With the advent of a potential overhaul of Congress at the hands of voters on November 7, we are witnessing some hysterical predictions by a highly-placed Executive Branch official of "an immense tax increase and the economy would sustain a major hit.''

But, as this Bloomberg article published today reports, "Stock-market investors aren't buying it."

Why isn't Wall Street in the grip of fear that a Democratic Congress would unilaterally roll back the Bush tax cuts and move aggressively to regulate the economy?

As the article points out, investors are soberly "banking that a Democratic victory will mean political stalemate with President George W. Bush rather than passage of an anti-business agenda."

By contrast, a presentation uncluttered by facts and figures but featuring some surprising camera angles, purporting to depict the likely consequences of tax policy in the Pelosi era, is offered for the amusement of a few and the edification of still fewer.

The Taxman Cometh...

Playing now at http://www.americaweakly.com/.

Today, the non-partisan Urban-Brookings Tax Policy Center released a succinct but comprehensive analysis of Bush-era tax legislation as well as the future of the estate tax and alternative minimum tax.

Among the summaries and data presented are progressivity and distribution measures of the major tax bills passed in 2001, 2003, 2004, and 2006.

It’s like the Cliff's Notes of tax policy thus far in the 21st century.

In a survey of likely tax policy priorities in the 110th Congress in the event of a Democratic takeover, the National Journal (subs. req'd.) examines recent piecemeal statements by as-ifs House Speaker Nancy Pelosi (D-CA), Senate Finance chair Max Baucus (D-MT), and (let’s see how this looks) House Ways and Means Committee chair Charles Rangel (D-NY).

Lo and behold, there is no evidence at all supporting the GOP's gleeful and unremitting alarm on the campaign front about 'the Democrats’ grand plan' to raise your taxes. Of course, there seems to be no plan at all.

Instead, there’s Charlie Rangel (D-Harlem) trying to protect upper-middle Americans from being submerged as the AMT’s mission creep continues. Holding them harmless costs $45 billion a year, points out Baucus (Butte-to-Billings Corrdor), who would rather make the R&D corporate tax break permanent, but Rangel first wants to make AMT changes permanent, pricetag: $800 billion over ten years.

“Democrats are pledging to return to pay-as-you-go budgeting rules” requiring offsets to pay for for the AMT fix or for the extension of the R&D credit. So the revenue will need to come from somewhere. A Democratic staffer mentions the $345 billion IRS tax gap with a straight face. In second place is a one-time $5 billion tax on oil inventories — the “last-in first-out,” or LIFO accounting change. Maybe roll back the 2001 tax rate cuts on those making over $500,000 a year, or on millionaires. It adds up. Really. Slowly.

But seriously, the survey is worth reading in its entirety. If there is any overarching tax policy objective that emerges from possible Democratic leaders, it is more in the direction of budget balance, than redistribution.

Our Matt Lewis referred below to a Washington Post article this week speculating about whether Administration tax policy can be credited with lowering the budget deficit. Midstream, that article also offhandedly mentions that “subtleties of that argument have been lost on the campaign trail.”

So, what economic issues are voters thinking about? No idle question, 19 days before the midterm elections.

Voters are citing many economic issues. Prices at the gas pump and heating bills. Mortgage costs and housing values. Retirement investments and the stock market. Wages and benefits. A swirl of trends and countertrends come into play, almost none of which reflects tax, let alone fiscal policy.

"Tax cuts are working," the Post article quotes Bush saying again this week out on the stump. "There's a difference of opinion in the campaign about taxes. ... Democrats will raise taxes."

That message is apparently failing to resonate. We may not be at the point of hearing cries of “no new tax cuts!”, but the Post article reports a poll suggesting that the Administration’s single-minded tax cut focus may simply not be that relevant to voters. According to an AP-Ipsos poll released this week, “59 percent of voters believe Democrats would do a better job handling the economy, while 39 percent prefer Republicans.”

David Broder today gives this year's Congress and the Bush Administration bad marks for fiscal policy.

His bottom line: the economy isn't growing enough.

Still, a chart that is part of the National Journal story gives pause. It compares the economic performance of the first 5 1/2 years of this Bush administration with identical periods under Presidents Ronald Reagan and Bill Clinton. Personal income after inflation and taxes rose 22.7 percent under Reagan, 20.4 percent under Clinton and only 14.1 percent under Bush.

The Washington Post ran a good article on the tax cuts and the deficit yesterday- lots of interesting quotes from credible folks with different opinions. Here's a great quote on the forces driving the lower deficit:

"The simplest way to think about it, I think, is we know we have growing income inequality, especially at the top," said Isabel V. Sawhill, a Brookings Institution economist who worked for the Clinton administration. "The very rich are pulling away from the ordinary rich and the middle class. Those very rich people pay higher tax rates. When the distribution of income shifts upward, as it has in recent years, you get a revenue kicker from that."

Now, compare that article with one Reuters ran on Monday, in which most quotes come from economists housed at businesses or law firms, and the only option for reducing the deficit that's really presented is to cut spending. Further, the assertion that the Bush tax cuts lowered the deficit goes unchallenged, and the title -"U.S. Budget Deficit Could Shrink Further in 2007"- is highly implausible, given that the Congressional Budget Office predicts the deficit will increase in 2007.

The Reuters article is irresponsible; take a look at the Washington Post article for a serious discussion of the relationship between the Bush tax cuts and the deficit.

Citizen's for Tax Justice has recently released a report card reviewing Congress' voting record on tax policy over the last six years. From the CTJ release:

[The CTJ] Congressional Tax Report Card looks at the five key tax votes in the House and Senate that have produced major changes to the federal tax system, dramatically affecting tax fairness, revenues and budget deficits, plus one additional vote on an important recent tax bill that Congress narrowly rejected.

CTJ bases their grading system on a "combination of two criteria: tax fairness and fiscal responsibility." Check out how your elected representatives' were graded by CTJ at http://www.ctj.org/pdf/reportcard2006.pdf

Based on statements from policymakers, we are getting first glimpses of what Congressional fiscal policy might look like, if the Democrats capture one or both chambers in next month’s midterm elections.

Potential House Speaker Nancy Pelosi (D-CA) has made clear that her top fiscal priorities will be:

• passage of the minimum wage hike
  
• re-adoption of the pay-as-you-go budget rules of the 1990s
  
• a long-term solution to protect the middle-class from AMT creep
  
• an extension of middle-class, but not upper-class tax cuts expiring in 2010

Prospective Senate Budget Committee chair Kent Conrad (D-ND) offers this on the expiring tax cuts:

As I have indicated they are on the books through 2010. So nobody should be misguided with respect to our intentions on middle class tax cuts. There may be some tax cuts that go to the wealthiest among us that are going to have to get trimmed, because you know we have to pay our bills.

When Rep. David Obey (D-WI), once-and-maybe-future House Appropriations chair, last served in that capacity in 1994, he cut over 100 domestic spending programs, and today, his staff suggests a hard line on local earmarks.

To judge them by their words — should they find themselves in the majority in the 110th Congress — these may not be your father’s tax-and-spend Democrats.

The President is mighty proud of the new deficit numbers. In fact, he called a press conference to say that the tax cuts he pushed have generated the surge in revenue that's partly responsible for the lower deficit this year.

Hmmmmm. Well, corporate profits have gone way up, it's true. And he did cut taxes on corporate profits. There's a correlation there, for sure.

But wait- his Treasury Secretary's old outfit- Goldman Sachs- thinks there's something else going on. In a recent report, they wrote, "the most important contributor to higher profit margins over the past five years has been a decline in labor's share of national income."

It could be that tax cuts had a marginal impact on profits, and therefore increased revenues collected on profits in the short term. But even the hardly liberal Goldman Sachs found that the main reason for higher profit margins is that corporations are squeezing what's left of the middle and lower class. Is that something the President should be proud of?

For anyone interested in how the Bush tax cuts have impacted individual states, take a look at this report from Citizens for Tax Justice.

President Bush on the Treasury's announcement that the FY 2006 budget deficit is $248 billion:

First, I want to briefly mention that today we've released the actual budget numbers for the fiscal year that ended on September the 30th. These numbers show that we have now achieved our goal of cutting the federal budget deficit in half, and we've done it three years ahead of schedule.

1) The deficit has not yet been cut in half. The President promised during the 2004 campaign to cut the deficit in half in four years. The deficit reached $412 billion in 2004, and this year's deficit is $248 billion. That's not 1/2.

The baseline from which the President thinks the deficit has been cut was merely his own estimate. That OMB estimate -$521 billion- was wildly off the mark, and not because of policy changes that OMB could not take into account. It has no place in a serious discussion. "They've cherry-picked a high point that never actually occurred," said Robert Greenstein of the Center on Budget and Policy Priorities in CongressDaily ($$).

2) Cutting the deficit in half, as Dana has written, is not good enough. The deficit is still very large, and nothing has been done to address the structural factors that are estimated to produce larger deficits next year and the year after.

3) What's happening here is the President is trying to manage public expectations. He wants the voting public to think he has made the best out of a bad situation. That way, people won't think it's so bad that the Administration’s current deficit is nearly half a trillion worse than when Bush took office, or that the national debt is up by about $3 trillion, to a total of $8.5 trillion.

I doubt this will happen. People still have high expectations, because I don't think anyone has forgotten the budget surpluses of only 5 years ago. And the deficit may be beginning to negatively affect ordinary people. In the final analysis, the fiscal policies of this Congress and the President will be seen as nothing more than the failures they are.

Cactus of the econo-blog Angry Bear looks for a connection between who's President and tax enforcement rates. A few interesting results: Ronald Reagan was a strict tax enforcer in his second term, while George W. Bush's first term saw the largest decline in the tax enforcement rate in the last 50 years.

Ive had a few posts in the last month or two about taxes and honesty. One post showed that the lower the degree of tax enforcement, the lower the share of total income taxes paid by the top 1% and 5% of income earners. Another noted that over time, the correlation between the amount of corporate and individual income taxes paid and enforcement has increased, which seems to indicate that a lot of us are becoming less honest when it comes to taxes.

But how big is the problem of tax evasion? Is there any direct evidence that it gets better or worse in any given year? Its a tough question to answer because it requires knowing how much income people actually make, not how much they report to the IRS. Being an adorable scamp, I was wandering around the IRS website and located a table showing, among other things, taxable income (from the Statistics of Income or SOI) as a percentage of total income (from the BEA NIPA tables). The data runs from 1950 to 2004.

Sen. Joseph Lieberman has proposed creating a tax credit for home purchases. The Tax Foundation says it's a really bad idea, because that type of tax credit could raise home prices.

Consider this story: Assume you had four houses and each was worth $500,000, but in House A there was $20,000 sitting on the kitchen table waiting for you if you bought it. What would happen to the price of House A relative to the other three? It would increase by $20,000, and the net price you would pay on each of the houses would equalize. You would be no better off by having that $20,000 in the kitchen table than before because the price of that home would just become $520,000. The same is true for when the government provides money to a homebuyer for making a purchase of a home.

If Senator Lieberman really wants to make homes more affordable, why not restructure the home mortgage deduction that's already on the books? Like credits, the home mortgage deduction has raised home prices. A targeted deduction may lower their cost. More people who don't itemize their deductions could afford to buy a home.

Plus, cutting back the mortgage deduction would flatten the ridiculously large margins for expensive housing that have been, in part, fueling the "housing bubble." That might make affordable housing more attractive to builders, and a bigger supply of affordable housing could help bring more renters into homes, too.

And, of course, a smaller deduction would reduce the deficit and make the tax code more progressive.

So how bout it, Sen. Lieberman?

(For more, see this great piece from the NYT magazine on the perverse consequences of the home mortgage deduction.)

In the aftermath of the House earmark disclosure rule adopted last month, the debate about the adequacy of that rule’s scope continues.

The rule requires the disclosure only of earmarks with a single ultimate beneficiary. So, critics point out, far more “pork spending” than “tax expenditure” earmarks will be disclosed, since the latter tend to benefit industries and sectors, rather than individuals and single entities.

Sen. Ron Wyden (D-OR) said this week in a podcast by the Tax Foundation that he wants to address this imbalance. As reported by BNA, Wyden said "If we're going to be tougher on the spending side with these earmarks, let's look to being more rigorous with regard to gratuitous tax breaks as well."

In this vein, Sen. Wyden said, he hopes to see action in 2007 on his bill, S. 1927, a broad and ambitious bill that aims to eliminate tax breaks and make other sweeping reforms, while “provid[ing] real tax relief to the middle class.”

The devil is in the details, but combining tax earmark disclosure, tax loophole closure, tax simplification, increased progressivity, and long-term savings and investment incentives --all in one revenue neutral package — makes S. 1927 an interesting place to start a fiscally responsible tax reform discussion.

As reported in Congress Daily today, disagreements persist between Senate Finance Committee chair Charles Grassley (R-IA) and House Ways & Means chair Bill Thomas (R-CA) about how to handle the set of popular tax credit extension currently embedded in the "trifecta" legislation.

Among the points of contention, if the extender bill were to be considered on a stand-alone basis, are:

• the inclusion of negotiated sweeteners, such as "a $4 billion abandoned mine reclamation fund that was added to court the vote of Sen. Robert Byrd, D-W.Va., a tax cut on capital gains from timber sales aimed at luring Sens. Maria Cantwell, D-Wash., and Mark Pryor, D-Ark., to the package, and added depreciation benefits for business rebuilding after Hurricane Katrina." Keep them, says Grassley "In my view, the agreement is closed. No items should be subtracted. No items should be added." Ways and Means Committee GOP sources says Thomas begs to differ.

  
  

• the term of the extension: "If we have to do extenders, it will be a one-year, pretty skinny package ... I don't think there's an appetite for a lot of new starters," one Senate Republican aide said. Thomas is said to be inclined to make the extensions permanent.

Speculation on tax issues from MarketWatch.

Policy analysts say sweeping tax-law changes are unlikely in the next two years, no matter whether Democrats gain seats or Republicans retain control in the upcoming election.

Some Republicans would like to make permanent the Bush tax cuts, such as low capital gains and dividends rates, most of which expire in 2010. Meanwhile, some Democrats say they'd like to fix the alternative minimum tax -- right now it requires an annual adjustment to keep it from hitting a larger group of taxpayers -- but neither aim is likely to pass because major tax changes cost a lot of money, policy analysts say.

"Tax reform is imperative, but getting there in the next two years? I would say the odds are roughly zero," said Leonard Burman, director of the Tax Policy Center, a joint venture of the Urban Institute and Brookings Institution. "Two years from now is the run up to the 2008 presidential election and I'd say it's virtually impossible that any Congress pass anything as controversial as tax reform."

...of reports that make the free lunch-"tax cuts pay for themselves" crowd look like the circus sideshow that they are.

Last week, CRS released a report* on the revenue effects of the "2001-2004 tax cuts." It found that:

Given the positive and negative effects, it is likely that the feedback effect in the very short run would be positive, but at the current time as the stimulus effects have faded and the effect of added debt service has grown, the 2001-2004 tax cuts are probably costing more than their estimated revenue cost.

So, there you have it - again: Sorry, kids, no free lunch.

The report is a lengthy technical discussion, though digestible by non-economists (like me), on various assumptions about economic growth and amount of growth that would be necessary to offset the revenue loss from tax rate cuts.

*This report is not widely available on the internet, but several pay-for-service sites, such as GalleryWatch.com and TaxAnalysts have it. The title of the report is "Revenue Feedback from the 2001-2004 Tax Cuts" and the Order Code is RL33672.