Prof. Mark Thoma of Economist's View gets real on disingenuous tax policy.

So don't just tell people how much they will benefit from a tax cut with charts and tables showing how this or that household will fare under a particular tax cut proposal, be honest enough to tell people what they have to give up too. For too long conservatives have sold tax cuts as though there is a free lunch - as though the tax cuts pay for themselves - and it's time for those who are intellectually honest to begin fully spelling out the consequences of their tax cut proposals. If you think government is riddled with waste and inefficiency, then point fingers and tally amounts - tell us who's lazy, incompetent, doing unnecessary things - show us there's enough waste to finance your tax cut proposal. If you advocate tax cuts to improve economic efficiency, fine, but the efficiency gains won't be large enough to pay for the tax cut. Tell us what programs will be cut, or if programs can't be cut, who will have to pay more taxes, or how much of the burden will be shifted to future generations. Maybe people will agree that government is too large, maybe not, but let's debate the real issues and quit selling tax cuts based upon misleading claims that serve to hide the true goal of the policies.

That'd be nice. But as Dana said, instead of thorough discussion, we'll probably get more of the partisan Punch-and-Judy Show. It might be more productive to urge honest economists, analysts, and journalists who share these aspirations to get involved in the public dialogue, like Prof. Thoma does.

In a surprising development, the National Venture Capital Association (NVCA) yesterday broke ranks with other industries that use the carried interest tax break, distinguishing themselves from buyout firms and hedge funds on the grounds that venture capital creates viable businesses -- and so deserves continuing special tax treatment -- while their private equity (PE) counterparts do not.

"We're raising our voice. We don't want to get swept up with private equity firms, NVCA vice President Emily Mundell said yesterday at a media roundtable, according to BNA ($) today.

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. We have not hired additional lobbyists.

The distinction between the econonmic value of VC versus other PE firms is an obscure one and hard to explain. And it has no apparent bearing on VC's case that its, or any fund managers, require or deserve to pay capital gains rates on income received for services performed.

Alan Greenspan hit a hornet's nest when he disparaged the Bush fiscal policy record in his new book.

Responding to Greenspan's comments, President Bush, yesterday:

"I would also argue that cutting taxes made a significant difference, not only in dealing with a recession and an attack on our country, but it also made a significant difference in dealing with the deficit because the growing economy yielded more tax revenues, which allowed us to shrink the deficit."

Vice President Cheney, today:

The economic growth encouraged by the president's tax cuts is now producing sharply increased federal tax receipts -- up by nearly 15% in fiscal year 2005 alone, nearly 12% in fiscal year 2006, and projected to rise nearly 7% in the fiscal year that will end this month.

Once again, the Bush administration is saying that tax cuts pay for themselves. This theory has been refuted by almost all credible economists- including ones working in Bush's Treasury Department. These tax cuts just didn't and won't generate substantially more growth. No more growth, no increase in tax revenue because of the tax cuts.

So if tax cuts for the wealthy don't pay for themselves, who pays for them? Well, we all do.

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Studying public opinion on economic inequality can make you both hopeful and cynical. On the one hand, we sincerely don't like extreme and rising inequality, for uniquely American reasons. But on the other, we support legislation -the 2001 and 2003 tax cuts being most notable- that make society even more unequal. And we don't support a lot of legislation that would level the playing field. This inconsistency can bring you down a road you don't want to follow- where you doubt the capacity of the public to act in its own interest.

But let's leave that to the fringe right-wing of folks like Prof. Bryan Caplan, who proposed distributing the franchise on probably the same basis as he determines eligibility for high-level economics courses.

The public can and does act in its own best interests, if it's given the chance.

Why should anybody be so cheery? Well, there's an interesting paper by Profs. Jacob Hacker and Paul Pierson on the tax cuts and public opinion that makes the case that these inconsistencies are less evidence of cognitive failure than of manipulation and a broken system. They found that the tax cuts were supported on their own, but not when they had to be weighed against alternative uses of the same money.

When asked about these competing uses, voters consistently saw tax cuts as a lower priority than plausible alternative uses of the forecasted surpluses...Versus Social Security, tax cuts lost by a 74 to 21 percent margin. Versus Medicare, the margin is 65 to 25 percent. Even when Social Security is take out of consideration, 69 percent of respondents preferred using extra monies on "education, the environment, health care, crime-fighting, and military defense," rather than a tax cut, which garnered just 22 percent support.

Agenda management proved crucial in moving the legislation, and so did efforts to minimize the potential cost of the tax cuts and mislead the public about its distribution. Tax cut proponents used deceitful frames, policy designs, cost estimates, and other gimmicks.

The administration and its allies came into office determined to overstate the surplus and understate the size of the tax cuts, hiding the true budgetary effects of the tax cuts would minimize the danger of the fiscal tradeoffs becoming salient. budget estimates of the Congressional Budget Office (CBO) that overstated the surplus under any plausible scenario were a great help....[the architects of the tax cut] added in numerous unrealistic assumptions of their own. Most notably, supporters of the tax cut refrained from discounting revenues that were almost certain to dissipate. The key example is the the Alternative Minimum Tax (AMT)...

In the end, how did they get away with all this (emph. mine)?

Yet even in today's political system not all matters lend themselves to the dynamic we have unearthed in this case. not all issues make voters eyes glaze over in the way that details of tax policy do. On matters such as abortion or the environment, extreme policy initiatives run up against opposition that is knowledge-rich, well organized, and poised to react.

With respect to economic and class issues, however, the situation is different. As the passage of the 2001 tax cut starkly displays, it is here that the political resources that voters need to ensure responsiveness have eroded the most. The decline of unions and locally rooted Democratic Party organizations, coupled with widespread disillusionment about the political process, has left lower- and middle-income citizens dependent on the media and a race-horse-obsessed discourse shorn of much content. It is now possible for policy makers to venture far from the average voter on important matters. But there is nothing random about the kinds of adventures that are possible, the types of voters most likely to benefit, or the citizens most likely to pay the price.

The rationality of the public should not concern us, but the state of civil society probably should.

Last week, we noted Mr. Norquist's rap against Rangel that the House Ways & Means chair "created, fed, defended ... a monster," the Alternative Minimum Tax. Norquist incoherently tries to depict Rangel as an AMT-loving Frankenstein, "defending [the] monster he helped create."

In a similarly frothy op-ed in the Washington Post today, "Rangel's Tax-the-Rich 'Reform'," Novak takes the opposite tack, attacking Rangel's year-long efforts (apparently lost on Norquist) to repeal the AMT as "the most radical left-wing tax revision in half a century.... the latest and most egregious lunacy imposed on the American taxpayer."

I'll leave it to you to decide whether Norquist or Novak goes further off the deep end. But there is this one precious and hysterical mischaracterization from Novak today:

Ways and Means summoned the usual lineup of tax redistributionists for a Sept. 6 hearing on "fair and equitable tax policy for America's working families." [including] Jason Furman (emph. mine), director of the Brookings Institution's Hamilton Project.

Furman? The famous redistributionist? Has Halloween come early this year, Mr. Novak?

Paul Krugman's take on how former Federal Reserve chairman Alan Greenspan gave a green light to the tax cuts he now calls irresponsible.

When President Bush first took office, it seemed unlikely that he would succeed in getting his proposed tax cuts enacted. The questionable nature of his installation in the White House seemed to leave him in a weak political position, while the Senate was evenly balanced between the parties. It was hard to see how a huge, controversial tax cut, which delivered most of its benefits to a wealthy elite, could get through Congress.

Then Alan Greenspan, the chairman of the Federal Reserve, testified before the Senate Budget Committee.

Until then Mr. Greenspan had presented himself as the voice of fiscal responsibility, warning the Clinton administration not to endanger its hard-won budget surpluses. But now Republicans held the White House, and ... Greenspan ... was a very different man.

That may seem unprincipled and self-interested. But let's not forget that Greenspan was a devotee of the writer Ayn Rand, who believed that acting in one's self interest is the very definition of being principled. Here's Greenspan responding to a review of Rand's Atlas Shrugged (emph. mine):

Shortly after "Atlas Shrugged" was published in 1957, Mr. Greenspan wrote a letter to The New York Times to counter a critic's comment that "the book was written out of hate." Mr. Greenspan wrote: " 'Atlas Shrugged' is a celebration of life and happiness. Justice is unrelenting. Creative individuals and undeviating purpose and rationality achieve joy and fulfillment. Parasites who persistently avoid either purpose or reason perish as they should."

At Womenstake, Christina Martin-Firvada reports on how the GOP is finding that tax cuts are going out of style.

In case you do not follow this sort of thing, it's Fashion Week in New York,that magical time twice yearly when vanity wrestles good sense to the ground and hogties it to the latest impossible trend. (How do you feel about shoes designed to look too small?).

Here in Washington, spring 2008 previews are also going on, just without the skinny models and all-night parties. Two D.C. papers, Roll Call (subscription needed) and Congressional Quarterly, reported yesterday that GOP senators were advised by their pollsters to "cut the 'happy talk' about past tax cuts and economic growth," because voters are not interested in tax cuts and tax-cut messaging is unlikely to assist the GOP. The news is apparently leading to an enormous shift in thinking among GOP senators. As one report stated, "Senators said they realize they cannot use the tax cuts as simply a Band-Aid for every problem, and if they propose them, they must do a better job explaining why they are the right answer."

...More important yet will be whether members not only change their messaging, but their votes as well. Maybe voters are not interested in tax cuts because the tax cuts of the last several years didn't do much for most voters. More than a few Americans would be better off if recreational tax cutting disappeared once and for all, along with this season's unforgiving stovepipe jeans. So here is hoping spring 2008 heralds a season of good taste and even better policy sense.

The diminishing appeal of tax cuts may also be a kind of brand crisis, as the GOP and everything associated with it loses public favor. After all, public reasoning on the murky subject of taxation does not have a good track record.

Below are bits from recent pieces from the belly of the beast -- the depths of the corporate canyon at the lower end of Manhattan, where lies (damn lies) Wall Street -- with telling arguments regarding carried interest. Both are scary, both are funny (tho only one intentionally so).

Of course, there are plenty of strong free-market arguments in favor of ending a tax subsidy that every economist from Greg Mankiw to William A. Niskanen (of President Reagan's Council of Economic Advisors) will tell you is distortive and inefficient, an anomaly in the code that tax cut champ Chuck Grassley (R-IA) warns is impugning the code's integrity, a tax incentive to encourage behavior by multi-millionaires that would occur even without public assistance.

You will not find such pedestrian arguments in these pieces. No, the arguments featured here are very hard to understand yet somehow side-splitting. You see, they attempt the impossible: to defend the indefensible on the ground that it is incomprehensible.

Let's go to the video tape:

• Paid to Listen, Wall Street Journal:

  Congress once thought it had a political and policy winner in raising taxes on the private equity industry. Now it's not so sure. Complains Republican Sen. Charles Grassley: "There are powerful forces in this town that have been organized specifically on this issue that are probably going to be able to slow it up into next year."

  His Democratic partner in this waltz, Max Baucus, chairman of the finance committee, adds: "It's a very complicated subject."

  Hooray for special interests!

• A Wall Street Trader Learns Some Taxing Lessons, Bloomberg News:

The working rich are already way too heavily taxed.

The truest arguments are often the ones that are hardest to make ordinary people understand, and this is the truest of them all. Rich people know how to invest extra money. Poor people just squander it on necessities. That's why capitalism works so well: it keeps money out of the hands of people who don't know how to use it and directs it to people who know how to make it grow.

This is why it makes no sense for rich people to give away their money. Warren Buffett had the right idea: keep piling up as much as possible until the very end -- and then give it to a guy even richer than you.

In his story on last week's House Ways & Means Committee hearing on the carried interest tax loophole, "More Opposed to Equity Tax Plan,"More Opposed to Equity Tax Plan," Washington Post reporter Jeffrey Birnbaum misstates some key facts and mischaracterizes others.

[Incidentally, the Post editors almost got the headline right. "More Opposed to Equity Tax Plan" implies the plan is a tax on equity, which it is not. "More Opposed to Tax Equity Plan," would be much more accurate, but it would highlight the weakness of the position.]

Birnbaum opens by saying, "The real estate industry yesterday added its voice to the growing number of commercial interests" opposed to a bill that would close this loophole. In fact, the National Association of Realtors made its position known in a paper issued two months ago. He never cites any other commercial interests known to oppose the bill.

In saying, "Some leading Democrats in the House have proposed" to close the loophole, Birnbaum omits the fact that one of the leading voices championing the elimination of this loophole is senior Republican Sen. Charles Grassley (IA), ranking member of the Senate Finance Committee.

Finally, Birnbaum ends with a random quote from Rep. Thomas Reynolds of New York, who believes closing the loophole would threaten New York's position as the world's preeminent financial center, yet fails to mention that none of the four other committee members from New York spoke against the bill."

Unfortunately, Birnbaum's article gives a, well, slanted view of the issue.

In an op-ed yesterday's New York Sun, Confronting His Monster, Grover Norquist, the Frankenstein of modern conservative tax policy points his fickle finger at the man he says "created, fed, defended ... a monster," the Alternative Minimum Tax -- none other than (drumroll please): that's right, Charlie Rangel!

Is this better than Novak or what? "Hold" on -- let's be fair minded and consider Mr. Norquist's three claims on the merits:

• Created: Norquist notes, "The AMT was created in 1969." Charlie Rangel was elected to Congress the following year.
• Fed: "In 1986, he voted to raise the AMT rate to 21% [from 20%]. Mr. Rangel did not vote for an increase in the top rate to 24% that followed, but he joined President Clinton in raising the top AMT rate all the way to 28% in 1993." Norquist credits Charlie with a lot of authority on this issue, more than the chairman of Ways and Means in 1986 and as much as President Clinton in 1993, during a period when Rangel was rank-and-file on the committee.
• Defended: Rangel? When? I guess Grover missed this post-election memo: "Rep. Charles Rangel, [incoming] chairman of the Ways and Means Committee in the House of Representatives, calls for the newly Democratic-led Congress to abolish the Alternative Minimum Tax (AMT) as a top priority."
• Glass Houses: Oh, Grover, Titan of Tax, where have you been lo these seven years, when the greatest tax-cutting president in American history, George W. Bush, easily could have shown a little leadership and gotten AMT reform done? Instead, talk about care and feeding of the AMT monster: Bush Proposes $60 bn. AMT Tax Hike

Following up on the letter we reported was distributed this week from 300 organizations urging members of Congress to close the carried interest tax loophole, a working group of policy analysts has released a paper for advocates, legislative aides and members of the media.

The paper, "Addressing Objections to H.R. 2834 — the Levin Carried Interest Bill," demystifies objections to the bill raised by private lobbyists defending the carried interest loophole and offers responses to those objections.

The paper concludes, "The bottom line is millionaire fund managers should not be able to pay a lower tax rate on their income than the people who clean their offices and answer their phones. It really is as simple as that."

Contributors to the paper include: Professor Lily Batchelder, NYU School of Law and Tax Policy Center; Jonathan C. Goldstein, Thacher Proffitt & Wood LLP; Heather Slavkin, AFL-CIO; Steve Wamhoff, Citizens for Tax Justice, and yours truly.

Prompted by right-leaning Atlantic Monthly blogger Megan McArdle's criticism of Jon Chait's The Big Con: The True Story of How Washington Got Hoodwinked and Hijacked by Crackpot Economics, left blogistan has fired off a volley of posts refuting McArdle's assertion that free-lunch supply siders are an obscure, rare breed.

McArdle:

I'm diving into Jonathan Chait's piece in The New Republic on how a whole huge conspiracy of crazy supply-siders has taken over the Republican party. This is, to put it kindly, wildly overblown. I mean, I'm all for someone taking on the sillier kind of supply siders who fanny about claiming that tax cuts increase tax revenue, but they've been rather thin on the ground lately. Most tax cutters today want tax cuts because they think they are good for the economy, not because they think that it will increase tax revenue.

Kevin Drum:

The problem, as Chait says, is that virtually no one in the Republican Party does believe [a 5% tax won't cripple the economy]. George Bush doesn't believe it. Dick Cheney doesn't believe it. Newt Gingrich and Dick Armey and Tom DeLay didn't believe it. And judging by the astonishing pander-fest that takes place whenever taxes are mentioned in one of the Republican debates, not a single one of the Republican presidential candidate believes it.

And then there's the Wall Street Journal editorial page, which routinely suggests the nation will collapse if taxes are raised. There's the Club for Growth, ditto, plus Rush Limbaugh and his clone army. And there's Grover Norquist's tax pledge, signed by virtually every single GOP member of the House and Senate.

Matthew Yglesias:

Meanwhile, the reason people like Jon and I and other liberals spend so much time pointing out that this claim is false is precisely the same as the reason conservatives spend so much time defending it: it's an extremely potent political claim.

There's a systematic effort by the right to convince people that tax cuts are not merely beneficial in some ways or beneficial all things considered but that there are actually no tradeoffs whatsoever. Getting that idea taken seriously in the press is very powerful politically, so those of us who don't approve of the tax cutting policy agenda are very upset about the ability of conservatives to get away with making it, over and over and over again.

Also, go check out Brendan Nyhan's compilation of President Bush and VP Cheney quotes on how tax cuts pay for themselves.

Does anyone really like the IRS' private debt collection program except the folks who are making money off of it? Apparently not. Yesterday, the Taxpayer Advocacy Panel, an independent federal advisory panel made up of taxpayers from every state, released recommendations that the IRS "abandon all plans to outsource any taxpayer debts and restrict collection activities to properly trained and proficient IRS personnel." It's pretty clear where they stand on the program.

The Taxpayer Advocacy Panel also stressed other concerns about the program, particularly that private collection agency staff had different values and attitudes in approaching debt collection, which hurt customer satisfaction and service:

The collection agency staff did not share the same values and partnership attitudes that were practiced by the employees of the selling organization. Over time, the function of managing the contractor's collection activities became more time consuming than handling the function internally.

Add yet another group to those fighting against this program. Let's hope its days are numbered.

More than 300 state, local, and national organizations sent a letter today to every member of Congress, urging them to support H.R. 2834, the bill intoruced by Rep. Sander Levin (D-MI) to close the tax loophole that allows fund managers to pay capital gains tax rates on the portion of their compensation for management services known as "carried interest." There is no other profession or sector that enjoys this tax preference.

OMB Watch is pleased to be among the letter's signatories. The issues involved -- tax equity and fiscal responsibility -- are close to the core of OMB Watch's mission.

The letter is timely, arriving at congressional offices the day before both the House Ways and Means and Senate Finance committees will be taking up carried interest and related tax equity issues at hearings tomorrow at 10 a.m.

For the Carried Interest sign-on letter, click here.

For the OMB Watch press release accompanying the letter, click here.

Although it hasn't provided a scoring of the proposal by Rep. Sander Levin (D-MI) to close the carried interest tax loophole, the Joint Committee on Taxation released two documents yesterday on various aspects of the current tax treatment of carried interests.

Present Law And Analysis Relating to Tax Treatment of Partnership Carried Interests and Related Issues, Part I provides:

• background information about carried interests and going-public transactions of partnerships involved in private equity, hedge fund, venture capital fund, and similar alternative asset management and financial advisory business activities
• economic data relating to partnerships, and to private equity, venture capital, and hedge funds, and certain carried interests
• a description of present law relating to Federal tax rates for individuals, tax treatment of partnership profits interests for services, and tax rules relating to compensation and employment tax
• a description of present law relating to taxation of partners and partnerships, including publicly traded partnerships, and compares the tax treatment of taxable corporations and of passthrough and untaxed entities
• a description of recent legislative proposals

Present Law And Analysis Relating to Tax Treatment of Partnership Carried Interests and Related Issues, Part II provides:

• background information about offshore structures for private equity, hedge fund, venture capital fund, and similar alternative asset management and financial advisory business activities
• background information about tax-exempt investors and unrelated business income tax, foreign individual investors and income effectively connected to a trade or business, and deferral of income of managers
• a geographic distribution of hedge funds and private equity funds