Federal Budget & Tax

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Friday, June 29, 2007

Fiscal Integrity Award Winner: Sen. Charles Grassley

We here at OMB Watch were so inspired by comments reported in today's Wall Street Journal that we decided to issue a brand new Fiscal Integrity Award.

It takes a special person to come to the defense of the integrity of the capital gains tax. In recent weeks, its integrity has increasingly come under question, as members of Congress, the media, and yours truly have been focusing on a loophole that allows private equity fund managers' service compensation to be taxed at the capital gains rate.

To the surprise of many, Sen. Charles Grassley (R-IA) warns that failing to close up the "carried interest" loophole is, according to the Journal, tantamount to "failing to maintain the integrity of the 15% capital-gains rate", thereby rendering it vulnerable to attacks from those who want to let it rise to 20% in 2011, as it currently is scheduled to do:

What I'm doing is an effort to ward off the demagogues on Capitol Hill that can say this is just a way for the rich to get richer, and the middle class to be stung... I would ask my Republican colleagues to look at it from that standpoint, that we want to make sure we aren't feeding the demagoguery of class warfare that the other party is always getting blue ribbons for doing.

Well done, Sen. Grassley. You should give that guy who keeps insisting that AMT repeal shouldn't be offset a good talking-to.

Posted by Dana Chasin, 03:05:43 PM

Private Tax Collection Program Remains

BNA ($) on how the private debt collection program wasn't killed yesterday:

The House passed the Financial Services and General Government appropriations bill (H.R. 2829) June 28 on a vote of 240-179 after House Democrats yielded to concerns about plans to shut down the Internal Revenue Service's private debt collection program.

Rep. Jose Serrano (D-N.Y.), chairman of the House Appropriations Financial Services subcommittee, agreed to drop the language that would cut funding for the program to $1 million--$254 million below the Bush administration's request.

Republicans, led by House Ways and Means Committee ranking member Jim McCrery (R-La.), argued during debate on the House floor that eliminating the program would hamper the federal government's ability to collect tax debts and would reduce federal revenues. Because the bill also would restrict the Treasury Department's ability to raise and use revenues, McCrery said such a major change was in the jurisdiction of Ways and Means and should not be part of the appropriations bill.

Although the House Rules Committee June 26 gave Serrano the ability to waive all points of order with regard to that language, Serrano conceded that the measure should not be in the bill and agreed to strike the provision (Section 106) from the legislation.

Nonetheless, Serrano said he believed it was important to put the language in the bill and raise the issue on the House floor "so that people fully understand what it was that this subcommittee was trying to do."

Serrano said the whole idea of the language was to show that the government ought to be collecting its own money. He also objected to McCrery's argument that the provision would reduce the amount of money coming into the federal government, saying revenues would be unchanged if IRS officials were collecting the money instead of private services.

"At least historically we have had a situation where we knew that the person knocking at our door or on the phone was a member of the government, who had been trained in how to deal with the public and who fully understood what was within the law allowed in that conversation," Serrano said.

Posted by Matt Lewis, 09:35:33 AM

Thursday, June 28, 2007

Who Said This ... and Why?

OK, in a story on today in BNA about legislation to reform tax laws relating to carried interest, guess who

suggested the bill has been introduced because of a recent focus on the private equity and hedge fund industries, and said tax policy should not be targeted at individual sectors... saying it does not make sense to single out one industry

and was this a statement in support of a bill to end the targeted tax treatment of an individual sector so as to keep it from remaining singled out, as per current law?

(Click here for answer)

Posted by Dana Chasin, 06:05:16 PM

Wednesday, June 27, 2007

Shut off Funding for Private Tax Collection?

The House Appropriations Financial Services Subcommittee may try to kill the private debt collection program by shutting off its funding. Here's the story:

The IRS' use of private debt collectors has retrieved millions in delinquent taxes but has raised questions about collection techniques and privacy rights. The House plans a vote this week on restricting the program's funds.

Democrats critical of the program since it was approved by a GOP Congress in 2004 included only $1 million for private debt collection in the 2008 budget for Treasury Department agencies.

Posted by Matt Lewis, 11:23:37 AM

Tuesday, June 26, 2007

This is Rich: Defending the 'Carried Interest' Tax Break

Generally, those enjoying the benefit of a flagrantly inequitable provision in the tax code are discreet in their defense of it. Now that legislation to end private equity and other fund managers' carried interest tax break (for an explication of the issue, click here) has been introduced in Congress, some are bravely, if not so discreetly, attempting to defend it.

Some amusing examples from the last couple of days --

Steve Renna, senior vice president, Real Estate Roundtable: "They [the bill's sponsors] think they are getting the fat-cat hedge fund and private equities, and it's not the case." They may be getting those 'fat cats' -- your words -- but they are getting other unfair beneficiaries of the tax break, such as Real Estate Investment Trust managers. Feel better now?
Renna, again: "How would you like to tie up all your attention on a deal, all that you can provide? You are betting it all on your deal, and that you will get paid in the end." Mr. Renna, can you pay a capital gains rate on casino winnings -- when you weren't betting with your own equity?
Robert Stewart, vice president of public affairs, Private Equity Council: "If the new leaders of Congress have some programs they want to raise money for, they can certainly do that, but there's no public policy purpose to apply it to only one asset class." No one has mentioned raising money for programs, but neither would the proposed legislation to end the tax break apply to one asset class -- fear not; it would apply equally to managers of both public and private funds.
National Venture Capital Association (NVCA) "This proposed legislation could have far reaching, negative implications for the start-up community, venture capital investment, and the US economy. It is critical that legislators identify and fully comprehend the unintended consequences of this proposal as it could impact one of the country's most important economic engines." Now what inequity can't this reasoning justify?

The defenders of the 'carried interest' tax break will need to do better when Ways and Means chair Charles Rangel (D-NY) hauls them before his committee for hearings on the issue next month.

Posted by Dana Chasin, 03:13:54 PM

Thursday, June 21, 2007

Ways & Means to Examine Fund Managers' Tax Rates

The House Ways and Means Committee has announced hearings after the July 4 recess to examine tax rates applying to private equity and hedge funds managers. Committee chair Charles Rangel (D-NY) said he and ranking member Jim McCrery (R-LA) agree "it is imperative" that the committee conduct a hearing to explore taxation issues surrounding the "carried interest" issue.

Currently, about 70 percent of blue-chip fund managers use a scheme to qualify most or all of their income for the 15 percent capital gains rate by structuring their management fee as a share of profits. Victor Fleischer, a University of Illinois tax professor, told Bloomberg News yesterday that this practice costs taxpayers $4-6 billion a year (though this figure excludes some similar practices by venture capital, real estate, and oil and gas fund managers).

The two principal arguments in support of such schemes and the main counter-arguments go as follows:

1. Risk and Reward: Traditionally, managers have required investors to pay a fee equivalent to two percent of a fund's assets, a fee taxed at ordinary rates of up to 35 percent. The managers also receive fees of 20 percent of profits above a specified return, called "carried interest," subject to the 15 percent capital gains rate. To pay only the capital gains rate, fund managers agree to waive their two percent management fees. Doing so exposes them to contingency risk tied to value of the funds' holdings, putting them in the same position as the funds' investors, who pay capital gains rates on realized profits. They share the risk; shouldn't they share the rate?

This tax advanatge would be justified if -- or to the extent that -- the managers actually owned funds' securitized assets, as the investors do. But, except in rare instances, they do not. According to the logic of this argument, lawyers' fees from contingency cases should also be taxed at the capital gains rate.

2. Comparative Dis/advantage: The argument is propounded by "business representatives" (see today's New York Times) that because some countries permit this practice, removing the tax advantage for American-based fund managers "could stifle American competitiveness."

First, this is tantamount to arguing that no American sector should pay more in any form of business tax than the lowest tax rate applied to any global competitor. Not only would such a policy's aggregate cost to American taxpayers be several hundred billions dollars a year, so many provisions of our tax code would need to be revised so often that tax planning itself would become impracticable, stifling American competitiveness.

Second, this argument puts financial fund managers at pains of explaining why their sector deserves such a bountiful tax advantage at the expense of every other sector in the American economy. Given how profitable -- and politically unpopular -- the sector is today, that could be a pretty painful argument to make.

Posted by Dana Chasin, 08:26:49 PM

$32.1 Bn. Alternative Energy Tax Plan Stalls in Senate

A cloture vote on the $32.1 billion tax title in an energy package failed by three votes in the Senate today, 57-36. Sen. Mary Landrieu (LA) was the only Democrat to vote against cloture; 10 GOP Senators supported it: Coleman (MN), Collins (ME), Crapo (ID), Grassley (IA), Lugar (IN), Roberts (KS), Smith (OR), Snowe (ME), Specter (PA), and Thune (SD).

The tax title in the bill sought to close oil and gas industry loopholes and provide tax incentives to promote alternative energy source production. It was fully offset, but some provisions such as the closing of the "sale-in, lease-out" (SILO) transaction loophole on a retroactive basis rankled financial services industry lobbyists.

Finance Committee ranking member Grassley was unmoved: "We're in a pay/go environment... We're in a situation where we've got to provide the necessary offsets in order to get this legislation through... hope you understand that God only made so much fossil fuel." Committee chair Max Baucus (D-MT) said that he would bring the tax title up again.

The House Ways and Means Committee approved an energy package providing $16 billion in alternative energy tax incentives yesterday, 24-16. A House vote on the package has not been scheduled.

Posted by Dana Chasin, 06:21:49 PM

Tuesday, June 19, 2007

Carried Interest

The New York Times has carried three stories of interest in the last week on ... carried interest. See here, here, and especially here. The issue of the tax rate applied to fee compensation for hedge fund managers has, hitherto, attracted little attention outside a small circle in the financial sector and tax policy makers, but that may be changing.

Finance Committee chair and ranking member Sen. Max Baucus (D-MT) and Charles Grassley (R-IA) introduced a bill last week that seeks to reform corporate taxation practices.

As the Times explains:

The extraordinary pay packages of those who manage hedge funds and private equity have caught the attention of the Senate Finance Committee, which is looking at whether the manager's portion of a fund's profits — called carried interest — should be taxed at the capital gains rate or the higher ordinary income rate. ... Most private equity funds and hedge funds receive two kinds of fees: a 2 percent management fee (2 percent of the assets they manage), and a 20 percent incentive fee, or a 20 percent cut of the profits.

Coincidentally or not, four days earlier former Treasury Secretary Mr. Rubin

now the chairman of the executive committee at Citigroup, made the case for why private equity and hedge fund managers should pay more than double the low rate in taxes they now enjoy [while] responding to a question posed to him about whether the 20 percent fee on profits that most private equity firms charge should continue to be taxed at the lower capital gains rate of 15 percent or changed to the top ordinary income tax rate of 35 percent. Mr. Rubin, who said he was expressing his own views and not that of his employer, was a panelist at a tax reform conference run by the Hamilton Project.

Posted by Dana Chasin, 11:55:38 AM

Monday, June 18, 2007

Fantasy Tax Policy: AMT Without Offsets

Some anti-tax groups and the Wall Street Journal are teaming up to promote a tantalizing tax policy: AMT repeal not subject to pay-as-you-go budgetary rules.

Per The Hill, heavy hitters including the U.S. Chamber of Commerce, the National Association of Manufacturers, the Business Roundtable and Americans for Tax Reform, managed by activist Grover Norquist, are lobbying the Senate Finance Committee.

Comic relief is provided by the Wall Street Journal, with a baseless editorial last Thursday,100% Marginal Tax Rate attributing to Democrats a plan to reform ATM on the backs of (the wealthiest) three million American taxpayers.

Two problems, as House Ways and Means chair Charles Rangel (D-NY), points out in a letter to the Journal editor:

[First, r]egardless of any document or news report you may cite, such a plan has not been introduced, even in draft form. Second, your editorial fails to note that President Bush's own budget proposal insists that permanent AMT relief be paid for with offsetting revenue increases.

Meanwhile, the betting is running 50-50 on whether Ways and Means will release its long-awaited plan before the July 10 All-Star game.

Posted by Dana Chasin, 05:28:55 PM

Wednesday, June 13, 2007

More Meditations on the Hamilton Project

One last thought on the Hamilton Project- I believe they do not serve the cause of fighting inequality.

Stay with me on this one. Take this statement:

Industrial policies and direct market interventions can try to change the before-tax distribution of income. But ultimately such policies harm the economy—for example, excessively high living-wage laws can result in large job losses for low-skilled workers.

Factually, I believe the statement is wrong. Government intervention in markets can promote the common good. Everything that's known about health care provision is a case in point.

As for its politics, the statement gets to the heart of what's wrong with the Hamiltonian philosophy, which posits that government is wasteful but nice, and the market is cruel but efficient- the "Mommy-State and Daddy-Market" philosophy, one that seems to dominate the economics profession from Brookings all the way to George Mason University.

Hamilton's version of this story is less crazy than others. But it is fundamentally the same- it denigrates government and puts the market on a pedestal. Worse, all varieties of the message are legitimized when one comes from the "non-partisan" Brookings Institute.

Look, this kind of behavior just isn't helpful. It might have been cool in the '80s and the '90s, but it's not cool anymore. Our country now has big problems to face up to- inequality, the health care crisis, global warming, etc.- that can't be solved with tax breaks. It's going to take vigorous collective action, and our best collective institution is and will probably always be the federal government. Belittling it like the Hamiltonians do only serves the interests of people who don't want to do anything about these problems (a point made well in this interesting article on inequality by James Lardner).

That's why it's hard to swallow the Hamiltonian's professed interest in reducing inequality. If they really did, they would scale back their assault on government. But they don't take seriously anyone who believes in governmental efficacy, so why even bother with them?

Posted by Matt Lewis, 05:47:07 PM

Americans' Views of Taxes -- Another Look

A report published today by Media Matter for America and the Campaign for America's Future challenges the conventional wisdom that the ideological attitude of Americans regarding taxation is conservative.

A majority of Americans think their taxes are too high, a conservative theme, but they don't care about it that much. Taxes generally rank low in the list of Americans' priorities, and taxes are never number one.

The report cites an April 2007 Gallop poll indicating that fully 41 percent of Americans believe that amount they pay in taxes is not too high or too low, but "just right."

The question of whether the era of "tax and spend" --in which government grew inexorably on a tide of invisible tax increases through Republican and Democratic administrations -- is ready to be challenged is explored in further depth in this article in the Washington Monthly.

Posted by Dana Chasin, 04:51:16 PM

Friday, June 08, 2007

EITC Reform: Tax Credit Where Credit is Due

As BNA ($) reports today, the administration is looking at ways to make EITC eligibility easier to figure out. According to the article, the IRS estimates that more than 22 million individuals and families received EITC benefits in the 2005 tax year, yet roughly 25 percent of those eligible do not claim it, due in part to the tax credit's "labyrinthine computations" currently needed to determine eligibility.

In an effort to address this problem, the administration proposes to reform EITC eligibility as follows:

allow separated spouses to claim the EITC
simplify the rules regarding presence of a qualifying child
allow taxpayers to receive the EITC for workers without qualifying children if their children do not have valid Social Security numbers
clarify when a Social Security number is valid for EITC purposes

The administration has proposed these changes in each of the past two years, but they went nowhere in the GOP-dominated 109th Congress. To get full credit, however, White House will need to request some additional money to promote and administer increased tax credit claims.

Posted by Dana Chasin, 12:20:19 PM

Tuesday, June 05, 2007

Best Government Job Title Ever!

The IRS has named its new "Professor in Residence," and it's none other than Professor Gregg D. Polsky - the Sheila M. McDevitt Professor of Law at Florida State University. Woohoo!

For those of you not familiar with the Professor in Residence position at the IRS, here's some background info from the IRS press release:

The Internal Revenue Service Office of Chief Counsel revived its Professor in Residence program earlier this year. Dormant since the late 1980s, the program provides some of the nation's top legal academicians the opportunity to contribute to the development of legal tax policy and administration. Reporting directly to the Chief Counsel, the Professor in Residence provides advice and assistance on a wide array of legal issues within the scope of his or her expertise.

Am I the only one picturing a guy smoking a pipe, sitting in a huge leather chair by the fireplace in a book-lined room with mahogany accents? I wonder if the fine folks down at the IRS head over to the Professor's office after a long day, pour a couple of snifters of brandy, light up some cigars, and kick back to discuss the latest transfer pricing scandal.

While it might not be all that glamorous, I think it does have to win the crown for Best Government Job Title Ever!

Posted by Adam Hughes, 04:23:28 PM

Monday, June 04, 2007

GAO Still Not Pleased With Long-Term Fiscal Outlook

The Government Accountability Office (GAO) has released the latest version of their "The Nation's Long-Term Fiscal Outlook" report today. As with previous reports, GAO finds little change in the long-term outlook and warns that current fiscal policies are unsustainable (duh!).

Despite re-stating the important fact that current policies are unsustainable, the report also helps to distinguish what is driving long-term imbalances. Instead of lumping Social Security and Medicare together and labeling the problem as an "entitlement" one, the GAO report highlights health care costs generally as the major obstacle. The relevant paragraph from the report states:

Although Social Security is a major part of the fiscal challenge, it is far from our biggest challenge. Spending on the major federal health programs (i.e., Medicare and Medicaid) represents a much larger and faster growing problem. In fact, the federal government's obligations for Medicare Part D alone exceed the unfunded obligations for Social Security. Over the past several decades, health care spending on average has grown much faster than the economy, absorbing increasing shares of the Nation's resources, and this rapid growth is projected to continue. For this reason and others, rising health care costs pose a fiscal challenge not just to the federal budget but to American business and our society as a whole.

Under the leadership of Comptroller General David Walker, the GAO continues to bring an important and under appreciated voice to long-term fiscal policy debates. The short report is worth a read:

GAO: The Nation's Long-Term Fiscal Outlook

Posted by Adam Hughes, 04:54:10 PM

Friday, June 01, 2007

I'll Take Market Demand for $100, Alex

Adam's post got me thinking. It really is a slow week. So, I will take this opportunity to quibble with Adam's misunderstanding of the cow market and PETA's well-intentioned, but ill-conceived scheme to use the tax code to incetivize people to be vegetarians.

Adam first. He seems to be arguing two different points. One is that an individual's decision to not eat meat will not reduce the number of cows (and chickens) that will be raised and slaughtered in a given year. I disagree. Let's say you eat one cow a year. If you decide to not eat beef, then at the end of the year, beef producers, after all is said and done, will notice that there's an extra cow hanging out in the feedlot. Next year, those producers will respond by raising and slaughtering one less bovine, and hence fewer greenhouse gas emissions. (An econ 101 textbook will back me up on this.)

Adam's second point is that without mass action, the decision to become a vegetarian will not have a noticeable effect on the total output of greenhouse gas emissions. But surely Adam recognizes this same problem in the case of an individual's decision to own a Prius. PETA, though, recognizes this problem. Like the tax credit that has encouraged thousands to buy hybrid vehicles, PETA want to use the tax code to to encourage the mass action that would appreciably reduce greenhouse gas emissions. And this brings me to my quibble with PETA.

PETA spokesman Matt Prescott "imagines" some sort of on-my-honor system by which people can attest to their vegitarinism in order to legally claim their tax credit. Adam correctly notes that this sort of system is next to impossible to implement.

I would suggest that if PETA wants to use the tax code to achieve its objectives, that it work out something feasible before stepping up to the mic. For instance, it could propose a Pigouvian tax on meat, or, it could agitate for an end to the massive corn subsidies that make beef cheap. My point is simply that using the tax code to create incentives for people to eat less meat, can be a plausible means by which reduce emissions of greenhouse gasses, but it's only going to work if you do it right.

Posted by Craig Jennings, 04:45:41 PM

Put that Burger Down and Get Out of Your SUV!

Since it's Friday and we've had a slow week here at the Budget Brigade, I wanted to put up a little light-hearted reading today. Enter this article from The Hill newspaper about an effort by the advocacy group People for the Ethical Treatment of Animals (PETA) to give a tax credit to - get this - vegetarians.

The logic goes like this. According to researchers at the University of Chicago, becoming a vegetarian would reduce carbon emissions 50 percent more per person than switching to a hybrid car. This certainly seems logical since a recent U.N. report cited the livestock industry as "one of the top two or three most significant contributors to the most serious environmental problems, at every scale from local to global," including global warming.

One problem though. Let's suppose you stop eating meat - no more steak dinners at Morton's, sausages on the grill, or chicken burritos at Chipotle. How much will your individual decision in this case actually reduce the level of activity of the livestock sector? How many fewer cows, chickens, pigs, etc, would be slaughtered and shipped around the country? Probably not too many. The estimates of reduction in emissions from this choice is an aggregate number - the average of each meat-eater's contribution to the emissions of an entire industry - not the actual reduction by each individual's decision to stop eating meat. To have an actual impact on emissions, a large enough number of meat-eaters would have to act in conjunction with each other over a long-enough period of time to be able to shrink the size of the livestock sector. Given that meat consumption has doubled over the last fifty years, my guess is you'll have to convince a whole bunch of your friends to join you at the salad bar.

A hybrid car, on the other hand, actually reduces your own physical emissions immediately. You don't have to wait for your neighbor to trade in his Hummer for a Prius for your individual decision to make a (albeit very small) difference. I'm not saying I think you should keep eating meat - that's really up to you. I just wanted to point out the relative benefits of a tax credit for hybrid cards vs. for being a vegetarian. Besides, this line of thinking probably isn't that important anyway beacuse I don't think you could really implement this type of credit - how in the world would the government be able to verify that you, in fact, had not eaten meat?

Posted by Adam Hughes, 02:50:19 PM

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