Retirement News

New Report on Wealth Inequality in the Great Recession Highlights Need for Asset-Building Strategies

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Three months after the publication of Thomas Piketty’s “Capital in the Twenty-First Century,” it remains an open question whether Piketty’s tome will be remembered more for its thorough documentation of the growth of global inequality or for the shabby treatment it has received from those seeking to discredit the book’s findings. That’s a shame, both because the book does marshal the best data available on the tricky topic of wealth inequality and because persistent wealth inequality is a problem worth paying attention to.

A new study (PDF) funded by the Russell Sage Foundation reminds us that growing inequality is a well-documented fact of American life. The Sage report provides a fascinating and sobering first look at how the Great Recession reshaped the levels and distribution of wealth between middle-income families and the best-off Americans. (The report also has the merit of clocking in at a mere two pages, slightly less than Piketty’s magnum opus.) The study finds that over the past decade, the net worth of the median American household has fallen, adjusted for inflation, by more than a third—even as the best-off Americans have seen double-digit growth in their real net worth. In particular, the median household saw its net worth decline from just under $88,000 in 2003 to $56,335 in 2013 (meaning that 36 percent of the median group’s real wealth vanished over this decade).  At the same time, the best-off 10 percent of American households have seen their real worth grow by almost 15 percent.

There’s a straightforward reason for this: the assets owned by the richest Americans are very different from those owned by middle-income families. While the wealth holdings of the “1%” and those in their immediate vicinity are dominated by stock and bonds, asset ownership for the vast American middle class means owning a home. And while the stock market has recovered well since the disastrous declines of the Great Recession, housing markets remain depressed relative to where they were ten years ago.

All of which highlights the importance of public policies designed to create wealth among middle- and lower income families that isn’t limited to the value of homes. The Corporation for Enterprise Development’s Assets and Opportunity Scorecard gives an encyclopedic look at the tax, and non-tax, policy strategies available to states in advancing this important goal.Policymakers can take steps to make sure that low-income families are able to save some of their income—and tax reform can play an important role in this effort. When the limited wealth of middle-income families is tied up in homes, that means these homeowners often have no other source of wealth to rely on to get them through hard times. A tax system that taxes poor people further into poverty (as ours does) makes saving more difficult, if not utterly impossible, for fixed-income families. See ITEP’s “State Tax Codes as Poverty-Fighting Tools” for a sensible overview of the ways in which state tax reform can assist, rather than undermining, other asset-building efforts, by reducing the tax load on the very poorest Americans.  

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. 

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

Estimates provided by the White House show that the payroll tax cuts proposed last night by President Obama would cost $240 billion next year, just shy of the $245 billion cost of the Bush income tax cuts during the same year as estimated by Citizens for Tax Justice.

Republican lawmakers were the original proponents of a payroll tax holiday. But lately many of them have spoken out against it or are reluctant to endorse it because the President supports it. Apparently cost is not the reason for their objection, given their support of the Bush tax cuts.

The payroll tax cuts, which would go into effect in 2012 and which are the largest parts of the jobs plan announced by the President last night, have several components. The payroll tax cuts for workers would cost $175 billion, while the payroll tax cuts for employers would cost $65 billion, for a total of $240 billion.

Economists generally find that the most effective measures to mitigate a recession include programs that directly create jobs (such as Obama’s proposals to hire or retain school teachers and fix schools). Also at the top of the list are direct spending programs by the government on things like unemployment benefits (also included in Obama’s plan), since they go to the very people who are most likely to immediately spend any money or benefits they receive.

But some lawmakers oppose any and all new government spending, creating an obvious political constraint that the President has tried to navigate by proposing payroll tax cuts and other tax breaks that make up over half of the $447 billion cost of his jobs plan.

Payroll Tax Cuts for Workers: $175 Billion

As part of the tax compromise enacted at the end of last year, a one-year payroll tax cut is in effect for 2011, reducing the 6.2 percent Social Security payroll tax paid directly by workers to 4.2 percent. President Obama proposes to extend this break into 2012 and expand it by further reducing the tax paid by workers to 3.1 percent.

As we have explained before, cutting payroll taxes for workers is neither the best nor the worst possible tax measure. A tax credit that is more targeted to low- and middle-income people, like the Making Work Pay Credit, would be more effective because it would target money more towards people who are likely to spend it immediately and thereby give an immediate boost to the economy.

On the other hand, a payroll tax cut for workers is dramatically more targeted to low- and middle-income people than the other types of tax cuts that are usually debated (like the Bush tax cuts).

Payroll Tax Cuts for Employers: $65 Billion

The President’s plan would also reduce the Social Security payroll tax paid by employers to 3.1 percent for the first $5 million in wages paid in 2012. This break would go to all employers. The plan would also eliminate the entire 6.2 percent payroll tax paid by employers for any increase in a firm’s payroll up to $50 million.

Giving all companies a break for the first $5 million in wages is not likely to be effective because it gives employers a tax break regardless of whether or not they increase hiring. Economists have pointed out that many companies are stockpiling cash that they already could use to hire more workers, and a recent survey of business owners reveals that labor costs are nowhere near their main concern. In other words, only increased demand for goods and services can really prompt businesses to hire more workers. 

Some economists do believe that the payroll tax cut for businesses that expand their payroll will be more effective. But there are several reasons to be skeptical about the number of jobs that will be created as a result of this measure. First, most of this tax break will go to companies that would have expanded their payrolls anyway. Second, the payroll expansion in many cases will not mean new hires but could simply take the form of pay raises for existing employees. (This problem would be limited to a degree because the Social Security payroll tax does not apply to wages in excess of $106,800).

What businesses really need are customers. A payroll tax cut or a more targeted tax credit could help somewhat to produce more customers by putting cash in the hands of people who will spend it. But the other parts of the President’s plan, like transportation projects, extending unemployment insurance, modernizing schools, and rehiring teachers will almost certainly provide far more bang for the buck.

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.

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.

Read the report:

Presidential candidate Senator Barack Obama has proposed increasing the Social Security payroll tax on wealthy Americans to enhance the program's solvency for years to come. While several commentators and politicians have suggested that this would burden the middle-class, a new report from CTJ finds that only around 1 percent of taxpayers would actually be affected by this proposal.

Social Security is funded by a payroll tax of 12.4 percent on the first $102,000 of each worker's earnings. Some experts and lawmakers have suggested raising the cap or eliminating it altogether. Senator Obama's idea differs in that he would only increase the Social Security tax for those whose earnings are above $250,000.

Some commentators have suggested that Senator Obama may actually change the way Social Security is financed more fundamentally by applying a tax increase to total household income rather than individual earnings. This would mean that the $250,000 threshold would apply to all household income rather than individual earnings.

We estimate that in 2008, only 2.1 percent of taxpayers will have adjusted gross income (which includes forms of income that are potentially taxable) above $250,000. This means that even under this more expansive interpretation of Senator Obama's Social Security plan, about 98 percent of taxpayers would not be affected.


Senator John Kerry (D-MA) has proposed legislation, co-sponsored by Senators Clinton and Obama and others, that 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. On Thursday similar provisions were added to the emergency supplemental bill for military operations in Iraq and Afghanistan as it was being marked up and approved in the Senate Appropriations Committee.

KBR has made a special arrangement to avoid paying taxes on about 10,500 of its American employees who are working in Iraq on various reconstruction programs. KBR recruits people to work on reconstruction-related projects, but when the workers get their first paycheck, they see that it's not coming from KBR, but from a KBR subsidiary, Service Employers International Inc, (SEI).

SEI's corporate home is the Grand Cayman Islands, although it has no actual offices there. While KBR employees working in Iraq would be subject to the 15.3 percent payroll tax for Social Security and Medicare (half of which is paid by the employer, the other half of which is paid by employees), SEI employees don't incur federal payroll tax liability because they're not working for a US-based company.

Kerry's bill, the Fair Share Act (S. 2775) would basically treat the foreign shell companies used in this scheme as American employers for the purposes of Social Security and Medicare taxes.

A similar provision was included in the Taxpayer Assistance and Simplification Act of 2008 (H.R. 5719) which was approved by the House on "tax day." That bill has drawn a veto threat from the White House because it would end the IRS's use of private debt collection agencies to locate unpaid taxes.

If the amendment does not survive in the final version of the supplemental war funding bill, responsibility falls mainly with the Senate Finance Committee, of which Senator Kerry is a member. As reports, the companies that apparently want to keep the loophole are trying to influence the process.

The Social Security and Medicare trustees released their report on Tuesday announcing that the fiscal foundations of Social Security and Medicare are essentially unchanged since last year. Once again, they project that the Social Security trust funds will be depleted in 2041, at which point payroll taxes flowing into the program will be large enough to pay only 78 percent of the benefits that would go to beneficiaries if the program was fully funded.

Of course, many Americans might be surprised to learn that any program is funded, on paper anyway, for the next 33 years, so most future retirees are probably reacting calmly to this announcement, as they should. It's difficult to project revenues and expenditures of any sort out more than a decade, since these projections are extremely sensitive to changes in the economy and other factors. Further, under current rules Social Security benefits increase annually to match the growth in wages, which generally increase more rapidly than inflation, meaning that even if the unlikely worst case scenario came true and benefits were reduced in 2041, they might still be greater, in real terms, than those benefits received today.

Medicare is a different story. As the report itself says, "Medicare's financial difficulties come sooner -- and are much more severe -- than those confronting Social Security." This is because Medicare is not just facing the coming retirement of the baby boomers in large numbers, which is the only challenge facing Social Security. Medicare costs are rising because health care costs generally are rising. The trust fund for Medicare hospital insurance will be exhausted in 2019 and payroll taxes flowing into the program will only cover 78 percent of projected expenditures. Medicare benefits are not automatically cut if this happens. Rather, it would put a huge strain on the rest of the budget, as more general revenues are diverted from other services.

The cabinet officials who presented these figures on Tuesday seemed to be uninterested in answering any detailed questions about them. The figures don't exactly support the administration's approach, which has been to play up the alleged "crisis" in Social Security to somehow justify siphoning money out of the program and into private accounts, while opposing Medicare reforms proposed by the Medicare Payment Advisory Commission (MedPAC), a panel of experts created by Congress in the late 1990s.

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.

Social Security Reform, KBR-Style

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Yesterday's Boston Globe breaks the story of how Kellogg Brown & Root (KBR), until last year a subsidiary of Halliburton, is avoiding hundreds of millions of dollars in federal Social Security and Medicare taxes by pretending its Iraq-based employees are working for a Cayman-Islands based "shell company."

According to the Globe, KBR has made a special arrangement to avoid paying taxes on about 10,500 of its American employees who are working in Iraq on various reconstruction programs. The way it works: KBR recruits people to work on reconstruction-related projects. But when the workers get their first paycheck, they see that it's not coming from KBR, but from a KBR subsidiary, Service Employers International Inc, (SEI).

Why such deception? Because unlike KBR, SEI is not based in the United States. SEI's corporate home is the Grand Cayman Islands. (Legally, anyway -- SEI has no actual offices in the Caymans, just a mailing address.) And while KBR employees working in Iraq would be subject to the 15.3 percent payroll tax for Social Security and Medicare (half of which is paid by the employer, the other half of which is paid by employees), SEI employees don't incur federal payroll tax liability because they're not working for a US-based company.

The Globe estimates that SEI is avoiding about $101 million in payroll taxes every year using this scam. If this has been going on throughout SEI's 5-year stint in Iraq, that's more than $500 million in revenue that won't be shoring up the Social Security system.

KBR representatives breezily dismiss this by pointing out that "the loss to Social Security could eventually be offset by the fact that the workers will receive less money when they retire, since benefits are generally based on how much workers and their companies have paid into the system."

So, for those looking for a more creative way of subverting Social Security than John McCain's privatization plans, here it is: reduce future Social Security benefits by pretending your employees aren't entitled to them!

One glitch in this clever plan, as the Globe alertly points out, is that Medicare benefits are not reduced for those who don't contribute. So the Medicare portion of the foregone 15.3 percent tax is money that is going to have to be raised through taxes on the rest of us. And Texas-based KBR is also avoiding state unemployment taxes on these workers, when means that they'll be ineligible for unemployment benefits later on.

Pete Peterson: False Messiah

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Pete Peterson, a co-founder of the Blackstone Group, is retiring from the private equity business and unveiling a new foundation bearing his name. The Peterson Foundation, which will be well-funded and staffed by luminaries like GAO director David Walker and former senator Sam Nunn, will work to promote the idea that entitlement programs cause our nation's fiscal problems, and will address other issues like nuclear proliferation.

As the New York Times reports, there is one problem with Peterson's scolding Americans for enjoying Social Security and Medicare: Peterson himself sees no problem in enjoying government largesse that is provided through the tax code. He has benefited enormously from the tax loophole for "carried interest," which allows buyout fund managers to enjoy the low 15 percent capital gains rate for compensation they receive for managing other people's money. As CTJ has argued in many places, this loophole essentially subsidizes the incomes of millionaires and billionaires through the tax code.

But this type of contradiction is nothing new for Peterson. Back in 1994, CTJ director Robert McIntyre wrote an article in the American Prospect called "False Messiah." He pointed out that the ideas Peterson promoted back then basically came down to (A) slashing entitlement programs that help people to reach and stay in the middle-class and (B) replacing the progressive income tax with a consumption tax that would be a massive boon to the wealthy while increasing the tax burden on everyone else. A consumption tax would make income from wealth and savings entirely tax-free. That's the sort of income rich families have a lot of and poor families have none of.

Nonetheless, Peterson had a remarkable ability even then to present his ideas as advice that would save the middle-class. It will be worth watching his new foundation to see whose interests it really serves.

The Grain of Truth in the Treasury Report's Warning Over Social Security

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On Monday the Treasury released an issue brief that will be the first of several on Social Security's funding problems. The report explains that, using the assumptions of the Social Security Board of Trustees, the program will not be able to fully pay the benefits that are scheduled starting in 2041. Under law, benefits must at that point be reduced to a level matching revenues in the program, which would be about 25 percent below the full benefit levels scheduled.

Balance Issue Overstated

It's worth pointing out that the assumptions used to make these projections are considered unreasonably pessimistic by many economists. It's also important to remember that benefits rise with wages, which usually rise faster than inflation. As a result, even if the pessimistic economic assumptions were borne out, the benefits scheduled to be paid in 2041, even after the 25 percent reduction, would still be larger in real terms than those benefits paid today.

Which is not to say such a cut in scheduled benefits would be acceptable, since the program is meant to replace a reasonable portion of wages. But the claims by the administration that the program is in grave danger seem overstated. Several measures, such as increasing the payroll tax by a couple percentage points or raising the cap on wages subject to the payroll tax, could ensure that the there is enough money flowing into the program for the next 75 years.

The report tries to make the argument that we must look further than 75 years and ensure that the program is in balance over an "indefinite future" -- which is hard to swallow to say the least. The fact that the program is currently scheduled, even using pessimistic assumptions, to be in balance until 2041 probably makes it more secure than most federal programs in the minds of many Americans.

Several members of Congress have rightly argued that the report is just one of several attempts by the Administration to convince the public that Social Security cannot function without some radical overhaul, which usually involves private accounts that have nothing to do with making the program solvent.

But There Is a Problem if Social Security Surpluses Are Not Saved

But there is a problem that deserves our attention. For several decades leading up to 2041, a portion of Social Security benefits will be paid out of the Social Security trust funds, which are basically accounting mechanisms to keep track of the surplus Social Security taxes that have been paid into the program since the 1980s. If the Social Security surpluses are not immediately spent by the government but are instead used to pay down the debt, that can make it much easier for the government to pay Social Security benefits later on as the baby boomers retire in large numbers. But this has only happened during the late 1990s, during the Clinton Administration. At other times, the Social Security surpluses have been used to fund other government spending and tax cuts.

This raises an important question. As Citizens for Tax Justice explained in a 2006 report on Social Security funding options, Social Security could be brought into balance -- on paper -- by raising or eliminating the cap on wages subject to Social Security payroll taxes, by increasing the payroll taxes or by broadening the definition of income subject to Social Security taxes. But if future presidents and Congresses cannot restrain themselves from spending the surpluses, it's not clear that the program will truly be any more secure.

This issue will be addressed in the next issue brief from the Treasury on Social Security. The authors end this edition by telling us that "Many analysts believe Social Security surpluses do not result in smaller levels of publicly held debt, but instead result in some combination of higher spending or lower taxes in the non-Social Security budget." Perhaps an earlier version included the words "when a President named Reagan or Bush occupies the White House."

The Administration has reduced its economic growth projections but is still arguing that its tax policy is stimulating the economy. President Bush is now touting projections that the federal budget deficit for fiscal year 2007 will be only $205 billion as proof. The projections came Wednesday in the Mid-Session Review from the Office of Management and Budget. The Center on Budget and Policy Priorities rightly points out that revenues have increased, reducing the deficit from its high of $413 billion in 2004, but that always happens in an economic recovery, and usually revenues increase by more (by around 12 percent, as opposed to the 3 percent increase that we've seen since the beginning of this economic cycle in 2001). What's more, revenue increased by 16 percent in a similar period in the economic cycle during the 1990s after taxes were increased. Finally, the Administration actually reduced its growth forecast for this year from what it projected back in February.

The only thing we would add is that the real deficit is bigger than $205 billion. The Mid-Session Review clearly indicates (on page 32) that the Administration will borrow $180 billion from the Social Security Trust Fund this year to keep the total deficit as low as $205. Social Security is projected to collect $180 billion more in payroll taxes than it will pay out in benefits this year. Social Security was changed back in the 1980s to collect a surplus that would make it easier to pay benefits later on, when the baby boomers retire in large numbers and more Social Security benefits must be paid out. The Social Security Trust Fund is essentially the accounting mechanism that keeps track of this, and it was never intended to be used to make budget deficits appear smaller than they really are. Not counting the Social Security surplus, this year's budget deficit is really $385 billion.

Congress Considers Borrowing Money from Social Security to Extend Tax Breaks

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House and Senate leaders are hoping to overcome some disagreements so that they can appoint conferees and finalize a budget plan before the middle of May. Democratic leaders in both the House and Senate initially proposed budget plans that would supposedly produce a budget surplus by 2012. The Senate plan was amended before it was passed, at the urging of Max Baucus (D-MT), to spend that alleged surplus on tax breaks and, to a much lesser degree, on expanded children's health care.

Members of the House passed their plan without any such amendment. Now the two budget proposals must be reconciled and the House must decide whether to accept the Baucus amendment in the final budget plan. Few have noted that the surplus they're talking about doesn't really exist. The "surplus" money that would be spent on tax cuts and so forth would really be taken from funds that are supposed to be used to shore up Social Security.

In 2012, the Social Security surplus, which is supposed to be separate from the rest of the federal budget, is projected to be $248 billion. The Senate budget plan, as initially proposed, would produce a surplus of $132 billion in 2012 - but that includes the Social Security surplus. So clearly the federal government is relying on the Social Security surplus to stay in the black. If the Baucus amendment is adopted in the final budget, that would essentially mean the Social Security surplus is being spent, mostly on tax cuts.

Of course the House and Senate budget plans are far more responsible than the President's since at least they revive the "pay-as-you-go" rule, or PAYGO, which helped us balance the budget in the 1990s. But the Baucus amendment, if adopted in the final budget, will be a pledge to waive PAYGO to spend the projected "surplus" that's supposedly coming in 2012.

Senate Passes Budget

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Irresponsible Amendments Added... But It's Still Better Than the President's Budget

The Senate voted 52-47 on Friday to pass a budget resolution (S. Con. Res. 21) requiring any extension of the Bush tax cuts to be paid for. The vote marked a victory for Democrats, who seek to avoid the embarrassments of the Republican-controlled Congress that failed to pass a budget last year. However, several amendments were added to the budget resolution on the floor that, if they survive the conference committee and remain in the final version passed by the House and Senate, will make it more difficult for Congress to end budget deficits. Nonetheless, the Senate budget still can be viewed as far more responsible than the budget plan proposed by President Bush. The main reason for this is that the Senate plan maintains the pay-as-you-go, or PAYGO, rules that require any new entitlement spending or any new tax cuts - including any extension of the Bush tax cuts which expire at the end of 2010 - to be offset with spending cuts or revenue increases elsewhere in the budget.

Spending the Social Security Surplus

Both the President's plan and the Senate plan rely on some flawed assumptions in order to appear to balance the budget within five years. The President's budget proposal was far more irresponsible, since it assumed the Bush tax cuts would all be made permanent and huge cuts would be made in public services. One problem with both plans is that they would continue the practice of borrowing the Social Security surplus (the Social Security taxes collected in excess of the Social Security benefits paid out in a given year). This money is supposed to be used to pay down the national debt to free up money in the future so that we can more easily pay the benefits of the baby boomers when they retire. (This is the idea behind the Social Security Trust Fund.) The Senate budget plan as originally presented by Budget Committee Chairman Kent Conrad was supposed to produce a "surplus" of $132 billion in 2012, but if you don't count the Social Security surplus that year, the budget would not quite be balanced.

Amendments Make Matters Worse

But even this illusion of responsible budgeting was more than the Senate could handle this week. An amendment offered by Senator Max Baucus (D-MT) was adopted 97-1 to spend this imaginary "surplus" on extending certain parts of the Bush tax cuts. If this provision remains in the final version approved by the House and Senate, it would not change the fact that any such proposal to extend the tax cuts without offsetting the costs would still violate PAYGO and thus require 60 votes in the Senate to overcome a point of order. But with the support of 97 Senators, it could signal that the Senate's commitment to PAYGO is shaky.

The Senate also voted 63-35 to adopt an amendment offered by Senator John Cornyn (R-TX) which would require a supermajority of 60 votes in the Senate to increase tax rates. This provision could prove problematic if, for example, Congress wants to pay for reform of the Alternative Minimum Tax (AMT) by rolling back some part of the Bush tax cuts for the wealthiest taxpayers.

Worst Case Scenario Avoided

Fortunately, the worst proposed amendments were turned away by the Senate. For example, an amendment to exempt extensions of the Bush tax cuts from PAYGO rules was defeated. The Senate also rejected amendments to further cut the estate tax and repeal the AMT without paying for it.

The House of Representatives will likely vote on their budget resolution next week, and a conference will likely take place after the Congressional recess to work out differences between the Senate version and the House version.

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.

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,

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