade.

Fingers Crossed for a Progressive, Budget-Neutral AMT Reform

Subcommittee Chairman Richard Neal (D-MA) indicated that a permanent reform will be proposed by the Democrats in a few weeks. It is not yet clear what that will look like, but Ways and Means chairman Charlie Rangel (D-NY) has hinted that a bill shielding more moderate-income families from the AMT could be paid for by redirecting some tax breaks away from the wealthiest taxpayers. Citizens for Tax Justice has proposed an AMT plan along those lines that would not change anything in the normal income tax rules, but other proposals have been suggested that would use new or higher regular income taxes on the wealthiest to pay for AMT reform.

Six Years Wasn't Long Enough for the Republicans to Fix the AMT

The subcommittee's ranking member, Phil English (R-PA), took the opportunity to argue that the AMT problem was the Democrats' fault. He pointed out that President Clinton vetoed an AMT repeal bill passed by the Republican Congress (that proposal would have repealed the AMT without offsetting the cost at a time when the administration was trying to balance the budget). Representative English did not explain how the Republicans managed to control every branch of government for six years without enacting a permanent solution in any of their six major tax bills. He also did not respond to the explanation that the Bush administration in 2001 intentionally chose to leave the AMT in place so as to make the cost of its first tax break appear less than it would really be after accounting for the AMT patches that Congress would inevitably enact.

The AMT essentially threatens to take the Bush tax breaks away from many Americans but leave them in place for the very richest (who, ironically, are not as likely to be affected by the AMT). Nonetheless, Representative English argued that any plan that would close loopholes used by the wealthy or raise taxes on the wealthy to pay for AMT reform would be "class warfare" and would be opposed by the Republicans.

On Monday the White House released the President's proposed $2.9 trillion federal budget for fiscal year 2008 along with proposals the administration says will balance the budget by 2012. As a new analysis from Citizens for Tax Justice explains, the President's plan relies on various tricks in order to come to the conclusion that Congress can make permanent the Bush tax breaks while also balancing the budget. First, the President includes in his revenue estimates the Social Security surplus, which is projected to be $248 billion in 2012. But that surplus, which is officially saved in the Social Security Trust Fund, is supposed to be used to pay down the national debt so that the federal government is better able to keep paying benefits when the huge baby-boom generation retires. That's the reason Social Security is currently taking in more money than it pays out in benefits. Keeping Social Security separate would show, according to the President's numbers, a deficit of $187 billion in 2012.

But it gets worse. The second trick the President uses is an assumption that Congress will pass massive cuts in vital services - even bigger cuts than were ever enacted when the Republicans ran Congress. The plan actually assumes that spending on defense and homeland security in 2012 will be down 22 percent, as a share of GDP, from its 2006 level, and all other appropriations will be down 29 percent, as a share of GDP, from its 2006 level. Even though Congress is unlikely to make such cuts, they should be taken very seriously in the sense that they begin to show the true costs of the tax breaks. If the Bush tax breaks are made permanent, cuts in government services of this magnitude are only the begining of what will inevitably follow. The Coalition on Human Needs provides a description of these proposed cuts in services

There are several other faulty assumptions used in the administration's projections. One is that revenues will grow more than they have over the past six years. The more realistic revenue projections from the Congressional Budget Office for 2012 are $155 billion lower than the administration's revenue projections.

Analysis from CTJ Shows AMT Can Be "Fixed" in a Progressive, Revenue-Neutral Way

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The alternative minimum tax (AMT), which was originally intended to ensure that the wealthiest Americans pay at least some tax regardless of how many tax breaks they could otherwise claim, will affect 17 percent of taxpayers in 2007, rising to 23 percent of taxpayers in 2010. This is partially because President Bush's tax cuts were not accompanied by adjustments to the AMT and also partially because the exemptions that keep the AMT from applying to most people have not kept pace with inflation. A new analysis from Citizens for Tax Justice shows that there is a way to adjust the AMT -- without increasing deficits -- to ensure that the majority of it is paid by the richest one percent of taxpayers.

Many Democrats have expressed an interest in changing the AMT in the next Congress. Several lawmakers have expressed alarm that a significant number of voters will suddenly have to pay a tax that never applied to them before if Congress does not act. The problem is that the AMT is expected to bring in $250 billion in revenue in the next four years, so repealing it altogether would be outrageously irresponsible. The solution offered by CTJ allows for the same amount of AMT to be collected and also ensures that the tax will serve its original purpose -- to guarantee that the very wealthiest pay their fair share.

Senate Finance Committee Leaders Propose Repealing the AMT at a Cost of Hundreds of Billions

It would be comforting to believe that the Democrats who are now running Congress don't need to be convinced to support tax fairness. It would be comforting, but not entirely right. Senator Max Baucus (D-MT), the new chairman of the Senate Finance Committee, has joined forces with the now-ranking member Charles Grassley (R-IA) to again propose fully repealing the Alternative Minimum Tax (AMT). The Center on Budget and Policy Priorities finds that full repeal, if not offset by other revenue, could cost $790 billion over ten years and even more if the Bush tax cuts are extended past their expiration date in 2011.

It's true that if Congress doesn't do something, the AMT, which was originally intended to ensure that the wealthiest Americans pay at least some tax, will start applying to people it was never intended to affect. This is partially because President Bush's tax cuts were not accompanied by adjustments to the AMT and also partially because the exemptions that keep the AMT from applying to most people have not kept pace with inflation. But the solution to this problem is to reform the AMT in a way that is budget-neutral and concentrates the costs among the very wealthiest households, who were the targets of the AMT in the first place. Citizens for Tax Justice has proposed such a solution (see above), which is both budget-neutral and progressive.

Thank you for visiting Tax Justice Blog. CTJ and ITEP staff will soon retire this domain. But ITEP staff are still blogging! You can find the same level of insight and analysis and select Tax Justice Blog archives at our new blog, http://www.justtaxesblog.org/

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