After Congress adopts the minimum wage small business tax package -- Small Business and Work Opportunity Tax Act of 2007 -- as part of the war spending supplemental conference report, and the president vetoes it, what will become of it? Will it be part of a post-veto "Supp. 2.0"?

WebCPA reports that "Senate Finance Committee Chairman Max Baucus has said that even if President Bush vetoes the package, the tax provisions will see the light of day again." Opponents like House Ways and Means ranking member Jim McCrery (R-LA), who complain that the tax package is not directed at the small business firms most directly affected by the minimum wage hike, would like another bite at the apple.

But would it fare better as stand-alone legislation? Or does the prospect of amendments by unhappy Republicans to a stand-alone version make the must-pass supplemental a good vehicle for it? Prof. Linda Beale of Wayne State University Law School says that:

Senator Baucus has already indicated that the almost $5 billion in tax breaks will stay in the supplemental bill even after Bush's expected veto because of the spending bill's troop withdrawal language.

• for the Joint Committee on Taxation's technical explanation of the tax package, click here
• for the JCT's estmated revenue effects of the package, click here

Peter Orszag, speaking at a conference on budget issues held by the Committee for a Responsible Federal Budget, gets the real long-term fiscal problem (emph. mine).

...the floor was given to CBO director Peter Orszag, who made the following three points.

1) The long-term story here is not aging or entitlements, but health care costs that are spiraling out of control. "We do a disservice," he continued, "by uniting the health care issue with the aging issue," which represents a much less serious fiscal danger. Medicare, not Social Security, is what is driving up the costs of entitlements, and it is increasing so dramatically because of overall increases in the cost of health care, not because of our aging population.

2) Social Security is often spoken of as the easiest of the three major entitlement programs to fix, but this gets it backwards. When dealing with health care, there is an opportunity to eliminate waste and inefficiency without affecting health outcomes. On the other hand, Social Security is a cash-transfer program, so the only way to cut costs is to reduce benefits.

3) There is no crisis unique to Medicaid and Medicare. The problem is with systemic inefficiencies in the health care system, and so it follows that the solution is not to cut benefits, but to figure out a way to bring down costs.

Nobody at the conference disagreed with Orszag's math. Seriously- everyone agrees that health care prices and waste are the cause. So there's a new consensus of what's driving the long-term fiscal imbalance- health care, irrespective of demographics, and not Social Security.

There was plenty of disagreement on a) whether this health care imbalance was as important as other problems -such as the rather abstract "entitlement" or "budget" problem that seems to be derived from a fundamental aversion to government spending- and b) what policies would address the health care imbalance, and c) the political viability of the proposed solutions.

It's really a look behind the curtain, in terms of the fiscal policy establishment- check it out if you have the chance.

House Ways and Means chair Charles Rangel and Senate Finance chief Max Baucus have indeed worked out a compromise minimum wage tax deal providing $4.84 bn. in tax relief for small business over 10 years, offset by an equal amount of tax increases.

The compromise extends the work opportunity tax credit for three and a half years at a 10-year cost of $2.6 bn., and increases Section 179 expensing limits to $125,000 through 2008 for businesses in the Gulf Opportunity Zone, costing $3.5 bn. over five years. Among the offsets are provisions removing a limitation that requires the IRS to suspend interest on some tax delinquencies after 12 months (raising $2.4 bn. over ten years), and raising the age that dependent children can benefit from preferential tax rates on capital gains ($1.4 billion over ten).

Gone are offsets from the $12.6 bn. Senate version with business tax breaks, including extended accelerated depreciation for restaurants and certain leased property changes. Also omitted is a cap on deductions for executives' deferred compensation, which the business community lobbied hard against.

Why would Democrats not seek to move the minimum wage, with tax package, as stand-alone legislation, given the likelihood of passage with both Rangel and Baucus supporting it? It's sheer speculation, but maybe they want to want the president pay the political price of vetoing a minumum wage increase, which he will presumably do, since it is attached to a supplemental war funding bill he has already promised to veto.

Rob Portman is in the Hill today, doing his best to spin the Congressional budget resolutions.

One of his comments stands out:

I'm disappointed that the budget pays for all that new spending with taxes, which I think will put at risk the very economic growth that has given us the increased revenues over the last few years to be able to reduce the deficit.

I'm not exactly sure what spending he's talking about. But anyway. The main point is that he's probably wrong about the macroeconomic affect of the tax cuts. Even the Bush Treasury Department doesn't think expired tax cuts will put long-term economic growth at risk. Why should anybody take Rob Portman's word over theirs?

Let's also not forget that economic growth in the last few years has not done wonders for the country. It's only been the wealthiest people who've done better. So the revenue from the expired tax cuts could be used to help regular people who otherwise wouldn't get much in this top-heavy economy.

For instance, some of the revenue could be used to reform the health care system so it doesn't cost people and the government so much money. This is a pocketbook and a budget issue, but it also has a lot to do with macroeconomics. People from all over the political and ideological spectrum, including Portman, warn that health care costs could harm the economy. They could drive up the deficit to unsustainable levels. And if health care spending takes up too much of our GDP, we'll have less money around to spend on more other things.

Health care reform is going to cost a lot up front. But unlike renewing most of the tax cuts, it might actually make a significant and positive impact on our economy.

Senate Finance chair Max Baucus (D-MT) has indicated that he and House Ways and Means chair Charles Rangel (D-NY) are looking at a minimum wage small business tax package "in the ballpark" of $5 billion over 10 years, confirming our report earlier this week.

Similarly, Baucus and other leading Democrats have decided that the war spending supplemental is the best vehicle for passing the minimum wage and its attendant tax breaks. "More often than not, the rider needs a strong horse. The supplemental is strong, the minimum wage is strong," Baucus said.

The remaining question is where the $5 billion in offsets to pay for the tax package will come from. Yesterday, Baucus and Senate Finance ranking member Charles Grassley issued a "press release highlighting a GAO report that identifies potential "tax gap" sources of revenue from enhanced enforcement.

While at his new job with the Red Cross, may he find redemption for the following:

• Implementing a program to privatize tax debt collection
• Privatizing regulations
• Offering early retirement to estate tax auditors
• Potentially politicizing tax collection (see OMB Watch's Advocacy Blog for more instances of potential politicization)
• Forcing TRAC to sue IRS to get tax data that shows how many corporate audits are cursory and unproductive

Oh, and for not really doing much to close the tax gap, though Congress never gave him a big enough budget to do anything significant.

Tuesday was Tax Day, and if anything it' a reminder that, as Americans, we're all united by at least one thing: a four-digit number, "1040." That's right - even the president and vice president are just like everybody else on Tax Day.

The president's and the vice president's tax returns were made available last week. You can see the Bushes' return here and the Cheneys' return here.

President and Mrs. George W. Bush reported taxable income of $618,694 for the tax year 2005. This resulted in a total of $187,768 in federal income taxes paid by President and Mrs. Bush.

The President's 2005 income included salary earned as President and investment income from the trusts in which their assets are held.

Vice President and Mrs. Cheney filed their federal income tax return for 2004 today. The income tax return shows that the Cheneys owe federal taxes for 2004 of $393,518 on taxable income of $1,328,678. During the course of 2004 the Cheneys paid $290,855 in taxes through withholding and estimated tax payments. The Cheneys paid $102,663 upon filing their tax return.

In addition to his demurrer on the tax gap, as Matt notes below, Treasury Secretary Henry Paulson also begged off yesterday on another matter of tax policy that had been a major Bush administration priority, telling the Senate Finance Committee:

There isn't a major tax reform proposal being put forward now, and I don't see that on the dockets in the near future.

So much for all that brave talk out of Congress about fundamental tax reform that we noted earlier this year, and the (now-languishing) recommendations offered in November 2005 by the president's own tax reform advisory commission.

So, what is left of the Paulson portfolio? Is Paulson doomed to follow in the tradition of Paul (friend of Bono) O'Neill and John (Social Security privatization) Snow as another irrelevant, ineffective Bush Treasury Secretary, wondering why oh why he ever left the private sector?

Treasury Secretary Henry Paulson thinks we have no choice but to let people evade taxes, apparently. Having just paid my taxes, I find that a little annoying.

In testimony before Congress yesterday, Paulson made a case for restraint in closing the the tax gap, which is a sanitized way of putting the annual total of tax evasion, avoidance and errors (noncompliance, in tax speak). IRS estimates the tax gap to be at $353 billion a year, or about 16 percent of total taxes owed.

So why can't we go after this money? Here's Paulson:

"There is a big part of the tax gap that we simply won't be able to reach without adding draconian and painful requirements on all taxpayers," Paulson said.

All taxpayers? But not all taxpayers are noncompliant. Indeed, the IRS collects 99 percent of the taxes on income earned from wages and salaries. It's business income, and income from capital gains and dividends, that the IRS has trouble getting a hold of (See this EPI report for more).

So no, reducing noncompliance would not add any type of requirement for most taxpayers. Businesses and wealthy people would be most affected. That's who doesn't pay up.

But Paulson is right that this issue does affect all taxpayers- it's everyone that loses out when people don't pay their taxes. It's compliant taxpayers that in the long run have to pay more taxes to make up for what noncompliant taxpayers don't pay. It's everyone that could use more funding for education, or infrastructural investment, or solving our health care crisis. And it's everyone that has to pay for unnecessary deficit spending and debt.

Those "Draconian and painful" consequences that Paulson mentions are real, and they're already present. They're the consequences of not doing anything about the tax gap.

Today's Wall Street Journal includes an odd squib, Bill to Raise Minimum Wage Might Include Tax Breaks. It opens, "Democratic tax writers hope to reach a deal on a minimum-wage bill that would include about $5 billion in tax breaks to help businesses affected by the higher pay levels."

"Might Include Tax Breaks"? That's hardly news; we've been reporting on it for months.

But $5 billion? Is that the long-awaited compromise in the months-old stand-off between House Ways and Means chair Charles Rangel and Senate Finance chair Max Baucus?

One would have expected much more fanfare, as Rangel and Baucus appeared to be $11 billion apart at last report. (Or is it the amount in the two versions that everyone can agree would "help businesses affected by" the minimum wage hike?)

The piece ends, "Democrats have decided th[e supplemental] will be the vehicle to enact the final minimum-wage compromise." Now that would be news. After all, when Speaker Pelosi added the minimum wage to the supplemental spending bill, Rangel and several other tax writers expressed concern that party leaders sought to circumvent the Ways ands Means and Finance Committees.

Breaking News: IRS Commissioner Mark Everson to step down...

Should current trends continue -- from higher payroll taxes to the potential impact of the Alternative Minimum Tax on middle-class earners -- the US system could tip from progressive to flat in a matter of years, at least for the top half of earners. And then tip back again.

For decades, the American tax burden has been shifting away from the rich. Now, two economists say, it could be at the brink of a historic tipping point, [looking at how taxes] affect Americans at each income level, and how tax burdens have changed over the past generation. Their short answer: The rich are paying less than ever.

See the April 15 Critical Faculties column in the Boston Globe.

The very problem that Matt alludes to at the end of his blog below, the inadequate "contextualizing and disaggregating" of fiscal issues by what are called "opinion leaders," is illustrated perfectly in a well-meaning but ultimately wonky piece published yesterday in tompaine.com, Hidden Truths of Progressive Taxes, by George Lakoff, senior fellow at the Rockridge Institute, and Bruce Budner, its executive director.

Lakoff and Budner do a good job of identifying the truths of (progressive) taxes, citing the benefits they buy, including services provided by:

police, firefighters, emergency services, public health, the military [and] the infrastructure needed for business and everyday life: roads, communications systems, water supplies, public education, the banking system for loans and economic stability, the SEC for the stock market, the courts for enforcing contracts, air traffic control, support for basic science, our national parks and public buildings, and more.

and suggests that "a simplified understanding of the progressive values that underlie our tradition of progressive taxation" might help broaden appreciation of these benefits and the values behind them."These arguments will appeal to those whom we call biconceptuals—the great majority of Americans whose worldviews borrow in various ways from both progressive and conservative values." Biconceptuals? OK, got that one, I think.

"An important point often lost in this debate is an appreciation that the common wealth, which our taxes create and sustain, empowers the wealthy in myriad ways to create their wealth. We call this compound empowerment." Right, good to put a name on that.

Now, ready for the clear and simple clarion call, the rallying cry that will reveal the hidden truths of progressive taxes and help us extol their virtues to our fellow citizens, we come to the final sentence: "We need to return to a fair tax policy that recognizes financial responsibility incurred by the compound use of America's empowering infrastructure."

Is that the best way to promote "a simplified understanding of the progressive values that underlie our tradition of progressive taxation"?

As the Alternative Minimum Tax (AMT) threatens to reach 20 million new taxpayers next year, the issue has now reached readiness for prime time on the editorial pages of the nation's newspapers. Below is a sampler from the many editorials on the AMT that appeared on the weekend before Tax Day 2007:

The Star Ledger of New Jersey, on what will truly motivate Congress to end the AMT:

As it grows[,] Washington will lose economic influence commensurately... Instead of paying 35 percent on incomes heavily adjusted by deductions, more and more people will pay the lower AMT rate of 28 percent on just about their full income, unadjusted by deductions. Many politicians may say they like the flat tax, but few want to give up the power associated with the public's sensitivity to tax deductions. For this reason especially, Congress will fight the AMT.

The Jacksonville (NC) Daily News, as if: "In an ideal world, the AMT would simply be repealed, because cutting taxes almost always leads to increased tax revenue."

The familiar hysterical illogic of the Wall Street Journal:

Word around Washington is that Democrats may try to combine AMT relief with a measure to repeal some of the Bush tax cuts. But no one should be fooled by this class-war fakery. The AMT was itself supposed to be a soak-the-rich scheme. Like most such schemes, it's now hitting millions of the non-rich, with millions more on deck for a soaking. The same would go eventually for whatever new taxes Democrats claim would also only apply to the rich.

The Los Angeles Times, on why AMT repeal this year is probably out of the question:

One ... factor is figuring out how to offset lost AMT revenue. The government would have to make up about $1 trillion over the next 10 years if the AMT is abolished and President Bush's tax cuts are extended past 2010. Reform of the AMT probably will require raising taxes or cutting spending — maybe both — and neither option is especially attractive to politicians with an eye on the 2008 election.

The Times editorial makes another safe prediction: "This time next year, 'alternative minimum tax' will either be Google's most popular search term or a forgotten phrase... The first option is more likely," because Congress will likely conduct a major debate, without major reform, and the AMT will get more prime time play in the nation's papers and other media.

Check out this NYT article to find out how much people like you are being audited compared to other people.

And see the latest release by Syracuse University's TRAC, which had to sue the IRS to get data that shows that it has been strangely unproductive when it audits large corporations.

You can always count on the Wall Street Journal opinion page to defend anything that rich people do. If all you did was read it, you'd think that whatever is in the interest of the wealthy is also in the interest of the nation. Wealthy people know how to spend money much better than the government. If we just let wealthy people do what they want, everyone will be better off.

Take this reckless column by two mainstays of the Washington establishment, Bill Frenzel and Ernest Christian. They argue that cutting taxes on the wealthy is good for America, pointing up a study by conservative economist Greg Mankiw that shows significant economic growth resulting from cuts in the capital gains tax (emph. mine).

To the champions of bigger government, the important truth of the Mankiw study was that the amount of tax on induced economic growth was insufficient to make up for all of the revenues lost to the Treasury from the original tax cut. Ergo, the government has less money to spend. Ergo, tax cuts are bad.

To those of us who prefer economic growth over government growth, the Mankiw study confirmed a different truth. If Congress is willing to forego 50 cents of revenue, the economy would grow and people would have $2 more income. If given the choice, most people would take the $2.

It was once true that a rising tide lifted all boats, and everyone was in it together. But it hasn't been that way for the last 30 or so years. Economic growth disproportionately benefits the wealthiest among us. Median incomes have barely budged for far too long. The only people who'll be getting those $2 are already doing fine.

I guess I should be happy that the authors didn't say that tax cuts pay for themselves. But if this is what passes for honest discourse on tax policy, we've still got a lot of work to do.

A must-read examination of the challenges facing Senate Finance Committee chair Max Baucus (D-MT) appears in today's Wall Street Journal.

Baucus is currently playing a pivotal role in several significant issues, as we have noted, from AMT to S-CHIP, to the minimum wage small business tax, to the estate tax -- taking sometimes sharply ideologically inconsistent positions, harking back to his support for the 2001 Bush tax cuts, which "infuriated other Democrats."

The piece also has this priceless perspective from his predecessor as Banking Committee chair, quotable Sen. Chuck Grassley (R-IA), on the road ahead for the maverick from Montana. Baucus, he says:

... has it more difficult than what I had... Sometimes it's going to put him in the position of either compromising a lot on what his party expects of the Finance Committee or getting 60 votes. [But] I want to help him do, like he helped me.

With Tax Day 2007 almost a week away, policy experts, legislators, and the media are examining the biggest anomaly in the U.S. tax code: the Alternative Minimum Tax (AMT). Aimed at the 155 richest families who paid zero taxes in 1969, the AMT failed to reach 2,824 untaxed rich families in 2003, while the numbers paying it topped three million.

Via a succession of "patches" raising AMT's exemption level in recent years, Congress has held the number of AMT taxpayers steady. But as the inflation brings more people within AMT's reach, the cost of these patches increases. As we have noted, extending the patch through 2007 would cost $45 billion; through 2008, $100 billion. Outright repeal of the AMT would cost $700 billion over ten years, assuming the Bush tax cuts are allowed to expire; $1.3 trillion if they are extended.

If Congress decides it can't afford another patch, the number of taxpayers subject to AMT this year will shoot up from 3.5 million to 23.4 million, according to the Tax Policy Center.

In honor of Boston's historical role in addressing anomalous tax policy, let's consider the Boston Globe's editorial resistance to just tossing the ATM overboard entirely:

The better option is to let lapse the Bush tax cuts for the richest, set a minimum income standard for the AMT, index it for inflation, and then tighten up the exemptions that let some wealthy Americans avoid taxes even under the AMT. As it stands, the alternative minimum isn't keeping them from exploiting a plethora of tax shelters, but it is squeezing far less affluent Americans.

• See also the front-page story in today's New York Times.

To follow up Dana's post about the NYT's obit for supply-side economics, I want point you to a couple of related posts.

First, Kevin Drum @ Washington Monthly:

I got to wondering if serious supply-siders got tired of having their entire school of thought made into a laughingstock by today's endless parade of yahoos blathering mindlessly about how tax cuts always and everywhere magically increase revenue. Surely they find such childishness embarrassing?

And there's a fascinating (for econ geeks like myself) back and forth between Bruce Bartlett and Mark Thoma in the comments threat on this Mark Thoma post. Thoma's post is also a good summary of macroeconomic stabilization policy debate of the past 30 years. Check it out if you want to wonder into the wild and crazy world of economics.

An announcement appears in today's New York Times of the imminent demise of "a frequently misleading and meaningless buzzword" and its "perversions ... long past time ... to be put to rest ... for good."

Bruce Bartlett, senior advisor to Reagan and Bush I, author of Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy, and "present at the creation of 'supply-side economics,'" now ridicules its nefarious notion that "all tax cuts raise revenue," adding that

it threatens to undermine the enormous gains that have been made in economic theory and policy over the last 30 years. Perhaps the best way of preventing that from happening is to kill the phrase "supply-side economics" and give it a decent burial.

Maybe my colleague Craig Jennings, prospective Ph. D. candidate, can put the shovel down now.

Tax day is coming up; want to be disgusted by what your income taxes are actually paying for? Check out this new report from the National Priorities Project.

Bummed that Ford is going to stick it to UAW workers as its executives use forklifts to carry their compensation to the bank, I decided to turn to the editorial pages of the Wall Street Journal - always good for a laugh. And today's editorial, The World's Largest Tax Increase Ever^TM($), delivers.

Congress has just lit a fuse for the biggest tax increase in history.

Congress, just now, lit this fuse? Apparently Congress has a time machine, because as I remember the 2001 and 2003 tax cuts, the very same tax code that will expire in 2010, they were written, passed, and signed into law in 2001 and 2003. Hilarious.

See also Dana's take over at TPM Cafe.

Also in same act piece, the WSJ editors grapple with logic:

Despite the Bush tax cuts -- or we should say because of them -- federal revenues are above where they've been for most of the last half century. The government is far from starved for cash.

Nice. They're saying - or they feel they should say - that as tax rates are decreased federal revenues increase, and therefore higher taxes will starve the government of cash. Is the WSJ editorial board suggesting Congress should cut taxes to create a well-funded, more expansive government?

This is what I love about Laffer-esque arguments for tax cuts. Supply-siders contend that as tax rates decrease, government revenues increase. And it always strikes me as funny because when I imagine Supply Side America, I see government economists in overalls shoveling cash into U.S. Treasury furnaces because the federal government is collecting just waaaay to much cash and its run out of storage space because Congress lowered the top marginal bracket to 1%.

According a Deloitte Tax LLP report of March 26, Senate budget writers are looking at revenues generated by S. 396, an anti-tax haven bill introduced by Sen. Byron Dorgan (D-ND), to help pay for the budget resolution.

The Dorgan bill would deny deferral benefits to multinationals locating subsidiaries in low-tax jurisdictions in order to avoid U.S. tax. Under the bill, foreign corporations setting up "shell" corporations in one of 40 tax haven countries defined in the bill would be taxed as domestic U.S. companies (unless they earn most of their income from trade or business in that jurisdiction).

The bill was offered up as an amendment to the budget resolution but was pulled at the last minute. Deloitte reports that Finance Committee staff members are studying the bill for its revenue raising potential, which Dorgan tax staffer Allan Huffman estimates at $14.7 billion over 10 years.

The Senate Finance Committee is ultimately responsible for determining which revenue provisions the Senate will adopt.

The Joint Committee on Taxation released its score today of the tax provisions in last week's Senate-passed supplemental appropriations bill. The cost: $12.5 billion over 10 years, more than offset by $13.8 billion in revenue raisers.

The president has promised to veto the bill on account of its war-related provisions, but the tax package is independently significant, since it builds on the Senate's small business tax piece of the minimum wage bill. Wage bills were passed earlier this year in both the House and Senate but have not gone to conference.

The Senate supplemental adds $4.2 billion to the $8.3 billion small business tax package in the Senate's original minimum wage bill. The House version of the bill included a $1.3 billion tax package. The Senate tax "supplement" won't exactly facilitate compromise with the House, where, even after the Senate passed the $8.3 billion package, Ways and Means chair Charles Rangel (D-NY) said: "There's nowhere to move. Move where? We've done everything we can do."

This stuff can get a little wonky on the stump. But in the end, should a Democrat be elected president in 2008, it could determine everything from the value of the dollar to whether Americans get universal health care coverage. It's the economic blueprint that Hillary Clinton advisors and former Clinton administration Treasury secretary Robert Rubin and Rubin deputy Roger Altman are developing -- heavy on free trade and balanced budgets, lighter on protecting workers from global competition and deficit-financing domestic social programs.

A story this week in the Politico profiles the establishment Democratic economic policy exiles-in-waiting and the challenges they face from "Capitol Hill, where the more populist wing of the Democratic Party appears to be ascendant," and presidential candidates such as John Edwards, the self-proclaimed "'populist' in the race, siding with organized labor and its skepticism of unfettered free trade."

Work continues behind the scenes in the House on AMT legislation as Rep. Richard Neal (D-MA) chair of the House Ways and Means Suncommittee on Select Revenue Measures consults with Ways and Means and Budget Committee chairs Charles Rangel (D-NY) and John Spratt (D-SC). Reportedly under consideration: permanent, deficit-neutral AMT reform built around an exclusion for households below a given level, with increased rates making up the lost revenue -- less drastic than full repeal, previously advocated by Neal.

Senate Finance Committee chair Max Baucus (D-MT), who has favored full repeal, is meanwhile backing a two-year AMT "patch." Rangel, seeking to keep the flame up on reform, seeks a one-year patch. The Senate and House budget resolution ATM provisions reflect the Baucus and Rangel positions respectively.

The urgency facing policymakers is conveyed in this chart, showing an imminent and sharp increase in the number of taxpayers liable to the AMT:

A Center on Budget report out this week supports the idea of a permanent solution, speaking to the inefficency of contintuous patches, in terms of taxpayer-targeting:

[AMT patches] deliver a significant share of their benefits to households with very substantial incomes... Whether a given household is removed from the AMT by an increase in the AMT exemption depends on... how many of the deductions and exemptions that the household claims under the regular income tax are disallowed under the AMT.

and in terms of cost to the system:

The AMT relief provided in 2001-2006 was not paid for and, as a result, has already added more than $100 billion to deficits. Moreover, the costs of AMT relief rise sharply each year... Extending the patch just through 2007 would cost about $45 billion; continuing the patch for two years, through 2008, would cost about $100 billion.

Check out Dana's latest post on TPM Cafe- The Budget Resolutions: Whose Largest Tax Increase in History?

By the time Congress left town for Easter recess last week, both the House and the Senate had adopted Fiscal Year 2008 federal budget resolutions. The two resolutions were remarkably similar and, in fact, closely tracked the budget proposed by President Bush in early February. All three budgets called for about $2.9 trillion in spending next year. They all claimed to produce surpluses by the year 2012. The spending increases they proposed in the next fiscal year were all within four percent of each other in real terms. And none called for tax increases.

First Vote to Extend Capital Gains Rate Fails

During its deliberations a couple of weeks ago on the budget resolution, the House Budget Committee "shot down a proposed amendment to extend the 15 percent capital gains tax rate [in] the first vote on the extension of these critical tax cuts," according to the American Shareholders Association blog, Shareholders' Corner. The Committee vote was party-line. An extension of the rate would not have been binding, but the vote offers a glimpse at the rate's future under Democratic leadership. 20/20 foresight?

Pro & Con: Taxing Private Equity Fees as Cap Gains

Senate Finance Committee ranking member Charles Grassley (R-IA) is prodding a big Wall Street sacred cow. Private equity investors' management fees are legally taxed at capital gains rather than regular income rates (roughly a 50 percent savings to private investors/50 percent loss to the public); Grassley wants to reverse that.

Have a look at a pro-ish take on the current law:

Why, then, does Grassley the tax-cutter want to stick private equity--which includes coastal giants such as Blackstone, as well as tiny Iowa firms such as Aavin in Cedar Rapids--with doubled taxes? Companies backed by private equity or venture capital grow faster and eventually employ more people at higher wages than other companies.

and a pro-reform view:

Let's be honest: it is a charade that private equity firms have claimed their 20 percent performance fees at the lower capital gains rate. To qualify, they invest a nominal amount of their own money to demonstrate that they have put something at risk, but it's a ruse. They are paying capital gains rates for doing their job, which should be taxed at the regular income rate.

Citizens For Tax Justice has a good piece on the "biggest tax increase in history" line being used by every Republican on the planet.

The budget resolutions in the Senate and the House do not by themselves increase or decrease taxes, but they do make Congress "pay for" any further tax cuts by setting up PAYGO rules that ensure that new tax cuts do not increase the deficit. Enacting more tax cuts is what, in a legal sense, extending the 2001 and 2003 tax cuts would be, since they expire in 2010, and new legislation would have to be passed to continue them.

President Bush, on the other hand, proposed to "pay for" new tax cuts with enormous spending reductions (the biggest spending cut in history?), but did not request that Congress enact a PAYGO rule that would have more or less required cuts of this magnitude if the tax cuts were extended.

If Bush were serious about offsetting the tax cuts, why wouldn't he ask for PAYGO?

PAYGO distinguishes the Bush budget and the Democrat's budgets. The President's budget wants more tax cuts even if they increase the deficit, while the Democrat's budget would allow more tax cuts only if they do not increase the deficit. This difference is an indication of how the parties intend to deal with the expiration of the tax cuts in 2010.