Federal Budget & Tax

Federal Budget & Tax: News Blog Background

Friday, November 30, 2007

Carlyle MD Sounds Retreat on Carried Interest Defense
Carlyle MD Sounds Retreat on Carried Interest Defense

In another sign that the buyout firms see trouble ahead in their effort to preserve the carried interest loophole, Carlyle Group managing director David Rubenstein conceded the difficulty of the defense in reported remarks to an audience at the American Enterprise Institute in Washington yesterday.

"We may not get everything we want; we probably won't. We may have to compromise."

The carried interest loophole allows fund managers' bonuses to be taxed at the 15 capital gains rate instead of the ordinary income tax rate of up to 35 percent -- oddly, the only profession where bonuses aren't taxed at the ordinary rate, due to a quirk in the law.

The lobbyists defending this quirk were defeated this month when the House passed a provision to fix by quirk by ending the loophole -- a move that would save all other taxpayers an estimate $25 billion over ten years.

That followed earlier reports of disagreements between the venture capital and buyout communities, each suggesting, probably correctly that the other does not deserve the loophole.

In September, the spat became public, with one VC partner hissing,

The private equity industry has spent millions upon millions upon millions on Capitol Hill recently and [Sen. Charles] Grassley (R-Iowa) and others have said they don't like the pressure they're getting. But [VC is] an industry that's been on the Hill for the last 30 years.

Posted by Dana Chasin, 03:01:17 PM

Wednesday, November 28, 2007

Going, Going, PAYGONE?
Great Explications and IRS Commissioner v. Grassley

President Bush and Senate Republicans continue to insist that the patch extending the hold-harmless provision, or "patch," keeping 20 additional Americans from having to pay the Alternative Minimum Tax (AMT) must not be offset, because PAYGO is an only an excuse for tax hikes. Bush swiftly threatened to veto the House-passed bill providing for an AMT patch extension earlier this month... precisely because the bill pays for the cost of the patch..

The reasoning is explicated most eloquently by Senate Finance Committee Ranking member Charles Grassley (R-IA):

Many of the members on the other side are using pay-go as a smoke screen [to] insure that the Federal government's tax base is at record levels. They now rely on pay-go as cover to keep revenue we did not intend to collect. They rely on pay-go as rationale to insure that the future tax base will be at record levels. Their insistence [that] Congress should ... be trying to replace revenues that were never intended to be collected over enactment of an AMT patch makes the point very clear.

"Never intended to be collected"? Because the tax was never indexed for inflation, maybe? The ruling in IRS Commissioner v. Grassley must have been issued in record time and unfavorably against the Senator, who had withheld tax payments owed under the AMT, citing the Grassley Defense that the IRS never intended to receive payment for the tax, despite the provision in the federal tax code mandating its collection.

That's pretty funny -- and if you had such an unexpectedly large load of fresh rubbish dropped on your street, would you believe someone who told you that the Department of Sanitation won't touch it because it "never intended" to collect it? The Center on Budget shreads this argument neatly in The AMT's Growth Was Not "Unintended".

But we must accept the distinct possibility that the Grassley Defense will win the day in the Senate, which is likely to waive PAYGO the instant it gets an opportunity to do so -- next week when it reconvenes.

And that would be that for Congress' commitment to the bedrock principle of fiscal responsibility through PAYGO. As the majority party in Congress, Democrats would be embarrassed by this development, though they would also be powerless to prevent it -- thanks to the institution of the filibuster. And Republicans would again have carte blanche to pursue additional tax cuts without paying for them.

No wonder Bush's deathbed conversion to fiscal responsibility, evidenced by his refusal to sign any spending bills to hit his desk this year, except for the defense bill, rings hollow.

Posted by Dana Chasin, 05:55:22 PM

Monday, November 26, 2007

New IRS Commissioner To Be Nominated

The White House announced last week that it has plans to nominate Douglas Shulman to be the next IRS commissioner. It's now been about 6 months since the last commissioner, Mark Everson, left that post, which seems like a long time for such an important agency. Shulman is now the head of a financial industry group, so I'd assume, given no contradicting evidence, that that's where his sympathies lie. The Senate must confirm his nomination.

Update: Shulman has an interesting bio. Evidently he helped found Teach for America. Could it be that President Bush might nominate a middle-of-the-road candidate?

Posted by Matt Lewis, 05:01:24 PM

Monday, November 19, 2007

He's STILL President?
Don't We Deserve at Least Better Bull for the Duration?

I woke up today and was struck by something I realize is true but nonethless have a hard time believing. George W. Bush is still president. Hasn't it been forever already?

I suppose the thing that baffles me most is, why they don't at least fix the broken record emitting mind-mumbingly meaningless, if not self-contradictory, twaddle over at 1600? Has anyone listened to it recently?

Why, fr'instance, just this Saturday on his national radio address, Bush apparently spoke about how urgent it is to enact the patch holding harmless over 20 million mostly middle-class Americans who would otherwise be exposed to the Alternative Minimum Tax. But, funnily enough, he's issued a veto threat against the bill to do just that.

On what grounds, you ask?

Members of Congress must put political theater behind them, fix the AMT and protect America's middle class from an unfair tax hike.

What in the world is he thinking of?

The bill, a PAYGO-compliant, revenue neutral measure, avoids adding to the national debt by means of offsets that close the carried interest tax loophole which allows investment fund managers' bonuses to be taxed at 15 percent, as opposed to 35 percent for middle-class taxpayers and limits the ability of these same managers to defer compensation earned from offshore tax shelters -- enabling a fiscally responsible AMT patch that protects America's middle class from an unfair tax hike.

C'mon, W. -- show some respect -- can't you do any better than that? A colleague points out that Karl Rove is gone and we're flat out of luck. Looks like 2008 might be a very long year. Wake me when it's over.

Posted by Dana Chasin, 12:30:25 PM

Friday, November 16, 2007

Would You Do Business With Lawbreakers?

Interesting article in the Washington Post earlier this week about a new investigation that is starting to develop a bit of a stir in Washington. Seems there are thousands of health-care providers who owe billions of dollars in federal taxes, but who continue to be paid by the Medicaid program - the health-care program for the poor. This came to light after a Government Accountability Office report was delivered to Congress this Wednesday.

When I saw this, it reminded me of another GAO investigation I remember from earlier this year that found a similar problem with the Medicare program (see our coverage of that report from last March). What is similar between these two reports (aside from the tax cheaters) is that the Center for Medicare and Medicaid Services (CMS) - the government agency responsible for implementing these two programs - claims there is nothing they can do about this.

To a certain extent, they might be right. Because of restrictions in law, CMS does not have explicit authority to deny health care providers from participating in either Medicare or Medicaid if they owe tax debts. In most cases, it would be illegal for the IRS to disclose those debts to the CMS - so they couldn't screen providers out anyway. The IRS can use a program called the Federal Payment Levy Program to satisfy tax debts by seizing some of the money paid to federal contractors, but Medicare officials have choosen not to participate in that program (this should probably change). But even that program won't help Medicaid. Medicaid payments are disbursed by various state agencies, and the IRS does not have a mechanism set up to automatically deduct money from those payments.

These are all valid points, but doesn't mean we shouldn't do anything about it. The Federal government should not be conducting business or making payments (either federal assistance or contract payments) to individuals or entities who owe taxes to the government. Period. Hopefully Congress will take some steps to clear up the obstacles preventing the IRS, CMS, and other government agencies from working together to streamline payments to health care providers so the government can collect the revenues that are due.

Posted by Adam Hughes, 02:46:08 PM

Thursday, November 15, 2007

Kuttner vs. Krugman, 1996 Edition

This is kind of random, but check out this exchange between Paul Krugman and Robert Kuttner (with a little bit of Robert Reich's ideas mixed in there) from 1996. Krugman's ideas sound, shall we say, Hamiltonian. He's changed his outlook quite a bit since then. Why have the other Hamiltonians stayed the same?

Update: Whoops, forgot the link- it's here.

Posted by Matt Lewis, 03:07:40 PM

A Free Fiscal Lunch from the Tax Fairy?

In an apparent deathbed conversion to fiscal responsibility, President Bush has finally met spending bills he doesn't like. After six cycles in which Bush never vetoed a single spending increase sent to him by a spend-and-spend-and-spend GOP-dominated Congress, he's making one thing clear this go-around. It's Democratic fiscal responsibility that he simply cannot abide -- the worst form of it emobodied in the party's pledge to pay for tax cuts, aka, the pay-as-you-go (PAYGO) rules that Congress adopted earlier this year.

But in so doing, the President is stepping on his own fiscal responsibility message. Even before the House passed a revenue-neutral, PAYGO-compliant bill last week to prevent 21 million additional Americans from having to pay the Alternative Minimum Tax (AMT) next year -- up from the current 4.2 million -- Bush issued a veto threat against the AMT "patch" bill, saying:

the Administration does not believe the appropriate way to protect 21 million additional taxpayers from 2007 AMT liability is to impose a tax increase on other taxpayers [via PAYGO provisions such as closing the carried interest loophole that] would increase the tax burden of American businesses and workers relative to their foreign competitors by raising taxes on certain partners in partnerships

A Washington Post editoral today, The Tax Fairy Debunked points out that Bush wants a free fiscal lunch from the tax fairy and asks him point blank: "Who is going to foot the bill, those enjoying the benefits of the patch or their grandchildren?"

The ball is in your court, Mr. President. Make good on your proclaimed fealty to fiscal responsibility and explain how you would pay for the patch, or explain why adding the cost to the $9 trillion federal debt is the responsible thing to do.

Posted by Dana Chasin, 12:03:40 PM

Wednesday, November 14, 2007

Stan Collender's Got A New Blog

You've read his columns (excerpted maybe too often on this blog)- now you can read his new blog.

Posted by Matt Lewis, 10:28:20 AM

Tuesday, November 13, 2007

Bill to Give More Low-Income People Child Tax Credit

The carried interest provisions may have gotten the headlines, but the AMT patch package that the House passed late last week also includes some important changes to the Child Tax Credit.

The Center on Budget and Policy Priorities has a good rundown of how the tax credit works, and what's wrong with it. Essentially, the way it's structured now, millions of low-income families get no benefit at all, while many more are seeing their credit reduced by inflation.

The Center's also done a good job explaining how the newly-passed provisions would help working families. It would make more families eligible for the refundable credit, and boost the size of the credit for families that already get it.

In anticipation of the Senate's consideration of the AMT patch package, Senator Barack Obama is now circulating a "Dear Colleague" letter to other members of the Senate in support of the House-passed reform to the child tax credit. Groups are urging people to call their Senators and make sure that they have signed the letter.

Posted by Matt Lewis, 03:16:51 PM

Friday, November 09, 2007

House Passes AMT Patch with Carried Interest

The House voted 216-193 today to pass the (OMB Watch-endorsed) Temporary Tax Relief Act of 2007, the one-year, $51 billion AMT patch to keep 20 million additional taxpayers from having to pay the tax this year.

It complies with PAYGO by raising enough to pay for the patch, the costly such compliance yet, re-affirming the House's commitment to PAYGO principles.

And it includes the carried interest pay-for provision closing a tax loophole which actually allows equity fund managers to pay only 15 percent tax on their bonuses -- a lower rate than anyone except the most destitute Americans.

The issue will now be taken up in the Senate. The administration promised a veto of the House bill, but what emerges from conference will be must-pass/must-enact legislation.

Posted by Dana Chasin, 05:37:55 PM

Thursday, November 08, 2007

Surreal Estate: House Hit with Hysterical Hyperbole

The Real Estate Roundtable has sent a letter to members of the House which amply demonstrates why the lobbying campaign to defend the carried interest taxloophole for fund managers is faring so poorly.

According to the Joint Committee on Taxation, the revenue raised by closing this loophole for all fund managers combined -- of which real estate fund managers are but a fraction -- is roughly $2.6 billion annually. That's about a fifth of one one-thousandth of our economy.

Bear in mind as you read this that the carried interest loophole relates to whether fund managers' bonuses (and only theirs among all other professions) should be taxed as ordinary income or capital gains. That's all. It's not a tax on investors. It's not a tax on transactions. It has nothing to do with investment performance, capital formation, economic growth, or jobs.

Fasten your seat belts, here we go:

The carried interest tax is the most significant and potentially most disruptive tax on real estate since the 1986 Tax Reform Act. Tax increases on real estate in 1986 led to massive real estate loan defaults and foreclosures. It ultimately was a significant contributor to the savings and loan debacle costing taxpayers billions in bailout funds.

Today, the housing and financial markets are reeling from the subprime crisis and the impact is reverberating throughout the economy. Imposing this damaging tax increase on top of this turmoil is ill-conceived.

We are concerned that the legislation does not take into consideration the severe impact it represents to real estate and our economy.

OK, now the facts:

less than 10 percent of all of the income earned in real estate construction and real estate development is earned by partnerships that could be affected by the carried interest provision
less than 5 percent of all wages earned by employees in the real estate construction and real estate development industry are earned by employees of partnerships that could be affected by the carried interest provision

Posted by Dana Chasin, 03:42:01 PM

Veto Vertigo: Bad News, Good News

Today, the White House issued a formal veto threat ($) against the AMT patch/tax extenders bill with carried interest and other payfors, which comes up for a House vote tomorrow.

The veto-mad president, gunning down the FY 2008 bills that are, in the aggregate, two percent more than his spending requests -- on the grounds that the bills' spending levels are "excessive" -- points to the fact that the AMT patch is wholly offset with pay-for provisions and calls them "inappropriate."

Dizzying, isn't it? He's hard to please, I guess.

So... it might be bad news for the 20 million taxpayers who will pay an average of $3,269 more next year if AMT isn't patched. But look at the bright side: the Senate can now uphold PAYGO and stand up for tax equity without having to listen to the real estate industry looby's hyerbolic claims that our econony's future depends on the carried interest tax subsidy for fund managers.

Posted by Dana Chasin, 01:54:33 PM

Wednesday, November 07, 2007

Fiscal Fortitude Award to ... Charlie Rangel
Extremely honorable mention to ... Warren Buffett

Per yesterday's blog about the fiscal fortitudinal challenge facing Congress, there is one person standing above the fray of the feckless: House Ways and Means Committee Chair Charles Rangel (D-NY). Asked if he intended to withdraw his carried interest provision as an AMT patch pay-for in the face of mixed signals from the Senate, he declared, ""Hell no, forget about it."

The House is set to take up the AMT patch/tax extenders bill Friday. Senate Republicans say when the House bill arrives, they will filibuster a higher tax on carried interest of private equity and hedge fund managers.

Rangel seems almost to relish the prospect of a patched battle with the Senate. Senate Democratic leaders publicly argue they want to pay for the AMT patch, but privately say they can do little because they don't have the 60 votes needed out of 100 to end a GOP filibuster. Rangel's reply: "So let the filibuster begin," speaking today before the U.S. Chamber of Commerce.

Extremely honorable mention to Warren Buffett, who spoke truth to fellow fund managers on NBC News.

Posted by Dana Chasin, 06:37:52 PM

Friday, November 02, 2007

PAYGO, Carried Interest Take One Small Step

By a party-line vote of 22-13, the House Ways and Means Committee voted yesterday to approve a $77 billion, PAYGO-compliant, one-year Alternative Minimum Tax (AMT) patch, holding the number of taxpayers subject to AMT steady at four million and keeping nearly 20 million Americans from having to pay the AMT for the first time.

Significantly, Congress' pay-as-you-go (PAYGO) rules survived several assaults by the Committee's GOP members, as the panel shot down a series of amendments to delete provisions of the bill to pay for the patch and instead approved the full complement of par-for provisions required under PAYGO, keeping the bill revenue neutral and honoring the fiscal responsibility rules that Congress imposed upon itself early this year.

The largest of these pay-fors, the carried interest provision, would close a special tax loophole allowing private equity and other fund managers to claim all their income as capital gains, even if they haven't invested a penny in their funds.

What comes next? House Majority Leader Steny Hoyer (D-MD) said after the vote that the patch will come to a vote on the House floor next week. Passage is expected. Thereafter, the bill will be considered in the Senate, where the Democrats' bare 51-49 majority means that the GOP stands a good chance of filibustering the bill.

But a pitched battle over PAYGO -- and carried interest -- could ensue. Senate Majority Leader Harry Reid (D-NV) declared for the first time yesterday:

I am not in favor of waiving PAYGO...I believe that we should pay for it. I think we made that as a standard. I think we cannot waver on that.

Posted by Dana Chasin, 04:11:27 PM

Halloween Lexicon: Scared, with a College Education

In a moment of brilliance, after one of the Three Stooges asks another what "apprehensive" means, the other says, "Dat means scared ... with a college education, yuck yuck yuck."

I was reminded of this exchange when I heard comments by some real logical folks at yesterday's House Ways & Means Committee mark-up of the AMT patch bill. "Nonsense" Exhibit A is on display below.

The idea that the AMT patch doesn't need to be paid for under PAYGO because ... finish the sentence however you wish, they all cause cognitive dissonance in the reasonable mind. Rep. Richard Neal (D-MA) heard several variations on the sentence and pronouced them "theology."

Then U.S. Treasury Secretary Henry Paulson, a former Wall Street banker, not a theologian, issued a press release similarly insisting on ignoring PAYGO. It's not the nonsense that my colleague Craig points up, just the feckless Gentleman C material that is the hallmark of this Ivy-League-turned-Texas-teaman administration:

While I appreciate the Ways and Means Committee for taking up an AMT patch today, the fact that this legislation raises taxes that would hurt our economy makes it very difficult for a patch to be passed quickly...
With only weeks to act to avoid the risk of 25 million taxpayers facing unintended tax increases, or millions more facing significant delays receiving refunds, Congress must quickly pass a patch that does not raise other taxes. The legislation passed through the Ways and Means Committee today does not meet that criteria. I again call on the leaders of both the House and the Senate to act quickly on an AMT patch that the President can sign for this year.

You don't need a college education to be apprehensive when a Treasury Secretary demands that Congress renege on its commitment to PAYGO and fiscal responsibility -- and blow tens of billions of dollars of fresh new holes in the budget.

Posted by Dana Chasin, 01:10:13 PM

Nonsense

This is...well, it's just sad.

Ranking member Jim McCrery (R-La.) said the AMT patch should not be offset because the patch is not a tax cut, rather is prevents a tax increase. Congress, he said, is in a "straight jacket"

McCrery is a 16-year old explaining a fender bender to his parents. "No, see, what happened was I didn't crash into that parked car. It was parked illegally, right? So it prevented me from driving legally. It ran into me, really."

Posted by Craig Jennings, 10:06:13 AM

Thursday, November 01, 2007

AMT and TPM

Check out Dana's TPM Cafe post on the AMT.

After months of delays and anticipation, House Ways and Means Chair Charles Rangel (D-NY) finally unveiled his self-described "mother of all tax bills" last week, the Tax Reduction and Reform Act. The revenue-neutral trillion-dollar bill proposes the abolition of the Alternative Minimum Tax (AMT), a package of "offsets" to pay for it, and a progressive redistribution of the regular income tax.

The first test of the bill's viability comes tomorrow, when the Ways and Means Committee considers a small, short-term piece of the bill, the Temporary Tax Relief Act. The bill consists of a one-year "patch" to keep 19 million more taxpayers from having to pay the AMT and a one-year extension of various popular tax credits and deductions for R&D, state and local taxes, teachers' supplies expenses, and other goodies.

Posted by Matt Lewis, 01:09:12 PM

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