The House Ways and Means Committee has approved HR 3056- the legislative package that will end the IRS private debt collection program- by a vote of 23 to 18. Great!

This morning, the Joint Committee on Taxation released its interpretation of a Chairman's amendment to the bill. if passed, it will not affect contracts that have already been issued to private debt collectors. That sounds fair, as the debt collectors who have contracts might take a loss if the program is ended wholesale.

A favorite canard put forward by the defenders of the IRS private tax collection program is that there's no other way to collect these taxes (watch a hearing on the issue here). If Congress gave IRS the resources it needed to pursue these cases, IRS administrators would instead direct the money to functions that would yield a greater return-on-investment.

But IRS has been spending a great deal of money on the IRS program so far. As of a few months ago, the IRS spent $71 million to set up the program. If IRS had spent that money on other things, it could have brought in about $1.4 billion- over 2 years. The private debt collection program is expected to bring in about that much money over 10 years. If the IRS is so concerned with spending money with a high return on investment, why is it even bothering with this program?

And there's no guarantee that the program will actually yield the expected revenues. Revenues are now being collected at a very slow pace, and according to the IRS National Taxpayer Advocate, many of the cases that have been given to the private collectors may be too complex for the PCAs to effectively prosecute. Plus, the last time the program was tried -in 1996- it actually lost money in net! The same thing has been happening so far- $71 million has been spent, but less than $50 million in new revenue has been brought in.

And it's undisputed that the IRS could do this work more efficiently in-house. Period. Even the IRS has admitted that. Program defenders say they're comparing apples to oranges- IRS employees have more powers than private companies and so are more efficient. But that's like saying you can't say that Muhammad Ali is a better boxer than, oh, President Bush, because Ali has natural gifts, training, and experience. Just because the IRS is better doesn't mean you can't compare them.

There's no business case for this program- and let's no forget that the program puts taxpayer information at risk, and has exposed people to abusive tactics by for-profit companies who are paid on a commission basis. End this program now! Pass HR 3056!

A tax on tobacco is a regressive tax, and so equity-based opposition to a tobacco tax increase generally makes sense. However, if the tax will be used to fund an expansion of a fiscally progressive program, then it is possible that the net result will be progressive. I spent some time this morning compiling info that would give some indication of how the SCHIP expansion would shake out. Well, someone has already done the yeoman's work and crunched the numbers. The fiscally conservative, but nonpartisan Tax Foundation state their opposition in this article, they essentially make the progressive case for tobacco-tax-funded SCHIP expansion.

Now, an income-tax-funded expansion would be more progressive, but given a filibuster-happy senate and veto-mongering president, this is a best-case scenario.

Tomorrow, the House Ways and Means Committee will consider a new "good government" bill to end the IRS private debt collection program. Check out the bill here.

It includes virtually the same language as HR 695- Rep. Steve Rothman (D-NJ) and Rep. Chris Van Hollen's (D-MD) bill to end the program. It also includes six other measures that tweak tax laws.

Previous efforts to end the program have been caught up in procedural issues. At first blush, this new bill seems get around those problems- it has proper jurisdiction and probably wouldn't violate PAYGO.

And the bill shows that Ways and Means Chairman Rep. Charlie Rangel was serious when he said he didn't want any new contracts issued to private debt collectors. Kudos to Chairman Rangel for sticking to his guns!

This may be the beginning of the program's end. Good riddance. It's wasteful and puts taxpayers at risk for no good reason. But in a larger sense, it's the poster child for what's wrong conservative ideology and politics- an overabundance of faith in the market, unwarranted distrust of government, and a penchant for putting corporate interests over the public interest.

To fully offset a $35 billion expansion of SCHIP, the Senate Finance Committee has proposed raising tobacco taxes to about $1 per pack. The Joint Committee on Taxation released reports on the proposed revenue changes on Friday.

• Estimated Revenue Effects Of The Revenue Provisions Related To The State Children's Health Insurance Program
• Description Of The Revenue Provisions For Markup Of The State Children's Health Insurance Program

The five-year revenue generation from the proposed tax would be $35.7 billion, with a ten-year total of $71.1 billion.

As the Center on Budget and Policy Priorities notes, for 61¢ per pack of cigarettes, the plan would extend insurance coverage to 4.1 million children who would otherwise not be insured. Citing CBO figures, the Center also points out that conservative talking points that the plan would primarily encourage parents of privately insured to switch to SCHIP are simply false.¹

In other words, nearly two-thirds (66 percent) of the children who would gain SCHIP or Medicaid coverage under the bill are children who would otherwise be uninsured, not children who would otherwise have private coverage.

Compassionate Conservative^® President Bush, meanwhile, remains adamantly opposed to expanding health care coverage to children.

¹I am shocked - shocked! - that conservatives would misrepresent the facts to further an ideological agenda

I never thought of it this way, but economist Dean Baker, writing in Business Week, points out that the current tax rule permitting private equity fund managers to pax taxes on performance-based fee income for services at the capital gains rate is tantamount to a special tax rate for one profession.

Despite the many areas of dispute among economists, virtually all of them would agree tax rates should not vary by occupation. In other words, we don't want to see one tax rate for firefighters, a different tax rate for schoolteachers, and a third tax rate for bookkeepers...

We might want to subsidize some important jobs (albeit probably not with special tax rates) that don't offer very high pay—for example, doctors in rural areas or inner-city schoolteachers. I doubt, however, that anyone would suggest the government initiate a policy of subsidizing hedge fund managers, some of whom pocket $1 billion a year.

Baker is in good company. Sen. Charles Grassley (R-IA), ranking Republican on the Senate Finance Committee said at the Committee's "Carried Interest, Part 1" hearing this week:

We can't allow the carried interest tail to wag the capital gains dog... the carried interest issue involves tax code integrity... This issue is about closing a loophole, not raising taxes on a single industry...

I'd direct Mr. [Steve] Forbes and other critics to cool it on the hysteria and get their facts straight [instead of] talking about charges of a fictitious tax increase."

Blogging at Tapped, Scott Lemieux comments on Paul Krugman's column($) in the New York Times today:

Targeted capital gains tax cuts also provide an opportunity to see a conflict between "free market" and "pro-business" principles. A "free-marketer" would presume that the market would produce the most efficient allocation of resources between wages, capital investment, etc., and hence taxes should distort this allocation as little as possible. People who support capital gains tax cuts, conversely, are implicitly arguing that the market gives too little incentive to invest (and the solution -- how about that! -- is a tax cut that overwhelmingly benefits rich people.)

Exactly. Lowering tax rates for one group of payers is not pro-market. It's pro-whatever-group-gets-the-cut.

"Moronic" is one way describe this editorial by Kevin "Dow 36000" Hassett in the Wall Street Journal. Brad DeLong calls it "the most mendacious ever." And Matthew Yglesias calls it the "worst editorial ever" and "insult to everyone's intelligence."

And how! Economist Mark Thoma squashes the piece like a bug in his post this morning:

...Here's the picture from the editorial where they are making their usual plea for more tax cuts:

The blue line is supposed to be the Laffer curve, but this is far from compelling. Since it looks like all that's been done here is to draw a line through an outlier, Norway (an outlier that in other contexts we are told to ignore because it is an outlier, e.g. see below), and since this is clearly not the best fitting line to these data, here's another possibility:

I haven't actually run the regression, but it looks clear to me that revenues rise with tax rates, and the fit also looks better than in the first graph. Toss out Norway, and the fit looks even better (and to quote The Economist blog on this point, "Throwing out Norway...").

I know how much supply-siders want to find a Laffer curve, they've become frustrated going this long without success. But if they really think one exists they'll need to keep looking because they haven't found it yet.

The lead business article in today's New York Times, Henry R. Kravis, the billionaire founder of the corporate buyout movement, put the lie to Wall Street's claims that taxing fund managers' fee income as ordinary income will shrink returns for America's pensioners.

Rep. Sander Levin (D-MI) -- author of a bill to end the so-called "carried interest" tax loophole -- and his staff met in late June. The Times reports that at the meeting, a Levin aide

asked Mr. Kravis to explain whether the measure would hurt workers and middle-income families by lowering the returns for pension funds that invest in Kohlberg Kravis funds, two aides at the meeting recalled. They said Mr. Kravis agreed with an answer by a partner that the proposal would not hurt returns, and the meeting ended soon afterward.

There is an exception to the age-old common law hearsay rule which permits testimony uttered "against interest," meaning that however dubious the rest of the testimony, something said that undercuts the speaker's interest can be admitted.

Sounds like Mr. Kravis has practically debunked the canard by supporters of the loophole that the real losers if it's closed are our now-retired, fondly-remembered, third-grade teachers.

The Senate Financial Services and General Government Subcommittee, a part of the Senate Appropriations Committee, passed its version of the FY 2008 Financial Services and General Government appropriations bill (HR 2829) by a party-line vote of 5 to 4.

If you're still with me, this bill would do a couple important things. First, it limits funding for the IRS private debt collection program, but not so much that it would violate congressional procedures. A similar version of this limitation was struck from the House's bill on procedural grounds (See this Watcher article for more) . The Senate would not eliminate the program, presumably, but it could contain it so that it probably won't do much more damage.

Second, it funds IRS operations at $11.1 billion, which is significantly higher level than last year, but lower than the $11.6 billion that the IRS Oversight Board recommended. Full funding of the IRS could reduce the tax gap, which would free up more revenue for program expansions and make the tax code more fair and progressive.

And third, it would defund the part of the Office of the Vice President (OVP) that's in the executive branch. As you may recall, Vice President Cheney has been saying he's not really in the executive branch, and therefore isn't subject to an executive order that establishes some oversight over the OVP when it classifies information. This measure may make the OVP's operations more transparent to the public, and help Congress hold the Vice President accountable if he or anyone else in his office, besides Scooter Libby, has done anything wrong.

Of course, this is only the subcommittee- the bill has a ways to go. But it's off to a pretty good start.

According to an article in today's Washington Post, the Congressional initiative to repeal the Alternative Minimum Tax (AMT) is "faltering before it's even unveiled." The proposal that House Ways and Means chair Charles Rangel (D-NY) and Select Revenue Measures subcommittee chair Richard Neal (D-MA) "had planned to unveil their plan in May [is] not likely to occur before September, if then."

The problem is that unless you want to blow a hole somewhere between $800 billion and $1.5 trillion in the budget over the next ten years, you've got to raise a lot of revenue to pay for AMT repeal. You can already hear Rep. Paul Ryan (R-WI) mouthing the mantra "biggest tax increase in American, no, world, no, galactic history." Actually, Ryan said, "If you have anything close to a marginal district, I wouldn't touch it with a 10-foot pole."

That's the kind of leadership that doesn't seem to mind the ever-increasing costs -- $50 billion a year and growing -- of the annual AMT ostrich act, aka, The Patch, holding harmless the tens of millions who would otherwise fall prey to the AMT each year. Which leads to this keen Post quip:

One factor complicating Democrats' task is the unusual dynamic involving the minimum tax. Most people don't know they may be facing the tax, so there's hardly a grass-roots outcry for AMT reform. At the same time, those facing tax increases are sure to rebel.

Now, by this logic, when, if ever, does it make sense to tackle the AMT problem?

When I think of the Senate, I picture something like the insides of a very old and very big clock, with gigantic rusty gears that move extremely slowly. Well, it seems like, when it comes to expanding the State Children's Health Insurance Program (SCHIP), those gears are finally starting to turn, but slowly, of course, and with so much effort and compromise required for so little movement.

CongressDaily (subscription only) is reporting that the Senate Finance Committee has reached an agreement on the scope of the SCHIP expansion- apparently it'll be for $35 billion over 5 years, while the CBO has put the cost of covering all uninsured children eligible for SCHIP at $47.5 billion. Still, the $35 billion may be close to enough to full coverage because, as Sen. Gordon Smith (R-OR) has said, adults who are on the program might get kicked off. Lovely.

They've also agreed to finance the expansion by increasing the tobacco tax by 61 cents. That's instead of cutting costs in the Medicare Advantage program, which would have been opposed by the health insurance industry, whose bottom lines are far more important than ensuring that kids get good medical care. Far easier to levy a highly regressive tax.

The bill is expected to be marked up and approved by the Finance Committee next Tuesday. We'll see how the full Senate responds. Only people like Sens. Jim DeMint (R-SC) and Tom Coburn (R-OK) have said they oppose it. The President says he opposes the expansion on "ideological" grounds, or something related to the role of government, blah blah blah. Isn't this the same guy who created the Medicare prescription drug benefit?

Anyway, unseemly compromise is what the Senate is all about. So while it's hard to like the way this bill is taking shape, it's hard to see an alternative. It might be wise to appreciate any movement we get out of the Senate's big old rusty gears.

In advance of tomorrow's Senate Finance Committee hearing on the carried interest tax loophole, the Joint Committee on Taxation issued a report today, Present Law and Analysis Relating to Tax Treatment of Partnership Carried Interests.

At the nub of the report is this "core question":

...whether a carried interest received by an asset management business should be viewed as a form of compensation for services, or whether it is more similar to an interest in capital. The Federal income tax treatment of partnership profits interests for services (of which carried interests can be an example) has evolved through litigation and Internal Revenue Service positions. Carried interests and similar arrangements may also raise issues relating to the application of tax rules governing compensation, such as the rules governing the receipt of property for services and deferred compensation (which affect both the timing and the character of income).

• Eric Solomon - assistant secretary of the Treasury for tax policy
• Peter R. Orszag - director, Congressional Budget Office
• Andrew Donohue - director, Division of Investment Management, Securities and Exchange Commission
• Kate D. Mitchell - managing director, Scale Venture Partners, Foster City, Calif.
• Marc P. Gergen - professor, University of Texas School of Law, Austin, Texas

On the eve of OMB's release of its supplemental update of the FY 2007 budget, commonly known as the Mid-Session Review, many in the budget policy community awaits its revised estimates of the budget deficit, receipts, outlays, and budget authority for fiscal years 2007 through 2012.

Some will point to the federal government's deficit of $123 billion for the first nine months of fiscal year 2007 as a sign of sustained progress toward a balanced budget, confirming the soundness of the Bush administration's fiscal policies.

Others say the new estimates are nothing to get too excited about and disconfirm as much as they confirm about the administration's fiscal rectitude. A CBPP report released today makes the following key points about tax policy and the short-term narrowing of the federal budget deficit:

Apart from the stronger economy, several other factors also have helped increase revenues since 2003. But these factors appear to have been independent of the capital gains and dividend tax cuts, and in some cases they reflect developments for which supporters of these tax cuts are unlikely to want to claim credit.

• A recent Congressional Budget Office analysis attributes a significant share of the remaining revenue growth (the growth not due to a growing economy) to a large increase in the share of national income going to corporate profits. When corporate profits increase at the expense of other forms of income, some of which are not subject to tax or are taxed at very low rates, revenues rise. In addition, new data ... show that the share of the nation's pre-tax income going to the top 1 percent of households jumped dramatically between 2003 and 2005 (the latest year for which data are available). Increased income concentration tends to raise revenues because it puts more income in the hands of those who pay taxes at higher rates.