ataxingmatter

Extenders Bill Subst. Amendment --third Senate try, moving in the wrong direction

The Senate leadership put out a new substitute amendment (S. Amdt. 4386) to the extenders bill passed by the House (H.R. 4213) on Wednesday, trying to get a few holdouts on board. (Link provides legislative text and further modifications.) The bill would now add about $35 billion to the deficit.

Changes include:

1) reducing federal Medicaid payments to states--a terrible idea in a period of significant state funding difficulties, and the vulnerable population served by Medicaid;

2) "repurposing" of stimulus monies--that is, treating amounts intended as part of the economic stimulus package but that remain unspent as offsets for expenditures in this package.   This is just relabelling items that already increased the deficit (because of the need to stimulate the economy after banks' greed and recklessness threw us into the Great Recession).  Stimulus funds, though, serve a real purpose in helping the economy and ordinary folks; the part of the extenders bill that relates to extending foolish tax cuts for businesss (such as the R&D credit that gives businesses a dollar for dollar tax reduction for expenses that they would have done anyway with the normal deduction permitted for business expenses) is now being paid for by stimulus monies whose spending would have been a real boost to the economy.

3) eliminating the advanced earned income tax credit--again, cutting programs that help the most vulnerable amongst us in order to provide "tax incentives" that aren't likely to accomplish their objectives

4) softening the application of the carried interest provision--you'd think that it would be a no-brainer to have Congress pass a change to the treatment of carried interest that would tax it all like the ordinary compensation income that it is.  Instead, these wealthy firms--private equity, hedge, venture capital, real estate--have lobbied intensively to preserve their special status of being able to earn compensation but pay taxes on it as though it were a privileged capital gain.  Baucus's latest change is even more elite-friendly--only 50% of the disposition income would be taxed at ordinary income rates (rather than the 75% that applies generally).  There will be no ordinary income recharacterization if all distributions and allocations are made pro rata based on capital contributions, and the retroactive elements of the bill (re loans issued to allow managers to buy partnership stakes in order to claim that they have a capital interset for their carried interest stake) will be removed.  The latter provision honors gamesmanship--the partnership that is going to give the managing partner an allocation attributable to compensation instead gives the partner first a loan with which the partner buys a capital interest and THEN a distribution on that capital interest, with which the partner pays off the loan.  For Congress to accept such a sham transaction that is intended to avoid the ordinary taxation of compensation for wealthy partners is nothing short of disgraceful.

Maule and Pappas on progressive taxation and the decreasing burden on the rich

Maule and Pappas have been engaging in a debate on progressive taxation and the decreasing burden on the rich.  See Canonizing the Rich, Part 1, Part 2, and Part 3.

As Maule shows in his posts, the rich have an increasing share of the income (an even larger share of the economic income--because they benefit much more than ordinary folk from tax expenditures in the Code, from capital gains preference to charitable contribution deduciton to mortgage interest deduction to life insurance exclusion, and more of adjusted gross income, a tax concept that excludes much of economic income).  But they pay a much smaller proportion of that income in taxes now than they did in the period when our country was the most prosperous shortly after WWII--a decline from about 50% of the income in taxes to less than 20% of it paid in taxes.  Meanwhile, our country has slid into a deficit spiral from the combination of gigantic tax cuts under Bush that were of primary benefit to the ultrarich (the 2001 tax cuts were projected to cost about $1.6 trillion over the first decade and have cost about $700 billion so far) and the huge increase in government under Bush from militarization and his "preemptive war" policy (costs of the Iraq-Afghanistan wars in human lives greater than 5000 and in dollars running to the multiple trillions--especially when long-term health needs of Vets and replacement costs for the expensive equipment is factored in).

So why would anyone think that these disastrous policies of cutting taxes for the rich should continue?  Such a policy has no good outcomes--deficits, inequality that threatens democracy with oligarchy, political instability, poverty and the disease, lack of education, despair and often violence that can come from it.  I wouldn't want to live in a country where the well off live entirely within isolated islands of gated communities, surrounded by deep zones of poverty.  I much prefer a country built on communities based on sustainability, where the wealthiest are merely rich and not "filthy rich."  A salary for a hedge fund manager or a CEO of a million a day (not uncommon in twenty-first century America) is, simply put, obscene when it is 300 or 400 or even 500 times the salary of the average worker.  No one "earns" that kind of salary--it is a corrupt gift from peers who want the same return favor when the manager sits on their salary board.

People who disagree with me on this tend to say that my opposition to such inequality is just jealousy.  No, it is concern for the very heart of this country's democracy.  And I suspect many of those who defend the low taxes for the wealthy put in place under the four decades since Reagan took office do so reflexively--because they are wealthy themselves and don't want to feel guilt for their undeserved fortunes, because they hope to be wealthy themselves and want to get in on the privileges enjoyed by the wealthy few, because they make their incomes by serving the wealthy and perforce take opinions favoring their clients, or because they have been so indoctrinated by freshwater economist thinking that they buy into the myths of the wealthy as the entrepreneurs that make our civilization possible.  Whatever their reasons, it is discouraging to see this defense of the US as tax haven for the wealthy.

There's a tax angle to everything--including the DeepWater Horizon oil spill

[Addendum 052510]

Oil is still pouring out into the Gulf ocean from the well head of the DeepWater Horizon.  The entire gulf is beginning to look like an oil slick, as we learn that oil companies like BP, rig owners like TransOcean, and contractors like Halliburton (the cement plug provider in the Gulf spill) never bothered much abouit preparing for potential disasters--especially not spending money to research solutions to potential catastrophes.  Quelle surprise!

There are lots of tax benefits for natural resource extraction--many that we should eliminate asap, if we are serious about preserving the environment and moving on to less destructive sources of energy (while activating our economy with real production instead of the financialization, and creating jobs, preventing reliance on middle East oil--all at the same time).

Senator Grassley wants to know just what the tax benefits and subsidies for the major contractors in the spill have been.  See Grassley letter to chair of BP, May 17, 2010, asking for an accounting of all tax breaks/subsidies and royalty relief from 2005 to the present and what benefits, tax and otherwise, are received by DeepWater Horizon's operating under the flag of the Marshall Islands; Grassley letter to chair of TransOcean, May 17, 2010, asking for the same information about TransOcean and information about its other rigs operating under foreign flags (and who made the decision to replace mud with seawater, leading to the explosion, among other things) . 

Sounds like a good line of questioning to pursue to me.  When we see the greed-centered decision-making of companies like BP and TransOcean, we should see as clearly as possible the way we've provided tax expenditure "handouts" to them over the years.  Welfare for corporations is a growing item in our budget--that will likely be added to by the "extenders" bill under consideration at this time in Congress.

Grassley also is seeking full information on the Minerals Management Services lax regulatory effort.  Not surprisingly, this agency absorbed the lesson of four decades of deregulatory thinking quite well, as evidenced by the "sex for leases" scandal a few years back.  See Grassley's letter to Salazar seeking accountability from the agency (May 17, 2010).  A similar letter to Halliburton seeks information on the cement and the regulatory oversight of its use.  See Grassley letter to Halliburton, May 17, 2010.

Addendum:  Transocean has an ongoing dispute with the IRS over $698 million in taxes that the IRS claims are due.  Originally a US multinational headquartered in Houston, it first purportedly moved its headquarters to the Cayman Islands (mailbox offices, anyone?) and then in 2008 created a new world headquarters in Switzerland.  The US tax dispute continues, and it also has an ongoing tax dispute with Norway.  See ABehind-the Scenes Firm in the Spotlight, NY Times, May 24, 2010.  It has a reputation, in other words, for taking aggressive tax-saving positions.  Seems to fit with its apparent stance on deep oil drilling.  Although it has expanded aggressively over the last decade or so and now runs half of the 50 deep ocean oil rigs (see its website, describing itself as the "world's largest offshore driling contractor"), it clearly has not spent  much money on developing safety and environmental protection technology as it should have done--and unless the US Congress changes the laws on liability, it may get off almost scot-free in terms of having to pony up for damages for the worst offshore oil disaster in US history--including human lives lost, ocean water and animals polluted and killed, and onshore damages.  See, e.g., Transocean's web announcement of a filing in the Southern District of Texas to limit liability.

Campaign finance and tax law

Ezra Klein, Congress's Bipartisan Regard for Wall Street Money, Apr. 21, 2010, provides an eloquent statement about the problems of our current campaign finance laws:  the rich are especially privileged, in that they can 1) donate to a candidate whose views they share in a way that can make a difference  in that candidate's chances for election but also 2) donate to all candidates indiscriminately in a way that hedges their rights to access no matter which candidate wins.  Poor constituents lose out doubly--they can afford only a pittance to help the candidates whose positions they believe most closely reflect their own, and they cannot begin to play on the "money for access" field.

So what if the access the rich are interested in is to talk about the tax laws?  For an amount of up-front money, access may provide a long-term monetary benefit in the nature of a tax expenditure that is tailored to provide significant benefits to upper-bracket taxpayers.  It may even be sold as a tax expenditure in the public interest--like the mortgage interest deduction, which is touted as a way to help ordinary Americans buy their own homes but which is especially beneficial for those with million-dollar home mortgages and high income tax brackets. 

The rich thus have money, in part, because they have had extraordinary access and through that access have succeeded in getting Congress (and regulators) to pass wealth-friendly laws.  Deregulation of swaps, for example, meant Paulson could short the toxic CDO specially created for it by Goldman and earn great wealth on a deal that might not have been allowed --or certainly would have been less likely with full transparency-- in a regulated market.  The preferential rate for dividends meant that a wealthy person could earn twice the income from his stock that his secretary earned in wages yet pay not a penny more of income tax. 

The power of money to buy access seems worrisome whenever it occurs, but perhaps particularly troubling if the access influences tax laws because of the underlying principle of sharing the burdens of the cost of government that is also corrupted.

So what can we do about this conundrum of the power of money to buy access?  I suppose we can vote those who readily provide access to money out of office.  But campaign financing pays for the information (and misinformation) that we receive, so it appears we voters will be likely to be misinformed more as the need to be informed rises.  On a local level, perhaps public financing of campaigns is the answer.  But on the federal level?  It appears that only volunteer activism and the work of organizations intended to counter directly the influence of purchased access could have an effect.

Do readers agree that corruption of the process is especially worrisome for tax laws?  Do you see any better ways to counter the corruption?

Job creation--tax cuts are not the right tool

Not unexpectedly, the "think tanks" that claim to be nonpartisan but that conduct research sponsored by corporate interests and support "capital market" solutions to economic problems are at it again pushing more tax breaks for the huge corporations that just gained more legislative clout with the Supreme Court's foolish decision in Citizens United.   See, for instance, the Milken Institute's, Jobs for America: Investments and policies for economic growth and competitiveness (Jan. 2010) (sponsored by one of the biggest of the "bad guys" pushing corporate tax cuts all the time, the National Association of Manufacturers). 

The Milken report wants the government to do the following:

• reduce the corporate tax rate  (The section 199 manufacturing credit--which amounts to a significant rate reduction for most US companies--has already been passed by Congress under the same argument that reducing taxes will result in job creation. but there not much in the way of new jobs to show for the tax reduction; this report claims that reducing the rate to 22% versus the current statutory rate of 35% would cause a .3 percentage point growth in GDP from 2011 to 2013, with an increase in employment of 2.13 million.   These sorts of claims are made for all kinds of tax cuts, but seldom pan out in practice.)
•  increase the R&D credit (we've already done that--the R&D deduction was made a credit and it didn't have a significant impact on job creation.  It's a stretch to think it would, since the research is either going to be done anyway or just tweaking around the edges in ways that doesn't require significant expansion of research facilities.  Most of the basic research done at universities is much more important to the core of job development and innovation expansion.
• let companies export technology products to produce products abroad (that will help overseas job production, but will essentially increase the flow of jobs to low-labor-cost countries and do nothing to create jobs here)
• invest in infrastructure projects (now, that one has real potential, butprobably NOT the projects recommended here, which include an expansion of offshore drilling and onshore exploration and coal usage--projects that do nothing to move us towards better use of energy and prevention of global warming). 
  

The Milken report, in other words, espouses many of the same policies applied by the Bush II administration.  They didn't create jobs under Bush and there's no reason to think they would be more successful now--in fact, we've tried tax cuts as job stimulus for years without success.  A recent Congressional Research Service (CRS) report notes that business tax incentives don't do much to stimulate the economy.  See Hungerford & Gravelle, Business Investment and Employment Tax Incentives to Stimulate the Economy (Jan. 22, 2010) (available on BNA).  The report notes that the February 09 economic stimulus package included $286 billion in tax cuts, many directed towards business, and that the administration has advocated futher business incentives.  However, it reports that "the evidence ... suggests that a business tax subsidy may not necessarily be the best choice for fiscal stimulus."   It considers, for example, the idea of tax credits--the two most common of which are investment tax credits and accelerated deductions for depreciation.  While studies suggest that such credits have some potential for increasing employment, they have not proven to be effective in practice.  Reasons for ineffectiveness include the complexity of credits, the uncertainty of credits prior to tax filing time, the lack of awareness about the credit til tax filing time, and the fact that "product demand appears to be the primary determinant of hiring."  Firms may not invest even with investment tax credits, if they are already at excess capacity.  In fact, the report notes empirical evidence from recent studies that suggest that the induced spending is less than the cost of the tax subsidy.

Let's face it.  Businesses will always demand tax subsidies, because the managers and owners benefit when they pay less in taxes.  But tax subsidies may do little or nothing to stimulate the economy or provide jobs.  This CRS report suggests that tax subsidies don't act as a stimulus for hiring, but rather as just another windfall for businesses.  The report notes that to the extent an investment subsidy isn't used to stimulate investment it may well simply be used to pay down debt or pay out dividends to shareholders.

Programs that create jobs are the ones that directly create jobs--not the ones that just put more money in the hands of already wealthy CEOs and shareholders who will likely sock the money away in some investment overseas.  We need to be creating jobs programs like those in the New Deal era--real jobs that can make the country better by building infrastructure and make the lives of the people directly affected better.  And we need to be very selective about the infrastructure projects that we fund.  Providing additional subsidies to Big Oil and other extractive industries is a 19th century solution to a 21st century problem. 

Will Congress be able to do anything other than the bidding of the big corporate interests and their managers and owners--especially after the right-wing Court in Citizens United overturned multiple precedents to find that corporations can spend whatever they want to buy elections, in the guise of claiming that such ill-founded judge activism furthers free speech rights?  Will Congress be able to show any concern for ordinary Americans?  It seems increasingly doubtful, unless Americans become better informed and able to vote in large blocks to disempower the corporatist agenda.  We must remove politicians that simply put in place the policies that the big multinationals want.  Those policies almost always will serve the managerial/owner class and not ordinary Americans.

Mikulski Proposal for Auto Company Assistance

Barbara Mikulski, Democrat from Maryland, has hopped on the bandwagon of doing something for the big US auto companies that are struggling with cash flows, in part due to the overall economic stagnation and in part due to their own shortsightedness in developing energy-efficient cars worthy of the new century.

As with so many proposals these days, Mikulski's involves the tax code and the addition of yet another "tax expenditure" item.

In general, interest on personal debt (as compared to investment debt or business debt)  is not deductible.  There is a gigantic exception for interest on mortgage loans--the "acquisition indebtedness" and "home equity indebtedness" exceptions under section 163(h)(3).  As many tax experts have said, those interest deductions favor high income taxpayers, because they are generally in the minority of taxpayers who itemize deductions, they are otherwise likely to be taxed at a high marginal rate (thus getting the greatest benefit from ordinary deductions), and they are more likely to have expensive homes with significant mortgages that permit them to get the maximum benefit from the mortgage interest deduction (which can amount to a deduction for interest on loans up to $1.1 million). 

Mikulski proposes adding another exception, for interest on auto loans.  See Auto Ownership Tax Assistance Amendment.  The interest would be deductible above the line, so that even those taxpayers who do not itemize (about 70% of taxpayers) would be able to benefit from the deduction.  It would be limited at high income levels ($250,000 for joint returns, $125,000 for singles).

Is this a good idea?  it depends on your views on several issues.

First, should we be enacting help for the auto companies?  In a world where taxpayers are expending $700 billion to help financial institutions, with very few strings attached--and where the Treasury is going overboard not to enforce the law in order to provide even more help to the big financial institutions--it is hard to draw a line to avoid helping the auto companies.  Why?  Because they directly employ millions of Americans, and related industries employ tens of millions of Americans.  If the US auto manufacturing industry is shut down, it would be a severe blow that would likely prolong the recession.  At the same time, the auto industry has long neglected to make changes that were needed.  It continued to develop and sell over-the-top SUVs and Hummers long after it was clear that these vehicles were environmental disasters--guzzlers of precious and limited oil resources and outputters of ozone-gobbling, earth-warming gasses. The industry could have turned itself around 30 years ago, but it rested on its laurels. 

Of course, much the same is true of the financial institutions that are now feeding more and more greedily at the public trough (now fudning their own money-making acquisitions rather than to provide needed credit to individuals or businesses) while continuing to pay dividends to shareholders, exorbitant deferred compensation to executives and enjoy resorts to carry on business.  The banks have grabbed enormous profits while doing almost nothing of real benefit to the American standard of living.  Banks pay piddling interest and charge usurious rates on credit cards, while continuing to entice vulnerable Americans to buy more and more on credit--a continuing legacy of the "Reagan revolution" of "trickle-down" economics that managed a massive transfer of income to the wealthiest households through steep cuts in tax rates and the building of a growth economy that primarily benefitted those same wealthy households through a push to consumerism funded by readily available debt with few consumer safeguards.  For a view that the transfer of wealth was the intended result of the loosening of credit (that is the primary cause of today's financial crisis and taxpayer bailout of these same firms), see this 2003 blog posting, Trickle-Down Economics was a Trojan Horse (part of a progressive discussion about the economics of the war in Iraq).

Second, should we be helping auto companies indirectly through a tax expenditure item?  Tax expenditures are complicating provisions, which in itself is a problem as the Code grows ever more complex.  Tax expenditures, by their nature, undo a coherent structure in the Code.  The coherent structure is the lack of a deduction for personal interest.  The exception for home mortgage interest has long been decried as wasteful, unfair, and ill targeted, a factor in the housing boom that led to the housing bust, and a factor in the continuing growing inequality among Americans that prevents all from sharing in broad-based economic growth.  Furthermore, each new expenditure, no matter how temporary when initiated, generates an audience that will push to maintain it for the foreseeable future.  Congress can reap over and over again a constituent-satisfying moment of renewing the expenditure, giving Congress an incentive both (i) to make the tax expenditure temporary (so that it can reap election year rewards for extending it)  and (ii) to extend it (even if the original economic arguments for its extension are no longer viable).  We haven't been able to get rid of the home mortgage interest deduction, even though everyone knows it is unfair and wasteful.  The auto loan interest deduction would likely follow a similar trajectory.

Although the tax expenditure is at least somewhat targeted to a real need--the auto companies are in dire straits, and there are a number of low-income Americans who truly need cars to get to work and can't afford to buy one--it is doubtful that it will really accomplish its objective.  The tax expenditure is unlikely to be sufficient to help the auto companies, because it will be too little/too late.  The number of new buyers because of the interest deduction would seem to be limited--people who are in the lower-income brackets and have lost a job or are worried about losing a job will likely find the cost of the car too much, the ability to get credit too limited, and the benefit of the deduction too minimal to tip the scale to the "buy" decision.  (And, of course, all buyers will get the interest deduction, even if they weren't "incentivized" by it to purchase the car.) The amount of money coming to the auto companies from those sales would therefore also appear to be limited and insufficient to counter the fact that the auto companies are burning through cash at a very fast rate.   It therefore seems doubtful that the tax expenditure will accomplish the objective of both saving the auto companies and saving the people who really need to buy a car but can't afford one, while the negatives of tax expenditures will certainly accompany this one. 

Lame-duck Tax Bill

Well, Congress has gone and done it again--passed another tax bill that can't be paid for except by borrowing that mostly benefits people or businesses that don't need the benefit.   See this write up in today's Washington Post and this AP story.  The tax bill will cost another $38 billion over 5 years.  Id.

Take the research and development tax credit for one.  The credit is claimed to be necessary in order to incentivize research and development by today's multinational businesses.  Tell me, would any business worth its salt hold back on research and development because it could only deduct it and not get a credit for it?  I doubt it seriously.  And, this "extension" of the R&D credit is retroactive.  Meaning that businesses that have already done or not done the research will get the credit--not much incentive that.  So it is not really about providing an incentive for research at all, but about providing yet another tax break to big Pharma, big Oil and the other big industries that have lobbied hard for this tax break every year (and pay the politicians for it with big contributions).  Enough!  The R&D credit is not good economic policy.  If Congress wants to support research, it should provide dollars directly to support basic research at educational institutions.

What's another revenue reduction so necessary that this lame-duck Republican Congress had to pass it now (in spite of not passing most of the budget bills needed, and in spite of not fixing the AMT problem)?  Try the state and local tax deduction.  That tax expenditure, like so many of them, primarily favors the wealthiest quintile with multiple expensive properties.  It doesn't make sense, as I explain in my AMT article, see Congress Fiddles While Middle America Burns.

Elections, Donor Corporations, and Tax Breaks

On Sunday in the New York Times, Mark Hulbert looked at the paper by Michael J. Cooper, Huseyin Gulen and Alexei V. Ovtchinnikov on "Corporate Political Contributions and Stock Returns", available on SSRN.  If you haven't read the paper yet, you might want to look at Hulbert's discussion of it, titled The Share-Price-to-Campaign-Contribution Ratio.

The authors of the article note that, while "[c]

orporate contributions may not help the donating firms on average influence votingoutcomes, ... there is evidence that the funds raised by candidates help them win elections." They ask whether "contributions increase the welfare of the corporate contributors" and answer their question "by studying shareholder wealth effects for firms that make contributions to political candidates."  Their conclusion:  "the effect of firm contributions is more important than many of the established predictors of the cross-section of returns (more important than book-to-market (BM) and capitalization (SIZE)) and is about as important as a momentum variable."  Corporate Political Contributions and Stock Returns

The report, based on data on contributions to congressional races in the Federal Election Commission contributions database, finds that stocks of companies that contributed to large numbers of candidates performed better than stocks of companies that contribute to fewer candidates--to the tune of an average of about $150 million a year for each large contributing firm's shareholders.  The top ten in supported congressional candidates include UPS (629 different candidates between 1999 and 2004), AT&T (622), Verizon (581) and General Electric (530).  Of course, these companies are among the largest in market capitalization and most ubiquitous in US commerce, as well.  But the study determined that market capitalization was not a factor.

Hulbert interviewed Cooper, who said that the authors "had no direct evidence that Congressional action was responsible for the improved stock performance, but characterized the study's statistical findings as providing a 'strong circumstantial case' that corporate political contributions were affecting the behavior of Congress, for the clear benefit of the companies."

The study notes the correlation but does not pinpoint cause and effect.  But the authors are not beyond speculating about some likely ways the firms benefit.  It's no surprise that tax breaks figure in the mix.

Potential ways in which politician sponsored legislation may benefit firms include (but are not limited to) favorable tax treatment and or credits, the awarding of government contracts, the imposing of tariffs or other penalties on competitors, and implementing favorable regulatory requirements.

If connectedness to more politicians means enhanced firm value for those firms, it appears that it would likely mean unequal access for other firms and for individual citizens who cannot hope to create anything like the web of connections to politicians existing for a large public corporation that gives to multiple congressional campaigns.  The authors acknowledge this as well.

Perhaps future work will address whether our results are due to elected officials maximizing general public welfare or whether it suggests an unfair exchange of dollars for policy, resulting in wealth transfers from those firms without access to those firms with access.

We should pay closer attention to the data on contributions, profitability and tax breaks and credits for particular industries and particular companies.  This is another area where increased transparency may make it more difficult for corporate giants to re-write the tax Code in their own favor.

Tax Expenditures and Turf Battles: Senate Finance Committee vs Federal Financial Management Subcommittee

The Subcommittee on Federal Financial Management, Government Information, and International Security of the Senate Committee on Homeland Security and Governmental Affairs held a hearing on Tuesday, Sept. 26, on federal taxes. See this Committee link. The hearing was titled "Deconstructing the Tax Code: Uncollected Taxes and Issues of Transparency."  The hearing was "to examine uncollected taxes and issues of transparency relating to deconstructing the tax code, focusing on the 2006 updated estimate of the tax gap by the IRS, examine IRS efforts to close the tax gap as well as legislative solutions to increase taxpayer compliance, and explore the transparency of the tax code."  Id.  Witnesses included IRS Commissioner Mark Everson, Treasury Inspector General Russell George, National Taxpayer Advocate Nina Olsen, Rutgers Professor Jay Soled, IRET president Stephen Entin,  New York University visiting scholar Jason Furman, and so-called "fair tax" advocate Neal Boortz. See this link.

I have worried, as I suspect others have, that the "homeland security" terminology could develop into an enormous 'PacMan' gobbling up all other parts of government (and ultimately subjecting our revered constitutional freedoms to bureaucratic inflexibility).  The hearing's focus on "deconstructing the tax code" therefore caught my eye.  Was this a genuine committee investigation or just grandstanding or maybe even an attempt to refocus attention away from other aggravating problems?  (How can one detract attention from millions of dollars thrown away to Halliburton and others in no-bid contracts and waivers of rules about accountability?  How about holding a hearing on the tax gap and the ability of the IRS to enforce their rules!)  Just what was intended to be covered and what agenda lay behind the intriguing title?

The phrases "deconstructing the tax code" and "examine ... legislative solutions to increase taxpayer compliance" appear to describe the tax-writing work that one normally thinks of as belonging to the Senate Finance Committee.  Not surprisingly, the hearing notice got Finance's attention, too.  The ranking members of the Senate Finance Committee sent a letter September 22 (available in BNA's Tax Core) to the ranking members of the Subcommittee to make sure that those Homeland Security Senators understand the role of Finance in tax legislation.  Grassley and Baucus noted that the Senate Finance Committee has "exclusive jurisdiction" over federal tax laws.  While looking forward to working with the hearing committee, they noted that any legislation "must be referred" to their committee.

The answer to the question--what does the hearing address?-- is in Senator Coburn's and Senator Lautenberg's comments on recently enacted S. 2590, which creates a public database of entities receiving public funds through grants and contracts.  Senators Coburn and Lautenberg set an argument in motion for extending transparency on spending to the tax code--i.e., to the "spending" within the tax code in the form of tax expenditures.  Their statement is quoted in full below. 

Transparency in government decision-making should not be limited simply to spending; it should also be extended to the decisions Congress makes about the tax code. The tax code is currently over 60,000 pages long, and it is filled with obscure and little-known tax breaks. Because we believe that transparency is one of the best tools we have to curb wasteful behavior, we look forward to working together and with the Committee to develop bipartisan legislation like S. 2590 that will bring increased transparency to the tax code. Tax code matters can be extremely complex but the American public has a right to know how the tax code affects them. American taxpayers also deserve to know if they're paying higher taxes in order to offset the loss of revenue due to special treatment for special interest groups. This is a complex issue that will require careful study. We intend to address this issue in the Subcommittee on Federal Financial Management, Government Information, and International Security. We believe that a hearing addressing this issue will help us all to better understand the ultimate effects of targeted tax expenditures. Further study will also help to inform us on how to address the issue of greater transparency more comprehensively. Thomas link.

For background about tax expenditures, see this report from the Congressional Research Service.  For a statement about the merit of greater transparency in respect of tax expenditures, see the  written testiomony prepared by OMB Watch.   

Transparency requires clarity and honesty about terms.  In an earlier budget cycle, the Bush Administration refused to consider the cost of taxing dividends at the capital gains rate as a tax expenditure because it thought that integration was the better baseline (even though clearly not the standard for U.S. taxation).  The effect was not to treat the cost of the reduction in the dividend rate from 35% to 15% as a tax expenditure.  See this February 8, 2004 weblog discussion about the misleading discussion in the Administration's FY 2005 Budget about the dividend rate cut, set out below.

Treatment of JGTRRA’s Cut in the Tax Rates on Dividends and Capital Gains

Although not in line with previous reference tax law or normal tax law baselines, our tables exclude from the list of tax expenditures JGTRRA’s reductions in the tax rate on dividends. Reference law used for the FY 2005 Budget includes capital gains as tax expenditure, but only to the extent capital gains have not previously been taxed under the corporate income tax. Similarly, the lower tax rate on dividends is not included as a tax expenditure under reference law because dividends have generally already been taxed under the corporate income tax. This exception was made as part of Treasury’s ongoing reevaluation of the tax expenditure concept and to consider gradually changes in the baseline tax system to conform more closely with a comprehensive income tax that excludes double tax on corporate income. The same treatment is extended to the tax rate differential applied to capital gains on corporate shares, including JGTRRA’s increase in this differential.  Administration's FY 2005 Budget at 300.

Any discussion of tax expenditures should result in greater transparency, not to the misleading ploys evident in the FY 2005 budget discussion above.  Further, Congress should take care that discussions of tax expenditures do not act merely as an entree to renewed discussion of further revenue reductions rather than a genuine effort to make relevant tax information more accessible to ordinary Americans.

SUVs

One of the peculiar results of some of the "business-friendly" provisions of the Bush tax law changes was an accelerated depreciation provision that gave tax incentives to people to buy huge SUVS that are harmful to the environment and to smaller cars who share the road with them.  See, for instance, this story from 2003 advising small business owners about the tax benefit of purchasing a heavy-enough SUV instead of a lighter passenger car and this article providing a good description of the way section 179 and regular depreciation rules worked to favor SUVs after the Jobs and Growth Tax Act of 2003.

Congress reacted to the complaints about the irrationality of a tax provision that encouraged small business owners to buy gas guzzlers by enacting some limitations on SUV depreciation in the 2004 Jobs Act. In 52 Federal Taxes Weekly Alert (April 20, 2006), the RIA addresses a recent Congressional Research Service (CRS) report that points out, however, that SUVs are still favored under the tax law.

Here's how it works.  Section 179 permits taxpayers to expense (deduct currently) much of the purchase price of certain property used in a trade or business.  For 2006, the total amount that can be expensed is $108,000, but the 2004 Jobs Act restricted the section 179 deduction for heavy SUVs (gross vehicle weight over 6000 pounds) to $25,000.  That is still considerably higher than the depreciation permitted for most passenger vehicles, which is limited under  Section 280F to $2,960 for a car put in service in 2006 or $3,260 for a light truck or van or SUV rated at 6000 pounds or less.  Thus, this provision still heavily favors heavy SUV purchases.

SUVs get tax breaks in another way.  Under section 4064, an excise tax applies to domestic sales of cars that don't satisfy fuel economy standards.  The tax ranges from $1000 to $7700.  The tax does not apply to autos that weigh more than 6000 pounds, so heavy SUVs are  exempt from the tax.  Ironically, those heavy SUVs represent just the type of gas-guzzling vehicle that the fuel economy standards were intended to disincentivize.  Congress has created a contradiction in terms--it imposes an excise tax on gas guzzlers, but  exempts the worst of the gas guzzlers from the gas guzzler tax!

At least some in Congress are thinking about the irrational preference for heavy SUVs in the current tax code.  But the idea is apparently to provide accelerated depreciation for more fuel-efficient cars (up to $100,000) rather than eliminate the depreciation benefit for heavy SUVs.  See, e.g., this article in the Mercury News about Grassley's planned legislation and the Grassley news release, here.  That proposal doesn't make sense.  Congress should simply remove the benefit for SUVs by making them subject to the same limits that generally apply to other vehicles.  (Have you read about the Artic ice melting?)