ataxingmatter

Payroll Tax Cut -Keystone vote up Saturday at 9 in Senate

Apparently, Senate leaders on Friday ironed out the difficulty between the GOP and the Democratic party.  The GOP got most everything it wanted, and the Dems got just barely more than nothing.  That's the way "negotiating" seems to go in the Congress these days.  The right demands and demands and demands and gets most of it by obfuscating and obstructing. 

This time the Dems were worried about not getting a spending bill.  So while the House passed a spending bill to carry the Federal Government through September 2012, the Senate caved on all the things they'd said they wouldn't cave on--like the ridiculous provision for expedited approval of the Keystone Pipeline.  All to get just a 2-month extension of the payroll tax cut and expanded unemployment benefits--which the GOP knew it could not afford not to pass, no matter what.  And Obama has already flipped on his earlier looks-like-he's-finally-figured-out-how-to-stand-tall position that he would veto any bill that carried the expedited Keystone approval provision.  See Steinhaur & Pear, Senate Agrees to a Two-Month Extension of the Tax Cut, New York Times (Dec. 16, 2011). 

The GOP continues to call the Keystone pipeline project a "job creator", even though it will create no more than 50 permanent jobs, at a considerable environmental cost.  Schumer calls the Keystone provision a "Pyrrhic victory" for the GOP, because he says Obama will not approve it if pushed.  That's not so clear to me.  Schumer also spins the cave-in as a victory for Dems! saying that the GOP won't have the leverage of the need to pass a spending bill when this issue comes back.  See  Rubin et al, U.S. Senate Leaders Agree on Two-Month Payroll Cut , Bloomberg.com (Dec. 16, 2011). 

Again, past experience suggests this may be too rosy an assessment.  There were commentators who thought that surely the Congress would not pass further tax cuts after the 2001 tax cuts resulted in large deficits but instead we got the 2003 bill and the 2004 tax giveaway for corporations bill and many others, with the deficits mounting with each one.  One would have thought that the sunset of the various Bush tax cuts in 2010 would have been a perfect time for the Dems to develop a spine, but they didn't.  And the Dems weren't even able to pass a bill ending the carried interest subsidy for hedge fund managers, in spite of the Great Recession and the need to reign in financial institutions.

The Senate bill will apparently at least not include some of the bad stuff  that was in HR 3630 as passed by the House--it is "scaled back" so it looks like medicare premiums won't rise for seniors, and  the GOP won't win its attempt to end medicare's coverage of outpatient rehabilitative therapy for stroke victims and medicare payments to doctors will not be affected.   Nor will it include the "extensions" of expiring tax provisions like the R&D credit or the active financing exception for the financial  industries' deferral of its offshoreprofits.  Id.

The Senate bill will apparently be paid for by raising the guarantee fees for Freddie and Fannie, something that was included in HR 3630.  Id.  Vote is to take place at 9 am Saturday.

GOP's payroll tax cut bill (with a lot of other stuff) up for vote on Tuesday

[edited 2 pm 12/13 to provide additional links to news coverage of some of the changes]

Congress has been playing politics as usual over the few policies that are on the table that have a real chance of assisting, to some degree, the plight of ordinary Americans and perhaps even the slow recovery that is still trying to gain steam--extension of the reduction in payroll taxes (from 6.2% to 4.2%) and extension of unemployment compensation.

The Republicans have refused to pay for these common sense tax reductions for ordinary Americans with a similarly common sense tax increase on the wealthiest Americans who have continued to capture all the productivity gains in the economyt.  Republicans in the House think that these kinds of provisions should be offset by more goodies for the "uberclass"--at least as evidenced by the H.R. 3630, the bill introduced by Dave Camp (R-MI) and to be voted on today at about 4:30 pm. 

• It would restructure unemployment compensation in ways that add hurdles and make it less likely that unemployed Americans will qualify--providing more state flexibility and experimentation (including paying employers to cover part of cost of wages exceeding the recipient's prior benefit level), permitting demeaning drug testing of all unemployment compensation recipients (section 2127), and requiring a high school diploma or participation in state "reemployment services" for which recipients may be charged up to $5 weekly out of their unemployment compensation.  It would severely curtail the total number of weeks for which federal unemployment assistance is available--moving to a 59-week limit from a 99-week limit.  Methinks I see Scrooge here.....
• It will interfere with the Environmental Protection Agency's ability to regulate, letting corporations continue to harm the environment at the expense of ordinary Americans.   See Subtitle B.  Section 1102(b) lists rules that are "stayed" by the legislation and provides that no new rules can have an effective date earlier than 5 years out and requires consideration of various factors in determining that date.  Further, it requires adoption of the laxer 2000 definitions for certain key terms and the imposition of the "least burdensome" among potential regulatory alternatives.  This is a key cave-in to corporate polluters. 
• It will expedite the KeystoneXL pipeline by requiring a permit to be issued within 60 days unless within that time the President determines that the pipeline will not serve the national interest (in which case within 15 days the President must provide various committees and members of Congress a report justifying that conclusion from various perspectives).  It indicates that the environmental impact statement from August will be treated as satisfactory for environmental and historical preservation purposes and shall not have to be supplemented if there are modifications to the plan  and no further federal environmental review shall be allowed.  This is a clearly ideologically driven provision, failing to give due regard to the potential longterm environmental impact on drinking water aquifers or historical preservation impact. 
• It would provide yet another tax reduction for US corporations that have paid less and less taxes over the last decade, with a renewal of the ill-advised 100% expensing provision in section 168(k)(5) (along with the alternative of accelerating AMT credits)
• it makes further changes to medicare such as applying a cap to hospital outpatient therapy services and reversing part of the Health Reform Act passed earlier, by permitting new doctor-owned hospitals and permitting existing ones to expand, even though it has been shown that such hospitals spend more on testing and procedures (and profit more from them).  See, e.g., Pear, G.O.P. Bill Would Benefit Doctor Owned Hospitals, New York Times at A24, Dec. 13, 2011.
• it would continue funding for the "healthy marriage and responsible fatherhood" initiative, see 42 U.S.C. section 603(a)(2)  (the cynic in me suspects that these funds primarily go to programs supported by religious institutions and that they proselytize more than they teach reasonable relationship skills)
• it includes an extensive section remaking flood insurance provisions, including, in section 3005, lifting the cap for premium increases for flood insurance from 10% to 20% (an apparent boon to insurers), and another section prohibiting the administration from "disregarding" any levee or floodwall, even if it is not accredited.  The goal, made clear in section 3009, is privatization of the national flood insurance program.
• It includes extensive broadband spectrum auction provisions in Title IV, Subtitle A, reallocating spectrum from federal to nonfederal use.  These provisions, among many detailed ones, e.g., permit private administrators of state public safety networks to use the public spectrum for private purposes as well as the public safety  purpose and prevent states from denying requests for modifications of existing wireless towers that do not substantially change the physical dimensions thereof.
• It increases the guarantee fees charged by Fannie Mae and Freddie Mac.
• It requires a social security number for the refundable child credit
• It provides in section 5895 a 100% tax on "excess unemployment benefits" that go to millionaires (unemployment compensation is reduced proportionately as the adjusted gross income increases from $750,000 to $1 million)--The Times today has an article on the bill and notes that the number of millionaires receiving unemployment compensation is very small, but that their participation is predicated on the fact that the unemployment compensation program is a type of insurance into which payments are made to cover payouts.  Means testing such insurance programs is in sync with the right-wing goal of means-testing as a prelude to privatizing and/or eliminating all federally administered social welfare insurance programs, such as medicare and Social Security (and, see above, national flood insurance).
• It increases pension contributions from longterm federal workers by .5% a year for 2012-2014 and for those "secure annuity employees" with less than five years of service, by more than 10% a year and using 5 year average pay rather than 3 year average pay, sets annuity amounts, and ends the annuity supplement for post-2012 retirees.
• it extends the general freeze on federal pay for another year
• It increases the premiums for Medicare Part B and Part D for those making $80,000 or more (for those making $200,000 or more, the applicable percentage is 90%)--this again appears to move these national social welfare insurance programs towards more means-testing that will facilitate privatization or eventual elimination. 
• It sets up a number of procedural hurdles in the Senate, which is already hogtied by the ease with which a minority of its members can filibuster and thus stop legislation that is supported by a solid majority of its members.  For examples,
  • it requires a 2/3 vote in the Senate to amend the dates for section 601(c) of the 2010 Tax Relief Act--that's the temporary employee payroll tax cut;
  • it provides that a point of order by any Senator against an emergency designation in a bill eliminates that designation and makes it impossible to bring the designation through a floor amendment unless there is a supermajority 3/5 vote in favor of doing so (limiting debate to 1 hour)--thus one right-wing Senator intent on obstructionism can make it very unlikely that an important provision can pass by preventing even reasonable debate about the importance of the provision!

The GOP, of course, touts its bill as creating jobs.   While the Keystone pipeline may create some short-term jobs (the New YorkTimes reports estimates from Transcanada itself  and the State Department of only about 6500 temporary construction jobs  and maybe 50 permanent new jobs--see Keystone Claptrap, Editorial, New York Times at A34, Dec. 13, 2011), the potential negative impact on aquifers could be life-threatening.  Most of the other provisions are Scrooge-like additions of hurdles and caps on social welfare provisions or attempts to roll back the social welfare insurance provisions into means-tested ones that will be even more susceptible to the derogatory and inflamatory class-action warfare that the right has increasingly unleashed on anything that doesn't give a break to the wealthy and corporate clients of the all-powerful Washington lobbies. 

On lobbies, just read the New York Times article about the wealth that online educators are getting from state and federal taxpayer dollars for delivering no or sub-standard education, and the amount of taxpayer money being spent on lobbying to ensure the continuous flow of that wealth.  See Saul, Profits and Problems at Online Charter Schools, New York Times, Dec. 12, 2011.  It's obvious that the corporatist agenda sees no problem with siphoning off taxpayer dollars for private benefit with little public good created, but complains mightily about any siphoning off of exorbitant corporate profits--that tend to go to wasteful excess managerial compensation or portfolio enhancement--for taxes intended for public benefit.

The inclusion of the Keystone and other right-wing-rhetoric-driven items in a bill to provide the payroll tax cut and a limited unemployment extension (with hurdles) demonstrates the absurd level of ideological partisanship engaged in by the House Republicans.  Senate Majority Leader Reid characterized the bill as loaded with "ideological candy" that the Senate would reject.  Sloan & Rubin, House to Vote on Payroll Bill as senate Eyes Tax Sweeteners, Bloomberg.com (Dec. 13, 2011).    Of course, most of the sweeteners that Reid proposes adding are components of the right-wing corporate-friendly agenda--like the R&D credit that rewards what companies do anyway; the active financing exception for big banks, insurers and other financial institutions that lets them defer taxation on their financing income earned overseas; and accelerated depreciation for restaurants and motorsports tracks that provide special tax subsidies to particular industries!

It's the Jobs, Stupid--support for the unemployed, not repatriation tax holidays for multinationals

Mark Thoma over at Economist's View has an interesting graph on the topic of "how long will it take the labor market to recover?" (Oct. 9, 2011).  Although September's news was not as bad as expected--110,000 jobs created and thus official unemployment rate of 9.1% holding steady--it is still a far cry from good news. 

I'm pleased to report that Detroit is doing better than expected.  While its unemployment rate is still above the national average, it has come down faster from its exceptionally high rate.  And the people that I know best that were hardest hit are now back at work.  One worked for a business that made auto parts, and had been laid off for three years.  He got his old job back three weeks ago and has been estatically working overtime until he is too tired to get up on a Sunday morning!  The other is a construction worker who has suddenly gotten more potential jobs than he can handle.  Great news.  They and their families can now breathe somewhat of a sigh of relief.  They can afford a few new things for the kids and can worry a little less about where the next mortgage payment is going to come from.  They are out there buying groceries and clothing and gas at a higher rate than before, and that puts more dollars in the cash registers of local businesses.  A win all the way around.

That's why the most important thing for Congress to focus on right now is jobs.  That means funding unemployment insurance to keep the long-term unemployed on their feet looking for jobs and still buying food and clothing for themselves and their kids.  It means thinking about PROVEN measures that stimulate jobs should be up there with fairness in thinking about tax policies.  So Congress should continue the most important tax breaks for the part of the working middle class that is struggling the most--payroll tax reductions.  It ought to mean paying attention to labor laws and redressing the current imbalance that allows employers to intimidate workers who want to unionize and make it close to impossible for the union organizers to meet with the workers.   Unionization rights need to be updated to account for the fact that we are no longer a close-knit bunch of workers in the same geographic space but often communicate more by email than by talking in person--so card voting should be allowed.  And guess what--it also ought to mean ensuring that the already struggling middle class does not have to worry about the potential loss of Social Security and Medicare benefits.  The government should reaffirm that these earned benefits are earned, and not going to be taken away. 

Of course, one of the best ways to do that for Medicare would be to move to a "medicare for all" system that would (i) allow the government to be much more effective in controlling price increases; (ii) ensure that everyone had decent health care, whether or not they had a job; and (iii) permit employers to let the government handle health care while the savings mean more employees can be hired.

But that does NOT mean passing more tax breaks for businesses as indirect (and not very cost-effective) stimulus for jobs.  Prime example--the ineffective, costly, and Big Company-favoring "repatriation tax holiday" for which multinationals like Google and Cisco have been so assiduously lobbying--the very companies that have most easily artificially shifted their income offshore by claiming to sell their intellectual property cheaply to offshore affiliates (and getting by with it because of ridiculous transfer pricig rules that make it possible).  We already know repatriation is a very ineffective way to create jobs.  It would be foolish to repeat a past mistake that simply led more companies to offshore more money in anticipation of successfully lobbying for yet another repatriation holiday.

It should even mean cleaning up some of the obvious fairness problems in the tax code that favor the rich and uberrich--e.g., the carried interest provision (a no-brainer, since there's really no logic in private equity fund managers getting capital gains treatment for their managerial work, the treatment of profits interests in partnerships has long been rife with self-interested Wall Streeters setting the scope of the rules, and when ordinary workers have troubling just making ends meet, it is obscene for professional asset managers to be preferentially treated as to their compensation income).

Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 passes

No big surprise here.  The House on December 16 passed the Senate-approved TRA by a vote of 277-148, clearing it for the President's signature.  The bill extends the Bush tax cuts for two years and reduces the number of estates subject to the estate tax, and the rate of tax when they are taxed, even below the number subject to the tax in 2009.  It includes the usual "patch" for the AMT for two years, and various tax breaks for businesses--especially expensing provisions that will likely merely result in more pay to managers and more payouts to mostly wealthy shareholders.

Those most vulnerable get the relief from the lower rates (not many dollars for them, of course), the 2% cut in the payroll taxes, and the extension of unemployment compensation.

Those at the top of the wealth and income heap who have garnered almost all the benefits of productivity gains in the economy over the last few decades get most of the benefit of the bill--tens of thousands of dollars of tax relief for the top 20% of the income distribution, substantial estate tax reductions, and none of the burden-sharing that progressives had advocated (such as the carried interest treatment as ordinary income).  The bill even provides what amounts to an interest-free loan to the wealthy who convert regular IRAs to Roth IRAs--the "deal of the century" according to one CPA who services the wealthy.  See Leondis, Tax Measure Gives Deal to Wealthy Roth IRA Converters, Bloomberg.com, Dec. 17, 2010.  And of course, the bill also lets the wealthy transfer up to $100,000 from regular IRAs to charities without paying the income tax they should have to pay on the appreciation. 

All in all, the wealthy made out like bandits in the tax bill.  And in many ways, that is the appropriate way to view them--they have stolen the sustainable livelihood of the middle and lower classes for two decades and are rapidly moving into position to become a ruling oligarchy.  The bill was a big win for corporatism and the wealthy on the right.

More on the White House "deal" on tax cuts

Dan Shaviro, a colleague at NYU, ends up being hopeful about the Obama-GOP deal.  See "The deal on extending the tax cuts", Start Making Sense, Dec. 6, 2010 and "The tax cut deal: too soon to tell who really won?", Dec. 7, 2010.  I think that is because Dan tends to credit Economics 101 with considerably more wisdom than I do (and place "efficiency", as defined by the free marketers, higher on the wish list for tax policy than I), so he thinks Social Security isn't on a sound footing and that benefits will need to be cut; thinks expensing for corporations is a reasonable way to spur growth; thinks there is some possibility that the 2012 replay of "Bush tax cuts, take 2" might play out in favor of Obama if he is "very clear that he planned to veto any extensions and let all the tax cuts expire UNLESS the Republicans made the deal he requires".  I'll intersperse my comments with Dan's below.

1) extending all the expiring individual rate cuts for 2 years:

Dan says "we knew this was going to happen" so the only problem is that it comes up again in 2012 when Obama will "might face extra credibility problems".

I think we only knew this was going to happen because Obama didn't fight on this at all.  Obama signalled at the beginning that he would cave, and he did not take to the bully pulpit at all.  He conferenced with Republicans and cut out the Democratic leadership in reaching his "deal"--which is a Republican policy in everything but name.

2) extending unemployment insurance through 2011:

Dan says it is an important stimulus and "wasn't going to happen otherwise." 

I agree on the stimulus.  But the Dems should have brought unemployment extension up on a daily basis and forced the Republicans to vote against it.  So the "wasn't going to happen otherwise" is part of the give-up before you start negotiating that got us into this mess. 

3) reduce the Social Security payroll tax by 2% for one year:

Dan says "good stimulus" though "targeting could have been a lot better" and admits my point (made when payroll holidays were first brought up) that the payroll holiday feeds into the drive to decimate Social Security by hitting the Trust Fund.  But Dan thinks the "concern" about long-term fiscal problems is real, and so is comfortable with addressing it "sooner" anyway.

I disagree. The concern about Social Security is being hyped in order to destroy Social Security as we know it.  It is in line with the enmity towards unions, towards single payer health care, towards re-regulation of the banks, towards breaking apart big banks, and towards any other policy that would restore a vibrant middle class.  By allowing a payroll holiday for everyone, the majority of the benefit goes to people who don't really need it, and too little benefit goes to those who do.  Targeting is better than a tax cut purely for the rich, but that isn't saying much.  Doing some stimulus in a means that pushes the GOP agenda to eviscerate Social Security forward is like tying one hand behind your back--a rather unwise way to enter a long-term battle for the economic future.  Will we have the brutal mix of casino and winner-take-all capitalism that has driven most of this country's policies from Reagan on or will we have a tempered capitalism that ensures a broad-based growth and creates an economic system that works for everyone?  The Republican's aims to let states go into bankruptcy and use that mechanism to destroy public employee unions says they are in this battle to destroy the New Deal if they can.  We need to fight just as hard on the side of the middle class.

4) Estate tax cut by increasing the exemption from the 2001 level to $5 million (basically 500% of the 2001 amount) and lowering the top rate to a mere 35%.

Dan thinks this might actually be preferable "in efficiency terms" to the current law, which would have restored 2001 rates in 2011, if done in a "distribution and revenue neutral framework".  And even though this isn't that, he doesn't think a more progressive estate tax "is long-term feasible anyway."  So this is not "a terrible outcome in a realistic overall sense."

Here we part ways 100%.  There is no such thing as a distribution and revenue neutral framework--that is a fiction of economics 101 that permits what we have seen, which is four decades of redistribution upwards.  Further, distribution neutral is not desirable in an economy where the winners already take all--if we don't reverse the direction of distribution in this economy, we will end up in oligarchy (if we aren't there already).  In that context, this was the single most viable opportunity for reinstating an appropriate estate tax, either by letting the Republican-passed law take hold (return to 2001 exemption and rates) or by passing a slightly modified but ideally more progressive version (higher exemption but progressively higher rates beginning at 45%).  This is indeed "a terrible outcome in a realistic overall sense."

5) extensions of the EITC, tuition tax credit and expensing (as well as the R&D credit, not mentioned by Dan 

Dan says that the EITC and tuition tax credit are okay because they may add progressivity and the expensing provision is okay as a short-term stimulus.

The EITC is okay.  Tuition tax credits just subsidize the things colleges spend money on that they don't want students to have to feel they are paying for--like too high administrative salaries (across-the board, at private and public universities).   We ought to fund higher education at public institutions, but with conditions, such as limiting the percentage of total budget spent on administration or on the revenue sports, etc.  As for expensing, it is unclear how it can be stimulative in this context, when the reason companies aren't expanding is because they don't see a demand for the business.  Most companies have the cash on hand and can borrow at a funding cost that is extraordinarily low.  That isn't what is holding back investment.  Odds are, the savings from expensing will just go to another round of higher manager salaries and big payouts to shareholders (who will also continue to benefit from an extraordinarily low dividend and capital gains rate under the deal).

Dan seems to think that Obama will be able to argue credibly that "this time I mean it" when it comes to the 2012 election and the Bush tax cuts are ready to expire once again.  Fat chance. There's nothing so far to convince anyone--Obama caved before fighting on the public option and on taxes for the rich and on the estate tax and on capital gains and on carried interest and on and on.  Obama in fact is now pushing his Democratic colleagues to support an agenda that will easily get 100% Republican support and maybe enough reluctant Democratic support to pass, rather than rallying them to fight so that he can veto, if need be, wrong-headed legislation.  So he has proven that the Dems lose in the minority and they don't bother to fight when they are in the majority.  No way his base will trust him to do it better next time around. 

Meanwhile, the GOP is already blaring that there is no way that they'll give an inch on anything.  They won't support the Build America Bond program, because they want states to declare bankruptcy as a means to destroy public employee unions.  And they don't seem to care that they are destroying the American social contract between the wealthy and the rest of us at the same time--we are what we are because we have recognized the importance of a strong middle class that acts as a check on oligarchy.  Yet the Republican party--and now too many Dems--are willing to throw it all away just to get elected one more time (maybe) in the future.

In my view, the American people are the losers here.  The AMT patch primarily helps those with high incomes.  Most of those who pay the AMT because of bracket creep are in the 250-500,000 income range--certainly not middle class.   Only a few are in the 75-100,000 range.  The extension of extremely favorable taxation of secondary market capital gains and dividend income is of benefit to the wealthy who own most of the financial assets.  The extension of the tax rate cuts even below 250,000 already aids the wealthy--adding the tax rate cut at the top means that most of the rate cut goes to the very well off.  This is a very good deal with corporate managers and owners, and rotten for ordinary Americans. It's the upside down world of George W. "the have-mores are my base" Bush.

White House Caves to GOP on Tax Cuts--"change we can believe in" became "I can't"

[edited 12/8/10 to correct typo and awkward wording]

President Obama has agreed with GOP negotiators on a "framework" to extend all of the Bush tax cuts for two years--including a package of cuts for the wealthy and big corporations, getting only extension of unemployment benefits  and the more or less useless "making work pay" credits in return.  He also agreed to a "temporary reduced estate tax" at 35% rate and $5 million extension, as the trade for a payroll tax holiday of 2%.  See Lochhead, Obama Announces Tenative Deal on Tax Cuts, PoliticsBlog, San Francisco Chronicle, Dec. 6, 2010.

How sad.  The death of the estate tax this year is the best opportunity the Democrats will have in the next forty years to get the estate tax right--meaning make it progressive, so that no one in the lower quintiles of the income and wealth distribution will have to pay it (not much chance of that no matter what the final shape of the estate tax is) and so that the wealthy pay a share of their estate upon their death (an increasingly larger share as the wealth of the estate increases) to make up for the fact that almost nothing is paid on their incomes during life.  As noted frequently here, the wealthy in the top 2% or so who may end up paying some estate tax are the ones that own the vast majority of the financial assets.  Much of their income isn't taxed at all--the very wealthy are the primary group that owns tax-exempt municipal bonds and that income isn't subject to taxation.  (In his first year in office, Vice President Cheney had some $2 million of tax exempt interest on which he paid no income tax.)  Most of the rest of their income ends up being taxed at very preferential capital gains rates.  Since the wealthy can control the time of sales of their assets, they generally time them for low rate or for ability to use loses to offset gains, further ensuring that they minimize the taxes paid.  Accordingly, the estate tax serves as a backstop to ensure that they contribute something to the government that has facilitated their wealth.  It should provide a $2 million exemption and a steeply progressive rate (beginning at 45% and increasing to as high as 65% or more).

Further, extending the Bush tax cuts for the wealthy and giving multinationals (who already are enjoying the cheapest borrowing rate imaginable because of the Fed's policies and other benefits) another huge tax break by permitting 100% expensing (at a $200 billion cost) is more of the "winner-take-all" politics that has caused the decimation of ordinary working Americans by giving all the benefits of the tax system to those at the top.  Letting the GOP succeed in extending the cuts on Obama's watch even before the minority becomes the majority in the House in January means Obama now takes credit for the Bush tax cuts and can no longer take the high ground. 

What's even worse is that Obama tried to sell his weak compromise as "an essential step on the road to recovery", saying that these tax cuts have a hand in spurring the private sector to create millions of new jobs and add momentum to the economy.  That's falling into the Republican trap of claiming that tax cuts do a lot to create jobs.  They don't. The rich will invest in businesses overseas or use their money to fund private equity deals that buy out companies so they can lay off workers.  Allowing businesses to expense has been tried for years--it was a huge part of the Bush tax cuts, and they failed on creating jobs.   Expensing doesn't encourage businesses to invest more--they already have more cash on hand than ever so they have every reason to invest in equipment if they need to without the tax subsidy to them.  Infrastructure spending is the best way to create jobs, and while the lower-end tax cuts will help keep spending up, they won't really create any jobs.  It's an oversell that will show win it comes time for the 2012 elections and the vast majority of the American workforce is still suffering while the well-off stay well-off.

What a shame that Obama caves so easily.  Not voting an extension of unemployment benefits wasn't an option for the GOP, so treating that as something "won" in the negotiation is foolish.  Similarly, the payroll holiday--while it will get money in the hands of the working class--is also something that will cause the Social Security fund to run short sooner, giving the GOP even more ammunition to privatize and/or cut benefits, which is their goal.  The Democrats just don't seem to be able to play the politics game well at all. Instead of letting GOP leader McConnell have his ear for the last week, Obama should have been helping to twist arms in the Senate to ensure that all Democrats and some Republicans stood with the American people.

Of course, the pundits recognize that the Bush tax cuts were "incredibly expensive" and "deeply flawed conceptiually" but then assume that "Obama can't afford to let all the $3.3 trillion in tax cuts expire as scheduled on December 31."  I think that is wrong.  I suspect that if Obama and the Dems would force the Republicans to vote (and in the Senate force a real filibuster), they would find that Americans don't get enough dollars in their pockets from the lower-class tax cuts to make that much of a difference.  Let them expire.  Then pass a new tax cut bill in January through a reconcilation measure.

It will be very hard for progressives to support Obama in the future.  If he doesn't have the ability to negotiate with Congress better than he has demonstrated on this issue he comes across as a failure.  And it is a failure that reinforces the "winner-take-all" nature of politics and tax policy that has resulted in banksters making millions while millions of ordinary Americans suffer.  Too bad that the "change we can believe in" president turned into a "sorry I can't" president.

tax cuts and deficit commissions

The game continues, as Republicans hold out for tax cuts for the wealthy (who are garnering increasing amounts of the total income) and various "deficit commissions" put out austerity plans that all call for cutting Social Security benefits and Medicare benefits.

Alice Rivlin, who spoke here at my campus some time ago, seemed clearly to have cutting Social Security and Medicare in mind even then.  See Alice Rivlin on Financial Reform and Deficits, ataxingmatter.  She is now "trying to stir a debate" about a national sales tax, according to Bloomberg.  Przybyla, Rivlin Proposes 6.5% National Sales Tax as Part of Deficit-Reduction Plan, Nov. 17, 2010.  See also Jackie Calmes, New Deficit Reduction Plan from Bipartisan Group, NY Times, Nov. 17, 2010.

Now Rivlin is one of those Clintonites who is a right-center Democrat and, like so many of the Clinton and Obama advisers, close to the banking elite as a former Federal Reserve vice chairperson.  She claims her plan would be good for the country, but it isn't so clear to me.  Growth for growth's sake, we learn, doesn't work very well.  Tax cuts for businesses don't necessarily translate into US economic growth--they may just lead to higher executive compensation and bigger buybacks of shares for shareholders.  Tax cuts for the wealthy don't lead to more jobs:  the claim that "small businesses" are helped when their owners aren't forced to pay the piddling (for them) additional taxes that would be due if the Bush cuts for the wealthiest were not renewed is a farce--there are very few businesses that even fall into the wealthy owner category, and those businesses aren't likely to invest a penny more in jobs just because their owners get even wealthier with bigger tax cuts.

The Rivlin plan is a combination of significant tax cuts (lowering corporate rates, even though corporations' effective tax rates are already at the international norm and perhaps lower if all is taken into account), freezing domestic spending (even though the unemployed, underemployed and vulnerable elderly and poor will need more support, not less, and even though infrastructure projects require additional funding and everything from education to food and drug inspection to disease control are already short-staffed); limit federal spending on health care for the elderly while raising Medicare premiums, eliminate most deductions and credits, cut the Social Security benefits (changing the cost-of-living adjustments and reducing growth in benefits for the top 25% of beneficiaries), give a one-year Social Security payroll tax holiday (aimed, I wager, to make Social Security look like it is insolvent and therefore in need of cuts and privatization), and add a national sales tax of 6.5% (terribly regressive).

The claim is that this combination of tax and spending cuts with the sales tax will increase economic growth and therefore create jobs.  I'm not convinced. 

Even Bloomberg's reporter recognizes that the real purpose of these sorts of trial balloons is to "paint[] an even starker picture of the measures needed to tame the debt" and thereby "sell unpopular remedies".    Aha.  The real purpose for Rivlin's new visibility is as the "bad cop" of the bad cop-good cop act that has as its goal to sell Americans on the need to end Social Security as we know it, to cut back on our societal commitment to provide decent medical care to the aged, and to carry out even more tax cuts for the benefit of our growing oligarchic class.  Yet the Social Security funds--paid in by workers and their employers--have been used to reduce the federal operating deficit for years, a process that was carred to extremes under Bush to fund the Bush tax cuts and the Iraq and Afghanistan wars.

 
Source: OMB via Huffington Post

Why doesn't Rivlin just support changing the current funding mechanism for Social Security so that it will be a tax on 100% of wages and on capital gains, as is Medicare?  Why not support nonrenewal of the tax cuts for the wealthiest Americans?  Why not support continued tightening of the corporate tax code, including restrictions on tax-free reorganizations that permit US multinationals to grow bigger and richer and more powerful (and too big to fail)?  Why not recognize that the deficit isn't nearly as bad a problem as the increase in inequality in our country and the potential for an oligarchic takeover of our society? 

Aren't jobs the real need, whether or not we do something now or later to limit the deficit?  Shouldn't we spend money to create jobs, if we have to?  Infrastructure and education are two public goods that the government can fund while at the same time creating jobs.  We can worry about the deficit later.  Or we can just decide not to renew any of the Bush tax cuts.  Nobody was clamoring for tax cuts when the Republicans pushed the first through in 2001, so let them go and we'll all be back more or less where we were then.  We'll manage.   If you don't think so, look at this Tax Policy Center (Urban Institute/Brookings Institution) analysis of the impact of the expiration of the 2001-2003 Tax Cuts.  Extending the cuts would result in an average effective tax rate reduction for all taxpayers of 2.7 percentage points ("current policy") compared with letting them expire ("current law").  Renewing the cuts gives the biggest cuts, both in dollar and percentage points, to the highest income taxpayers.

 

 

If raising taxes on the rich is not possible politically now and raising taxes on the middle class possibly hard on the recovery, then at least do nothing other than extend them for a year or two while the country gets back on its feet.  And then let them go, along with a repeal of the preferential rate for capital gains and the extension of Social Security to full income.  Problem solved, and people put back to work. 

Meanwhile, the Republicans are intent on letting the deficit go wherever so long as they can get the tax cuts they want most--for the wealthiest taxpayers amongst us. See, e.g., MichaelTomasky's Blog, Tax Battle Lines Drawn (Nov. 17, 2010).   Camp, Republican from Michigan, says the GOP would be "foolish" to go along with any idea to renew tax cuts for 80% of Americans without giving a tax break to the wealthy at the same time.  Everybody knows that the GOP wants to make those Bush tax cuts that were designed to expire into permanent reductions in tax revenues.  See e.g. (but note my "caution" below),  Will Obama Extend the Bush Tax Cuts?, Human Events (Nov. 16, 2010) (indicating that "Republicans said they are still determined to make all of the Bush tax cuts permanent, rejecting White House overtures to decouple the top rates for a shorter extension").  And the biggest beneficiaries are the GOP's primary backers--the wealthy and big business--not the jobless.  See, e.g., "GOP to Jobless: Drop Dead", Washington Post (Nov. 16, 2010).

(CAUTION--the "human events" blog just cited is a right-wing propaganda sheet scattered with contextually faulty or otherwise typically misleading statements , such as claiming that the scheduled expiration of the Bush cuts "could plunge the economy into another recession" or quoting Michael Steele in saying that the Republicans are fighting to "permanently stop the Democrats' tax hikes" --even though, of course, the scheduled expiration of the Bush tax cuts was designed by the Republicans as a way to fool the people about the actual multi-trillion-dollar cost and if the expiration of the Bush cuts according to schedule is a tax hike (which I'd dispute), it is a Republican one and not a Democratic one). 

Polls fairly consistently show that Americans think at least the cuts for the wealthy should expire and possibly the cuts for all of us.   A recent poll shows that about a third of Americans think we shouldn't renew any of the tax cuts, and another third think that at least we shouldn't renew the tax cuts on the wealthy--that means that there's a 2-1 vote against renewing the tax cuts for the wealthy.   See Steinhauser, Do Americans Want to Extend Tax Cuts for the Wealthy?, CNN Politics, Sept. 14, 2010.  As noted in that article, another poll  (Gallup/USA Today)showed 44% want to roll back the cuts for wealthy Americans and 15% want the cuts to expire for everybody (including wealthy Americans), so also a 2-1 vote against renewing tax cuts for the wealthy. 

And rightly so.  Because there is no way that renewing the tax cuts will be a significant stimulus to the economy nor any way that failure to renew them will hurt "small businesses".  See, e.g., Fisher, The Economics of Extending Bush's Tax Cuts.  On the other hand, not renewing the cuts for the wealthy would do wonders for the economy--it would give us about $800 billion over ten years, "enough to pay for all veterans' hospitals, doctors, and the rest of the Veterans Affairs health system, plus the United States Coast Guard, plus the Food and Drug Administration, plus the operation and maintenance of every single national park for the entire 10-year period--with more than $100 billion left over." Id (quoting Michael linden at the Center for American Progress).

ABA TAx Section Pronouncement on Carried Interest

The American Bar Association Section of Taxaction has issued a letter on Comments on Carried Interest Proposals in senate Amendment 4386 to H.R. 4213 (Nov. 5, 2010). 

 As many are aware, a letter from the officers of the ABA Tax  Section is one that has been developed by a relatively small group of participants and submitted to the council of officers for approval.  Most members have little opportunity, if any, to comment on the statement, though one can assume that in many cases the statements are likely to represent the views of a majority of the membership.  The leadership is not likely to step lightly into territory that they do not think would be supported by a majority of the membership.

This letter went to the current chairs and ranking members of the House Ways & Means Committee and the Senate Finance Committee, with copies to staff directors as well as the Chief of Staff for the Joint Committee on Taxation.

The letter makes  recommendations about the proposed statute, which would apply to service partners in investment service partnerships to characterize income allocations as ordinary compensation income and defer losses, and impose self-employment tax on the service partner interests in such partnerships.

Preliminarily, it reiterates a position stated in prior comments that taxation of carried interest adds "burdensome complexities" and "alters fundamental principles of partnership taxation" and should therefore be reconsidered.  Not a surprising position for tax lawyers.  We are in most cases as self-interested as the next guy or gal.  This provision would result in increased taxes for fund managers in partnerships that have claimed a significant rate and deferral preference for their income from services compared to the ordinary treatment of wages paid for services to less advantaged workers.  And of course there is a good bit of work for tax lawyers developing partnership agreements and doing adquisition and other tax work for private equity funds and other investment partnerships that have taken advantage of this "loophole" to create significant wealth for these managers. These service partners may earn this kind of compensation in the hundreds of millions of dollars annually.  It is very big business. 

Nonetheless, there is an essential fairness issue at stake.  If you are relatively rich and a part of the financial institution world of investment partnerships, you can earn a very very good "salary" for your work but get deferral advantages compared to ordinary workers and preferential rate treatment, paying much less in income taxes than ordinary workers.  It is hard to see how, in conscience, Congress can avoid enacting a carried interest provision that will undo that unfair advantage.  And since it will likely raise revenues in an era of much complaint about deficits and debt ceilings, what's not to like?

Secondly, the letter suggests that, if a carried interest provision is nonetheless to be adopted, the proposed statutory language is inadequate to the task.  It urges modifications to the scope of the proposal and to the treatment of qualified capital interests. Among other things, as to scope

• the letter claims that the proposal does more than tax the compensation element as ordinary income, because of the application of loss deferral and manadatory gain recognition for C corporations.  Yes, the proposal does do more than just deal with the rate issue, since it also addresses deferal and required gain recognition.  Why is that inappropriate?  The letter doesn't say.
• The letter includes in the "scope" discussion the recommendation that "small businesses" be exempted from the provision because of the purported burden of compliance.  This is similar to the attack on many other business tax provisions--the argument that "small businesses" should be exempt because it is too complex for them.  But that is questionable here.  Businesses that use the service partner loophole already have been dealing with complex partnership allocation and distribution provisions.  This proposal has been gathering steam for some time, so that they should be prepared to deal with it.  They are well aware of the preferential treatment that the partnership arrangement currently provides and quite likely chose partnership form in order to get that treatment (among other advantages), despite the complexity.  They generally will have a firm that handles the tax matters for the partnership anyway, so this does not really add to the burden on the business.  This has the appearance of a red herring argument--as it usually is  when "you should eliminate the tax because the burden of compliance is too much" arguments are used against everything from the estate tax to the demand for 100% expensing. 
• the letter criticizes the provision that treats all tiered partnerships as "bad" assets for these purposes.  It suggests instead a look-through approach.  There may be merit in that though there is a trade-off in the increased complexity due to the look-through rules.  Again, note that when it is to get a benefit for taxpayers, proponents tend to disregard the added complexity...
• the letter argues for a provision to end the service partnership taint if the interest ceases to be an investment service partnership interest.   Taints often carry over to ensure appropriate treatment of income over the long term, but it is possible that a cut-off provision would be appropriate.  But again, there is a trade-off in complexity and lack of information about the circumstances in which interests would change into and out of investment service partnership interests.  Without such information, it might be better to stick with the bright-line taint rule.

As to "qualified capital interests", the letter urges a much broader view of qualified capital (amounts as to which allocations will not be treated as compensation income).  For example, it includes the following recommendations (among others):

• The letter urges that a partner who purchases an interest from an existing partner be allowed to treat the purchase price for the interest as qualified capital, rather than merely acceding to the amount of the qualified capital account of the transferor partner.  Note that the norm for capital accounts for purchased interests is that a purchasing partner takes the transferor partner's capital account.  It is not clear why the ABA believes that the additional complexity a purchase-price-capital account determination would make would be reasonable, nor why purchase price should "count" as qualified capital when the transferor partner had a more limited qualified capital account.  Remember that purchasers of interests from interest holders do not add capital to the enterprise--they are merely putting money in the pocket of the interest holder that, presumably at least, the interest holder would eventually have received from the partnership. 
• The letter argues against the treatment of qualified capital as limited to the original capital contribution if the partnership will make disproportionate allocations of income to original service partners once investors join the partnership.  In other words, under the proposed statute, the capital bookup for appreciation in real estate property held by the partnership and allocable to the service partner during startup is not treated as qualified capital when the investors join, but the letter proposes that it should be.   The letter argues that "the value in a partnership at any such time is economically indistinguishable from value held outside the partnership that a partner could contribute in exchange for qualified capital."  Doesn't that miss the point?  If the original partners contribute equally but one provides all of the services for the real estate purchased with that original contribution, then surely the increase in value allocable to the service partner is attributable to the services provided as well as capital.  Tax rules often take an "all or nothing" stance, accomplishing with "rough justice" what would otherwise require intricate bifurcation rules or rough injustice results (here, that none of the increment in value to the service partner would be treated as payable for the services of the service partner).  The fact that a purchased item worth 250 would be "economically indistinguishable" from a purchased item originally worth 100 that has increased to 250 with services from the purchaser misses the point of attempting to account for the compensation received by the servicer the way we account for compensation of others.  And note that the letter's recommended position would result in a significant long-term advantage, in that much more of the "disproportionate allocations" that the service partner will receive henceforward would be attributed to qualified capital rather than payment for services.
• the letter also objects to the inconsistent application of section 752, the rule relating to the treatment of increases and decreases in liabilities, which are viewed (outside of this new statute) as contributions and distributions, respectively.  The proposed provision does not treat increases in the service partner's share of partnership liabilities as a contribution of money to the partnership (created increases in qualified capital), but does treat decreases in a partner's share of partnership liabilities as distributions out of capital, thus reducing the qualified capital account.  The statutory inconsistency reflects many other anti-abuse rules in the Code, such as the ones that disallow loss recognition but permit gain recognition.  While consistency is generally preferable, the ABA tax section should have provided some discussion of the likely rationale for not treating increased liability responsibility as a contribution of qualified capital in these cases, rather than merely arguning for consistency for consistency's sake.

The letter ends with a restatement of concern about increasing complexity.

Mayo Foundation v. US considers Medical Residents and Payroll Taxes: employee or student status paramount

The Supreme Court heard oral argument today in Mayo Foundation for Medical Education and Research v. United States, No. 09-837, a case asserting that the "student exception" in 26 U.S.C. section 3121(b)(10) exempts stipends paid to medical residents from FICA taxes.  For a case analysis, see Mayo Foundation, Legal Information Institute, Nov. 8, 2010. 

Briefly, the case revolves around the categorization of medical residents as "students" or as "employees."  The original case in Mayo was decided at the district court level under old regulations (a case called Mayo I by the Eighth Circuit) and concluded that the student exemption applied.  The IRS did not appeal Mayo I, and decided administratively not to contest the claim of excemption for medical residents prior to April 1, 2005.  As of that date, however, the IRS regulations were amended to provide that medical residents who work 40 or more hours per week are considered full-time employees who are not eligible for the student exception because their services "are not incident to and for the purpose of pursuing a course of study."  T.D. 9167, 2005-1 C.B. 261, 69 Fed. Reg. 76404 (Dec. 21, 2004).  26 C.F.R. section 31.3121(b)(10)--2(e) Ex 4; -2(f); -2(d)(3)(iii) (final regulations effective Apr. 1, 2005).  

The Mayo Foundation challenged the regulations, questioning whether Treasury can "categorically exclude" medical residents from the definition of student, merely because they are also full-time employees.  The district court ruled that the regulation was invalid.  Mayo Found. for Med. Educ. & Research v. United States, 503 F. Supp. 2d 1164 (D. Minn. 2007); Regents of the Univ. of Minn. V. United States, 2008 WL 906799 (D. Minn. Apr. 1, 2008) (concluding, at 1171-77, that the full-time employee exception to the application of the student exception was "arbitrary, capririous, and unreasonable").  The government appealed both decisions, even though the 11th, 2d, 7th and 6th Circuits had already ruled on cases under the pre-2005 former regulations that the FICA statute as construed under the former regulations did not permit a categorical treatment of medical residents as ineligible for the student exception. See 486 F.3d 1248 (11th Cir. 2007); 563 F.3d 19 (2d. Cir. 2009); 557 F.3d 412 (6th Cir. 2009); 545 F.3d 564 (7th Cir. 2008).

The Eighth Circuit's June 12, 2009 decision reversed, noting an "avalanche" of litigation on this issue that has "exploded across the country" and concluding that the appropriate answer was to defer to the IRS regulation that treats medical residents who work more than 40 hours a week as subject to the employment taxes.  

The Supreme Court granted a petition for writ of certiorari in Mayo Foundation on June 1, 2010 (2010 WL 149135) and held oral argument today.   BNA reports in Daily Tax RealTime (Nov. 8, 2010 at 2:51) that "the justices ... appeared to be looking to set out a clear rule for applying the student exemption to the Federal Insurance Contributions Act" (FICA) during the argument.  As Chief Justice Roberts commented in the hearing:  "The only way you can draw the line [for an apprentice who is both an employee and a student] is to have somebody say: This is going to be the line.  And if anybody is going to say it, it ought to be the IRS."  BHA, op.cit.

Estate tax and extension of Bush cuts generally

According to an interview with Treasury's Michael Mundaca reported in the Wall St. J. today (Sept. 13, 2010), Congress and the Obama administration are discussing a possible bill to allow estates that pass in 2010 to have the 2009 or the 2010 law apply.  See Martin Vaughn, Estate Tax Choice May Be In Works For 2010 -- Treasury Official, Wall St. J..

Does that make sense?  Probably not.  The problem exists because the gimmick was adopted by the GOP to pretend that the cost of all their tax changes wasn't as big as it actually would be if the changes were permanent reforms rather than temporary.  Allowing an election doesn't make sense, but neither did the original Bush tax cuts, that provided a gradual phasing out of the estate tax over the years of the Bush regime with a complete repeal for one year in 2010 and then a resurrection of the 2001 laws in 2011.  But how Congress deals with that sunsetting gimmick now will determine a great deal about the economy in the future. 

Regretably, politicians hear the loud ranting from the tea partiers and others, and so, as the New York Times reported on Saturday, in an article by David Kocieniewski, Tax Cuts May Prove Better for Politicians Than for Economy, NYTimes, Sept. 11, 2010. 

Obama at least knows that passing a new tax cut for the wealthiest 2% makes very little sense--they will save it or invest it overseas; they are unlikely to spend it on consumer goods that create new production demand in the economy or use it to create new, entrepreneurial businesses that hire people.  But Obama wants to create billions in new tax breaks for businesses that make no sense at all--such as making the R&D credit permanent (just a tax break for R&D that businesses have to do to stay viable) or providing 100% expensing (just a tax break, and likely to result in purchases of equipment from overseas, thus shipping jobs out of the country rather than helping jobs domestically). 

Meanwhile, the Republicans generally haven't ever seen a tax cut they didn't like (unless it is one targeted at the lowest-income Americans).  They make ridiculous claims such as the one that not providing an extension of the Bush tax cuts for the wealthiest Americans will stifle small businesses and hurt job creation.  Ridiculous, because very very few Americans who receive income from small businesses will be much impacted by letting the tax cuts for the wealthiest Americans lapse as currently set by law (only 2% of small business owners receive more than $250,000 of income from their business) and those with small business income aren't really encouraged to plow it back into the business by cutting their income taxes.  See, e.g., William Gale, Five Myths About the Bush Tax Cuts, Washington Post, July 30, 2010 (hat tip Linda Galler for reminding me about this article).

The Times article reports on the CBO's analysis of short-term effects of policy decisions, which concluded that (to quote the Times' description) "extending the tax cuts would be the least effective way to spur the economy and reduce unemployment" while tax cuts for the rich "would have the smallest 'bang for the buck' because wealthy Americans were more likely to save their money than spend it."  The CBO had more support for payroll tax relief, since those cuts in taxes would got to the people who are most likely to spend it in ways that stimulate the domestic economy.  The problem I see with payroll tax cuts is not who they are targeted to benefit but the result that can be misused by the right-wingers who want to decimate Social Security and Medicare--a payroll tax cut results in less money going into those coffers, which just feeds the ridiculous notion that the payroll tax programs are nearing bankruptcy.  No sense in giving the entitlement-haters more ammunition.  Better would be a pre-bate of income tax amounts, including a negative income tax refund to those who won't pay any income tax but will pay payroll taxes.