Yesterday's LA Times had a good op-ed on tax privatization, as follows.

ONCE UPON a time, the Internal Revenue Service proclaimed that its mission was "to collect the proper amount of tax revenue at the least cost, serve the public by continually improving the quality of our products and services and perform in a manner warranting the highest degree of public confidence in our integrity, efficiency and fairness."

Today's mission statement says nothing about cost containment or efficiency. The IRS' purpose now is "to provide America's taxpayers top-quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all."

Unless Congress steps in to stop it, the IRS is set to begin implementing a wildly inefficient plan to outsource the collection of past-due taxes from those who owe $25,000 or less.

TAPPED also has an interesting post commenting on the article.

Today's New York Times reports that critics say the IRS' private tax collection program, slated to start on September 7, "has so many pitfalls that they were urging debtors to insist on negotiating directly with the agency."

This strategy, the story reveals, has been adopted by the NTEU:

The National Treasury Employees Union, which represents employees of the agency and opposes the program, has drafted a sample letter that taxpayers can send to leave the private collection program and demand that the agency handle their cases.

As reported today by BNA, the IRS issued two announcements regarding its private debt collection program, due for launch on September 7:

-- one outlining taxpayer protections under the program

-- the other identifying ways for taxpayers to avoid scams perpetrated by private collection agencies (PCAs) or those impersonating the IRS.

We recently noted the whopping 23.5 percent program overhead that would be eaten up by the commissions to be earned by the private collection companies (as high as 24 percent of tax collections) and the attendant risk of fraud and abuse of taxpayer information. We've also noted that current IRS Commissioner Mark Everson has publicly admitted that the program’s overhead makes it far less cost-efficient than using trained and trusty career IRS agents to do the same work.

Furthermore, an internal IRS unit, the Taxpayer Advocacy Panel (TAP), has called upon the agency to drop the plan, citing growing concerns about identity theft and the ethical conduct of government contractors. Outside the IRS, there is opposition from the National Treasury Employees Union (NTEU) that represents IRS employees, as well as from Congress.

This week, NTEU issued a press release expressing outrage at the IRS’ rush to implement this gamble in the face of the clear intent of Congress:

The agency is moving ahead despite language approved by the House of Representatives in the fiscal 2007 Transportation-Treasury Appropriations bill preventing the use of any money to implement the program. Immediately following its passage, Rep. Steve Rothman (D-N.J.), author of the anti-debt collector amendment, called on the IRS Commissioner to delay the program. That was followed by 27 House members signing a bipartisan letter generated by Reps. Rob Simmons (R-Conn.) and Chris Van Hollen (D-Md.) calling on the IRS to halt the program.

The arrogance of the IRS in pushing forward with this misguided and costly program in the face of congressional efforts to halt it is beyond belief,” said President Colleen M. Kelley of the National Treasury Employees Union (NTEU). ”As more details are uncovered, it is increasingly apparent that this will be disastrous for taxpayers.

With all the opposition to the program, internal and external, and risks of rip-offs of both taxpayers and the IRS, one wonders: is this program the result of government by the scammers, for the scammers?

We noted earlier today how horrendously misleading and downright incorrect Sen. Grassley's statement about the CBO August Update report was in great detail, but thought it might be appropriate to compile a list of summer reading materials Grassley - or perhaps more importantly his staff - could read to get themselves up to speed on the issue.

Tops on the list is Jason Furman's excellent commentary in Slate Magazine concerning the Treasury Department's recent efforts at dynamic analysis. Perhaps the most important finding of the economists at the Treasury Department that Furman highlights is that making the Bush tax cuts permanent is unsustainable. From the Treasury Department report:

An important feature of this model is that a permanent reduction in taxes, as compared to baseline, would lead to an unsustainable accumulation of debt.

Furman further notes that if dramatically scaling back discretionary spending (by 50 percent) is an unrealistic option - which it is - then:

...the Treasury economists have another important finding: The sooner we get rid of the tax cuts, the better it will be for the economy. Specifically, they found that national output would be 0.9 percent higher in the long run if we let them expire in 2010 rather than allowing them to continue along, forcing us to face even bigger tax increases in the future to make up for all of the added deficits and debt.

We'll give the staff a couple of days to catch up on their summer reading list (we know August can be busy) and get through Furman's article and then post a few others items for them to consult.

In a memo to reporters and editors , Senate Finance Committee chair Charles Grassley (R-IA) hailed last week’s CBO report, The Budget and Economic Outlook: An Update — which projected an FY2006 federal deficit of $260 billion -- thusly:

“It’s pretty obvious that the critics of tax relief will ignore this report because it refutes their point. The critics like to say tax relief guts the revenue base and causes rising deficits. But the report clearly doesn’t support that assertion. In fact, the report shows that positive revenue changes to the baseline in the FY 2006 and FY 2007 budgets far exceeded the revenue loss from the reconciled and non-reconciled tax relief approved in this Congress. Spending is the problem, not tax relief.”

Maybe this is an object lesson in August recess staff work. I wonder how much of the CBO report the memo’s author read. The report attributes the lower-than-expected $260 billion figure in large measure to a recent surge in corporate income taxes, but acknowledges that this surge is temporary:

“The recent growth in corporate tax receipts relative to GDP reflects profits’ reaching new highs relative to the size of the economy. CBO expects that over the 2007—2016 period, both profits and receipts will return to levels more consistent with their historical relationship to GDP.”

As for the implication in Grassley’s statement that tax cuts pay for themselves, it ignores a glaring truth exposed recently by the Center for Budget and Policy Priorities, which concludes: “the new CBO estimate indicates that were it not for the tax cuts of recent years, the budget would now be in balance.”

OMB Watch has been making the same points, repeatedly, over the last several weeks:

• deficit impact of capital gains and dividends cuts;
  
• the recent revenue increases are temporary and mask underlying structural imbalances; and
  
• despite short-term gains, CBO forecasts grim long-term fiscal outlook

If the Senate Finance chair seeks another authority refuting the stale notion that economic growth fully or even substantially recoups revenue loss caused by tax cuts, he need only look as far as the U.S. Treasury Department. On July 25, a Treasury-issued report stated that:

“If the revenue cost of that tax relief is offset by reducing future government spending, the increase in output is likely be [sic] about 0.7 percent under plausible assumptions.”

This means that supply-side theory, according to the Administration, is at best a kind of “seven percent solution,” that a dollar in tax cuts will yield a seven-cent return in revenues.

The non-partisan Congressional Research Service (CRS), in a July 27 memo analyzing the Treasury report, confirmed this interpretation of the report’s conclusion:

“The base case estimates suggest that the induced effect on output were the tax cuts to be extended would lead to a revenue offset of 7 percent of the initial cost."

Put another way, the Administration is saying that for every dollar in tax cuts, there is a 93 cent loss in revenue. Indeed, as the seven percent solution would predict, real revenue, adjusted for inflation, has grown only negligibly since President Bush’s tax cuts went into effect and, according to the Senate Budget Committee minority staff analysis of the CBO August Update “revenues in 2006 are still expected to come in almost $300 billion below the original projections for the year.”

Senator Grassley, look to your left or look to your right, nothing we can see “shows that positive revenue changes to the baseline in the FY 2006 and FY 2007 budgets far exceeded the revenue loss.”

IRS Commissioner Mark Everson is moving forward with his plan to privatize debt collection despite Congressional opposition. BNA (sub. req'd) reports that Everson rejected a request from Rep. Steve Rothman (D-NJ) to cancel the privatization project that's slated to begin in late August or early September. See here for more information about the program.

In his response to Rothman, Everson admitted that the program won't be cost-efficient, but contended that Congress and the President have left him no other options.

IRS has been forced to turn to private collectors, then and now, because of a "100 percent failure to provide resources to the IRS," he said. President Bush has not asked for enough money and the Congress has failed to appropriate enough, he explained.

Everson linked collecting the debt and "narrowing the tax gap" in his letter. He also noted that House-approved IRS funding for fiscal year 2007 falls $104.5 million short of the administration's request. "Using our resources would be cost effective," he said, but there are not enough resources to do it that way.

There will be some accounting of how the private debt collectors have measured up, in the form of a cost-effectiveness study to be included in a biennial report to Congress, Everson said. It will compare IRS and private collection agency costs for collecting similar accounts.

While it's probably wrong to say that the IRS has no choice but to privatize (they could always just wait until Congress resolves the issue, as Rep. Rothman requested), Everson does have a point. There's no good reason to not fully-fund the IRS, since any money allocated to it actually does pay for itself in much higher revenues. So what's Congress's excuse?

Today, President Bush will sign another regressive tax cut into law. Yes, ladies and gentleman, I'm talking about the pension reform bill, which happens to not only fix some problems with the Pension Benefit Guaranty Corporation, but also makes permanent a handful of the temporary tax cuts passed in 2001.

The Tax Policy Center, a joint project of the nonpartisan Brookings Institute and Urban Insitute, estimates that the tax cuts will save people in the top income quintile about $368 a year, while people in the bottom quintile get $8.

For you tax wonks, the taxes cut include (from the Tax Policy Center):

• making permanent the pension and IRA provisions in the Economic Growth and Tax Relief Reconcilation Act of 2001 (increased contribution limits and catch-up contributions for IRAs, increased limitation on exclusion for elective deferrals, increased annual addition limitation for defined contribution plans)
• making the Saver's Credit (Subsection (b) of Section 25B of the 1986 Internal Revenue Code) permanent; and
• indexing for inflation the limits for deduction of the retirement contributions for active participants (Section 201(g) of the 1986 Internal Revenue Code), the limits for contribution to ROTH IRAs (Section 408A(c)(3) of the 1986 Internal Revenue Code) and the limit for Saver's Credit (Subsection (b) of Section 25B of the 1986 Internal Revenue Code).

Bloomberg News also has a good summary of the tax breaks.

The Congressional Budget Office (CBO) says the total cost of the bill comes to about $68 billion over ten years. And, of course, the bill does not provide for a way to offset its costs, and it comes at a time when just about everyone and their uncle thinks we're headed for huge, unsustainable, structural deficits.

This post is just to hammer the point further about much of a sham supply side economics really is. The CRS memo, discussed earlier by Matt, was requested as "a discussion of the dynamic model used by the Treasury Department," and includes a comparison of various models used in two Treasury reports. ("Dynamic scoring" is a method by which future tax revenues are calculated based on different economic conditions due to changes in tax policies.)

The CRS report bottom-lined economic growth as a result of the President Bush's 2001 and 2003 tax cuts at 0.7%. This figure is the result of middle-of-the-road estimates of changes of the labor force in response to changes in tax policies. A more realistic assumption - one that most resembles the real world - indicates that economic growth would increase by 0.1% (yes, zero point one percent).

So, when the Treasury Department issues a report indicating that the president's tax policies will induce the economy to grow an additional 0.7%, the report is actually making somewhat optimistic assumptions about the economy in some unspecified period after 2016. The upshot of this optimistic economic growth is that the president's tax cuts will generate enough economic growth to compensate for 7% of the revenue losses they inflict upon the federal budget.

I'll say that again: That the president's tax cuts pay for seven percent of themselves is an optimistic conclusion.

Let's add the Congressional Research Service to the list of government agencies that have demonstrated that the Bush tax cuts come nowhere near to paying for themselves.

Even more damaging, though, is the finding that the tax cuts barely grow the economy in the long-run. From Congress Daily (subscription required):

The Treasury report was based on "dynamic" analysis, which looks at how changes in tax law affect taxpayers' behavior in ways that influence economic growth. The report found that if made permanent, Bush's tax cuts would cause economic output to grow by 0.7 percent in the "long run" -- an unspecified period beyond 2016. But that economic growth would have to be paid for by cuts in government spending, the report says.

To be clear, that's a total of 0.7 percent growth over a long number of years, not annually. That's barely perceptible, according to Jason Furman of the Center on Budget and Policy Priorities. So why we should ever renew these tax cuts?

It's been a slow day at the BudgetBlog, so we thought we'd point out a few interesting links.

Tax & Business Law Commentary Blog has two good posts up, one about howBig Pharma is stiffing the IRS on taxes it owes on its foreign sales and assets, and another on how Rep. Gary Miller (R-CA) is stiffing the IRS on taxes he owes on his property sales. Feel free to ponder the potential meta-connections between the posts.

And check out this article from the Rapid City Journal on the effects that federal budget cuts may have on water supply issues in South Dakota. It's pretty frightening stuff.

In addition to concerns about the repercussions of the drought, Anderson and Williamson said recent budget cuts have forced them to discontinue seven flow gauges within the past year.

The USGS gets the majority of its funding from “reimbursable funds” from federal, state and local cooperators, Anderson said. Nearly 70 different cooperators including the Army Corps of Engineers, the Bureau of Indian Affairs, the Department of Transportation and other state and local agencies allocate funding for the USGS.

Mid-fiscal-year budget cuts from the BIA forced the discontinuation of seven gauges in the eastern and central portions of the state. A further cut from the Corps of Engineers likely will lead to the shutdown of eight more gauges in the next year...

...“We think it’s significant to the people of South Dakota to know that gauges are being discontinued,” he said.

“It’s real hard to say much about climate change when all you have is a 10-year record,” Anderson said. “If you have a 100-year record of stream flow, we can look and see whether there are trends in the amount of water in the stream and what that says about climate change in our area.”

An April 11 article by John Schwartz of the New York Times said the loss of funding for stream gauges had contributed to a heightened danger of flash floods in some areas of the country.

House Democrats are challenging a recent move by the IRS to downsize its estate tax auditing department (More here and here). Rep. John Olver (D-MA) just threw his hat into the ring, too. From BNA (subscription required):

Olver expressed "strong concern" despite IRS's assertions that the change is due to the declining number of returns as a result of a bigger exemption.

The Massachusetts Democrat pointed out that estates of more than $2 million are still subject to the tax.

"I am greatly concerned that this sudden and substantial personnel reduction will cripple the ability of the IRS to detect tax cheating among the wealthiest estates," Colvert said in an Aug. 1 letter to Commissioner of Internal Revenue Mark Everson.

IRS has taken significant heat from Congress since it announced July 24 that it intends to offer voluntary retirements to 157 of the 343 existing estate tax attorneys who audit estate and gift tax returns.

Olver asked Everson to delay the personnel reductions "until it can be definitively shown that the IRS will enhance and not weaken its current efforts" in the estate tax area." In fact, he said, "I believe that the IRS should increase, not decrease, its audit coverage in this area."

On July 28, 25 other House Democrats sent a letter to IRS Commissioner Mark Everson questioning the decision. From BNA again:

Reps. John Lewis (D-Ga.), ranking member of the Oversight Subcommittee, and Earl Pomeroy (D-N.D.), a senior panel member, said they fear IRS may not be devoting adequate resources to compliance in this area.

Taking a more urgent tone, 23 House Democrats said in another letter to Everson that IRS should rethink the decision at once.

"We have serious concerns about this significant shift in tax collection policy and request that you immediately delay this decision until Congress has adequate time to review your plan," said the lawmakers, led by Rep. Steven Rothman (D-N.J.) and including Ways and Means member Rep. Benjamin Cardin (D-Md.).....

"We cannot understand why you would want to eliminate auditors from a division that is not only the most productive, but also, according to your agency, where there is a growing need for audits," the Rothman group said.

BNA: Olver Criticizes IRS Decision to Reduce Attorneys Working on Estate Tax Audits

BNA: Decision to Reduce Estate Tax Auditors Not Political, Everson Insists at Hearing

Earlier, Matt asked:

[A]ny readers out there want to calculate how much lower the deficit would have been if the 2003 capital gains and dividends tax cuts hadn't been in effect?

Well, I'm not sure about the capital gains and dividends cuts, but the Center on Budget and Policy Priotities informs us that:

the tax cuts enacted since January 2001 are costing a total of $258 billion in 2006 (including the increased interest costs of the debt that result from the borrowing that is required to cover the lost revenues). This means that even with the spending for the wars in Iraq and Afghanistan and the response to Hurricane Katrina, the federal budget would essentially be in balance this year if the tax cuts had not been enacted, or if they had been offset by either increases in other taxes or cuts in programs, as would have been required under the Pay-As-You-Go rules that tax-cut proponents first ignored and then allowed to expire.

So, rather than debating where and when to cut Social Security and Medicare, Congress could be seriously debating the merits of an Apollo-like program aimed at moving the U.S. economy away from dependency on fossil fuels.

(Priorities, man, priorities)

Ya'll might have noticed an uptick in the quality of the blog since Monday. That would be the work of the newest member of the Budget & Tax program - Matt Lewis.

So, say 'Hi' to Matt when you get a chance.

Sen. Maria Cantwell (D-WA) - a key swing vote on the upcoming "trifecta" bill - has publicly announced she will vote against the bill. Cantwell's bold decision to stand up for working-class families in Washington and around the country who would get a bad break with this legislation is a significant blow to Sen. Frist's (T-RN) attempts to pass this crass and manipulative bill.

Sen. Cantwell should be praised for her brave leadership in speaking out against this effort. Kudos to her!

So here's something to help defray the federal budget deficit a bit: make people who owe taxes actually pay those taxes. Sen. Carl Levin's (D-MI) staff conducted an investigation into off-shore tax havens. His minority report, which was adopted by the full Senate Permanent Investigations subcommittee, finds that superrich tax cheats are gaming the system to the tune of $70 billion per year.

David Cay Johnston reporting in The New York Times:

The 400-page report recommends eight changes, some of them aimed at going after the law and accounting firms, banks and investment advisers that the report says enable tax schemes that rely on complexity, secrecy and compartmentalizing information so that advisers can claim they had no idea that the overall transaction was a fraud.

"We need to significantly strengthen the aiding and abetting statutes to get at the lawyers and accountants and other advisers who enable this cheating," Senator Levin said, adding that "we need major changes in law to stop the use of tax havens" by tax cheats.

[...]

[Sen. Levin] said that during the investigation he grew angry as he learned how common cheating had become and how existing government rules aided tax cheats. He said that complex schemes were broken into discrete pieces, allowing professional advisers working on each piece to assert that they had no idea that, taken as a whole, a scheme was improper.

The New York Times: Tax Cheats Called Out of Control