The Wall Street Journal has a good article on the top presidential candidate's position on taxes. It's subscription only, so here's an excerpted version:

The 2008 presidential race is likely to produce a sharp debate over tax policy and its effects on individuals, estates, investments and corporations. But voters may have to wait for the general election to hear it.

That is because there is substantial agreement on the biggest policy questions within each party's field of primary candidates. For now, those broad areas of consensus have left intraparty rivals to bicker at the margins.

I would also like to point out how Bush's revenue slashing affects the AMT's reach into the middle class. The Bush tax regime depends on over 13 million taxpayers to subsidize tax cuts for the wealthy. Granted some of those 13 million are wealthy, but many are not. The chart below shows how AMT liability per income group changes because of the 2001-2003 tax cuts

CBO's The Budget and Economic Outlook: An Update is a statute-directed baseline: "In accordance with long-standing procedures, CBO's projections assume that current laws and policies remain in place." So, the revenue figures in years 2010-2017 reflect a scenario in which the 2001/2003 tax cuts expire (as legislated). If Congress does nothing - that is let the sun set on tax cuts, the Treasury will see surpluses starting in 2012. But if those tax cuts are extended, it's a river of red ink.

There's really nothing new here. I just wanted to point out - again - how expensive the Bush Revenue Reduction Program is.

I, however, beg to differ with White House spokesmodel spokesman Tony "Unsurprised" Fratto.

According to newly published IRS data, individuals making more than $1 million per year - less than a quarter of 1% of the population - captured 47% of the increase(!) in national income from 2000-2005. And, based on an analysis by Citizens for Tax Justice, that same sliver of taxpayers received 62% of the benefits from Bush's capital gains cuts.

Fratto responded to the data by saying that it "is not a very interesting story." His response also included this bizarre bit of incomprehensible gibberish: "There is no question that you will always have distributional concerns with a tax rate, a broad-based tax rate, at the very top of the income scale."

Lots of good stuff came out today.

• A Congressional Research Service (CRS, aka the super-authoritative researchers who members of Congress ask to do reports for them, but typically the reports aren't available to the public) comparison of the House and Senate SCHIP bills
• The House Budget Committee's breakdown of how some of Bush's proposed budget cuts would impact each state
• A knowledgeable article in the Washington Post about the rise in no-bid contracting
• A good New York Times article about take-up rates in the State Children's Health Insurance Program (SCHIP)

That hot summer romance between investors and the market has cooled off so quickly over the last two or three weeks, to the point where even those hero/heart-throb hedge fund managers are singin' the blues.

We feel their pain. To add insult to injury, the sheriff's deputies in Washington are pickin' on them, threatening to close up that lovable loophole that lets them avoiding paying ordinary income tax on their compensation. Oh, how can you kick a fund manager when he's down and bleeding red? (Who's really down, anyway? Hedge fund performance is linked to market volatility, not values.)

Riding to the rescue, as reported today, is country music star Merle, um, Hazard, singing his hot hit H-E-D-G-E. While he croons, fans swoon:

Whee-doggies. I seen some good songs, but this'n here is the first I done seen that addressed my partickalar concerns about global liquidity in asset backed securities markets, and the inadequacies of the rating agency models for evaluating C.D.O. risk on subprime collateral.

One of the more interesting tax policy debates of the internet age is heating up, as Congress considers the ban on internet access taxation. The ban is due to expire in November. The current internet sales tax regime, governed by case law rather than legislation, may also come under discussion.

State and local governments have long argued that the federal access tax ban deprives them of something on the order of $10 billion annually and that the ban runs afoul of traditional notions of federalism.

The virtual -- so to speak -- certainty that the ban will be extended speaks to an ideological evolution in the United States over the last generation. Mark Murphy, Fiscal Policy Analyst , Department of Research and Collective Bargaining Services of American Federation of State, County and Municipal Employees (AFSCME) testifying on the issue before the House Judiciary Committee's Subcommittee on Commercial and Administrative Law in May, put the issue in historical context:

As our economy and society evolves. [B]y definition more and more economic activity will be innovative and advanced. It cannot all be made tax-exempt. One can imagine that if this approach to tax policy had been taken earlier in our history, then manufactured goods, or the automobile and gasoline, or airline service would be 'tax free,' while only agriculture would be left to bear the tax burden.

As Citizens for Tax Justice has asked: "Should Thomas Edison have Lobbied for a Moratorium on Taxing Electric Devices?

National Journal's Clive Crook deftly devalues "starving the beast" as a political tactic, which asserts that tax cuts can put pressure on lawmakers to reduce the size of the government.

"Starve the beast" exponents are not demanding packages of lower taxes and lower spending. They are saying that lower taxes will sooner or later wear spending down anyway. When you look at those cases -- instances where taxes have been cut independently, with no connection to new spending plans -- spending does not fall, say the Romers. In fact, it rises a bit. "Starve the beast" does not work.

I hope they are right. The idea that a kind of political extortion is needed to contain the growth of government may possibly be correct -- but it is certainly unappealing. The case for low taxes can be made perfectly well on the merits: Arguments one (pro-growth) and two (pro-liberty), as mentioned at the start, ought to be enough. Then, if you can convince people that persistent large budget deficits are bad for the economy (which they are), the case for limited government is made as well.

A couple comments: "starve the beast" is another product of the rightist mind, which puts all faith in the individual when it comes to economic matters, but no faith in the individual when it comes to political matters. This thought has been formalized by George Mason economist Bryan Caplan, who suggested limiting the franchise to libertarian economists. Who's the elitist now?

Crook, who is both a libertarian and a believer in democracy, thinks a convincing case can be made for small-government economics.

Well, here's a thought experiment. Let's say you're a bridge engineer, or an Army hospital administrator, or a levee builder. And let's say you think you need more funding to do your job. Who do you think will give you a fair hearing- an honest, good-faith conservative like Crook, or a liberal who's less skeptical of government?

I'd venture it's the liberal who doesn't think government is always the problem that'll give the fair hearing and make the right call. After all, it's been conservatives of Crook's stripes that were in power while all these problems were festering.

So by all means, let's finally have a discussion on the merits. In fact, it seems like President Bush wants to have this discussion, and has taken up Crook's view. I believe liberals can make a convincing contrary case, but will they? Instead of just yammering on about the debt?

Bush ($):

My suggestion would be that they revisit the process by which they spend gasoline money in the first place...From my perspective, the way it seems to have worked is that each member on that committee gets to set his or her own priority first, and then what's ever left over is spent to a funding formula.

That's not the right way to prioritize the people's money...And, if bridges are a priority, let's make sure we set that priority first and foremost, before we raise taxes.

To Bush, the nation can have only a fixed number priorities, a number to remain unchanged even in the face of new challenges. And with each massive tax cut for the rich, that number has to be revised downward. It's either we fix bridges or we secure our ports; we either prepare for an avian flu epidemic or we educate children; we either give veterans health care or we rebuild New Orleans. Heaven forbid we, as a nation, deem all of these things worthy of accomplishing, and heaven forbid we believe they should be paid for.

In his post about the president's call for a corporate tax cut, Matt asks:

And what if an unhinged market was the root cause of all this trouble [a potential economic downturn]?

I submit that the market is in fact completely hinged. That is: rapid expansion in financial markets (i.e. bubbles) is always followed by rapid contraction (i.e. bubble bursting). Oscillations between growth and contraction is the nature of the market.

And it is precisely because markets behave this way that some government policies are necessary. They provide a buffer between the humans that depend on constant sources of food, shelter, and security and the rough-and-tumble, unpredictable cruelness of The Market.

I'm going to go out on limb and suggest that of all the programs on which the government could spend money to mitigate the human misery caused by the housing bubble bust, corporate tax breaks would be the least effective.

Via the Washington Post, President Bush is considering a corporate tax cut at a time when an economic downturn appears to be underway.

One reason to distrust Mr. Bush's response is that this is how he and other conservatives react to everything these days.

It's that "can't do" attitude about government, the one that says the best way to use government is to get it out of the way by cutting taxes and scaling back involvement.

On housing, Bush said he is concerned but believes the market will find "a soft landing" without substantial government intervention beyond enforcing existing policies on predatory lending. "Somebody said, 'Should we be using taxpayer money to bail out lenders?' And the answer is: No, we shouldn't be. The market will work."

So we should all just sit on our laurels and hope that things work out. Because there's nothing we can do.

Ah, but what if the mortgage meltdown has something to do with, you know, policy failures? And what if an unhinged market was the root cause of all this trouble? Nobel-prize winning economist Joseph Stiglitz thinks that might there might be something to that explanation, and that we actually might be able to contain the damage that's been done.

But the Debbie Downer conservatives says there's just nothing we can do about it, except maybe cut unrelated businesses yet another fat tax break. It's just one more plan derived from a bankrupt and pessimistic ideology, with no basis in an analysis of the problem. Yikes.

More good news from the private equity/hedge fund tax loophole debate today as Shawn Fremstad over at inclusionist.org points out two very wealthy, successful private equity managers are speaking out in favor of closing the loophole. William Stanfill, the founding partner and head of a Trailhead Ventures, and William Gross, the managing director of PIMCO, an incredibly successful bond investment firm that invests $687 billion in assets, have both gone on record, and quite eloquently at that, to say they believe they should be paying the same tax rates anyone else does on their income.

Stanfill spoke up as a witness during the Senate Finance committee's latest hearing investigating this topic. Here's one of many excellent and candid passages from his testimony:

I can understand why many in my industry want to preserve this special tax advantage. Clearly, it has served US and ME well. The tax subsidy each year to private equity fund, hedge fund, and venture capital fund managers is in the billions of dollars. But I think this special tax break is neither fair nor equitable. After all, a gifted teacher who is training and inspiring and challenging our children and enriching human capital gets no such special treatment.

And Gross published his views in a lengthy, but well written monthly column called Investment Outlook that he writes. Gross says:

What farce, then, to give credence to current debate as to whether private equity and hedge fund managers will be properly incented if Congress moves to raise their taxes up to levels paid by the majority of America's middle class. What pretense to assert, as did Kenneth Griffin, recipient last year of more than $1 billion in compensation as manager of the Citadel Investment Group, that "the (current) income distribution has to stand. If the tax became too high, as a matter of principle I would not be working this hard." Right.

Right indeed Mr. Gross. Kudos to you and Mr. Stanfill! Let's hope more people (including those in Congress) have the same good sense on this issue.

Senate Majority Leader Harry Reid has announced that the Senate will vote on the nomination of Jim Nussle to be the new Director of the Office of Management and Budget on Monday, September 4 - the first day back from the August recess. Reid announced there will be three hours of debate on the nomination beginning at 2:30 pm. One hour each for the chairman and ranking member of the budget committee, and one hour controlled by Sen. Bernie Sanders (I-VT).

Sanders has announced a hold on Nussle's nomination because he has serious concerns about the nominee and his philosophical differences with the administration's fiscal policies. Sanders said:

President Bush is completely out of touch with the economic realities facing working families in America. Bush needs to hear the truth, not an echo. He needs a budget director who will make him face the facts, not fan his fantasies.

Jeffrey Birnbaum and Lori Montgomery's front-page story in today's Washington Post, Wall Street's Lucrative Tax Break Is Under Fire is dense and lengthy (1500 words) reading. But if you're trying to get a grip on the carried interest tax loophole issue -- particularly its legal/regulatory historical underpinnings -- it's the best place to start.

The crux of the article puts the case for closing the loophole in straightforward terms:

[U]ntil now, nobody has been focusing on the fact that if you're contributing services to a partnership where the returns are capital gains, you've managed to convert ordinary income to capital gains.

Advocates of change say there is ample reason to identify the Carry, or at least most of it, as a wage. It is, after all, not a return on invested money. It is the product of work done to help a venture succeed, in much the way that an assembly-line employee helps a company make cars or airplane parts, they say.

Hats off to the Post for putting a fairly opaque issue on the front page, giving it so much print, and couching it in terms that everyone can understand.

By a veto-proof margin (68-31), the Senate passed a $35 billion expansion of SCHIP.

Earlier this week, the House passed its version - a $50 billion expansion, partially offset by changes to Medicare. The president has threatened to veto both.

Posted by Craig Jennings, 10:14:33 AM



Carried Interest, Part. I: Krugman v. Schumer

The Krugman op-ed in today's New York Times that Matt cites below rightly challenges Sen. Schumer for a transparent and actually meaningless position (the bill to close the carried interest tax loophole already does what Schumer demands).

Krugman also hits the nail on the head, addressing the weird argument that industry defenders of the carried interest loophole make that if you take a risk by betting with someone else's money, a lot of your bettor's fee is a capital gain:

We're told that the tax rate on hedge fund managers has to be kept low to encourage risk-taking. But the managers aren't risking their own money. The only risk ... is the uncertainty of their fees — and as any ... salesman who depends on commissions can tell you, most people with uncertain incomes don't get any special tax breaks.

For some reason, though, Krugman keeps referring to hedge fund managers -- at least ten times in his op-ed -- without mentioning private equity fund managers once. I know that hedge fund managers are supposed to be the most nefarious creatures, about as beloved as Barry Bonds.

But in fact, because hedge fund managers are generally short-term traders, very little of their "carry" qualifies as capital gains, which require a holding of at least one year. Unlike private equity managers whose assets under management don't realize gains for several years.

Paul Krugman has a must-read, or maybe a I-highly-recommend-you-read-it column today. You can get it for free over at Economist's View. It begins:

It's been a good Democrats, bad Democrats kind of week. The bill expanding children's health insurance that just passed in the House makes you want to stand up and cheer. Reports that Senator Charles Schumer opposes plans to close the hedge fund tax loophole make you want to sit down and cry.

In statement released yesterday, AMA stated its strong support for the House version of SCHIP expansion:

The American Medical Association applauds the members of the U.S. House of Representatives who voted to pass legislation that preserves access to health care for children and seniors.

...

By increasing the tobacco tax and eliminating overpayments to insurance companies offering private Medicare plans, Congress has found two appropriate ways to pay for these important national health care priorities.

By a 225-204 vote, the House of Representatives yesterday approved the renewal and a $50 billion expansion of SCHIP.

Also on Wednesday, Senate Majority Leader Harry Reid (D-NV) filed a cloture motion on the Senate version of SCHIP renewal/expansion.

The Heritage Foundation just put out a report on the fiscal responsibility-ness of the Senate's SCHIP bill. It's stupid, but it begins with the fair point that the legislation would sunset, in 2013, the funding increases it would set up.

The Senate bill would gradually increase federal funding for SCHIP from the current $5.6 billion level to $14.1 billion in 2012. Then, suddenly, funding would plummet to $6.2 billion and $4.7 billion over the subsequent two years, and not top $5.0 billion again through 2017 (see chart 1).[4] If Congress enacts this legislation, lawmakers in 2013 will face two options:

1. Drop SCHIP funding 70 percent, substantially reducing the number of enrollees, or

2. Add approximately $60 billion in new spending over the next five years to maintain current enrollment.[5]

There is also a third option: add the $60 billion in new spending in 2013, when SCHIP will need to be reauthorized anyway, and pay for it. Indeed, if Congress does not pay for it then, they'd violate PAYGO rules if they're still around. Heritage is lying when they say there are only two options and that a paid-for renewal isn't one of them.

Ideally, Congress would have paid for this expansion now and gotten it over with. But just because the bill's finances are less than ideal, doesn't mean a serious violation has occurred. There will be pressure to extend this funding and not pay for it, but folks like us will bring pressure going the opposite way, too, and no rule has been broken.

And to attack a budget gimmick with more smoke and mirrors shouldn't fly either. Two wrongs don't make a right and all.