Month: November 2011

The six Democrats and six Republicans on the “Super Committee,” which is officially called the Joint Select Committee on Deficit Reduction, have conceded that they cannot agree on an alternative to the $1.2 trillion in deficit reduction that will occur automatically under existing law.  

As the result of this summer’s deficit standoff, Congress and the President agreed to these automatic cuts, to take effect starting in 2013, if the Super Committee was unsuccessful in forging a deficit reduction plan that both parties in Congress could support.

For months, Republicans and Democrats have gone through cycles of offering plans that they claimed would reduce the budget deficit, but which would actually increase the deficit by extending all or most of the tax cuts first enacted under President George W. Bush and which are currently scheduled to expire at the end of 2012.

Even if the Super Committee did come up with a way to reduce spending or raise revenue by $1.2 trillion or $3 trillion or $4 trillion, it would make little sense if coupled with an agreement to extend tax cuts that cost even more than this, particularly when those tax cuts are heavily aimed at the rich.

The Democrats have not always presented a coherent view on this point. The plan released by President Obama in September would cut taxes far more than it would raise them. As we said back then:

The tables in the back of the President’s 80-page plan quietly remind us that the total cost of making permanent the Bush tax cuts would be $3.867 trillion over the next ten years, but the President says he will “raise revenue” by making permanent “only” $3.001 trillion of these tax cuts. We certainly applaud the President for refusing to extend the $866 billion of these tax cuts that would go exclusively to those with adjusted gross incomes in excess of $250,000, but it’s difficult to call this deficit reduction.

Setting aside the $866 billion that the President proposes to “raise” by not extending that part of the Bush tax cuts, the net effect of the other tax provisions in the plan (excluding the parts used to help pay for his proposed new jobs provisions) is to raise only $259 billion over the next decade. That means that, overall, the President is proposing more than $2.7 trillion in deficit-increasing tax cuts through fiscal 2021! The cost of these tax cuts is even greater when accounting for the additional interest payments on the national debt that will result.

And just to set the record straight, the cost of the Bush tax cuts is actually larger than that. The administration’s cost figures were based on a budget window that begins in 2012, when the Bush tax cuts are already in effect and thus have no cost.

If extended through 2013 and beyond, these tax cuts would cost $4.4 trillion over the 2013-2022 period ($5.4 trillion counting the additional interest payments that will result because of the increase in the national debt). Almost half of these tax cuts would go to the richest 5 percent of taxpayers, and only about six percent of these tax cuts would go to the bottom 40 percent of taxpayers.

The last proposal offered by the Democrats on the Super Committee, according to media reports, would have raised an outrageously low $400 billion in revenue over ten years but would have left the question of the expiring Bush tax cuts for another day. This was something the Republicans on the committee could not accept.

Last year, Congressional Republicans demonstrated that they would not accept any bill that extended most, but not all, of the Bush tax cuts. During the Super Committee negotiations they appeared willing to raise a few hundred billion dollars by closing tax loopholes that mainly benefit working class Americans if they could make permanent and even expand the Bush tax cuts at a cost of over $4 trillion. Now they seem to be signaling that they will not accept any bill that is supposed to reduce the deficit unless it actually increases the deficit by extending the Bush tax cuts.

Both parties have tied themselves into knots over taxes that they will find difficult to untangle, but that matters little because if Congress simply does nothing (and that, frankly, is one thing it excels at) the Bush tax cuts will expire at the end of 2012 and one of the greatest causes of the budget deficit will be behind us.

We would like to think that Congress can now step away from its obsession with deficit-reduction plans that actually increase the deficit and turn its attention to the most pressing concern Americans have right now: jobs.

There is ample evidence that the Bush tax cuts have failed miserably to help the economy in the ways promised by their proponents. It’s time for Congress to focus on job creation measures that do not involve tax cuts for the rich.

A new CTJ report shows that only 0.3 percent of deaths in the U.S. in 2009 resulted in federal estate tax liability. This provides a rough approximation of the impact that President Obama’s estate tax proposal would have, because the estate tax rules in effect in 2009 are the same rules that President Obama has proposed to make permanent. A more sensible alternative is the estate tax proposal announced yesterday by Congressman Jim McDermott.

Read the report.

Washington State has the most regressive tax structure in the country. No other state asks more of its poorest taxpayers and simultaneously asks so little of its wealthiest taxpayers.  The major reasons for its distorted tax structure are the state’s excessive reliance on sales taxes (along with property taxes) and the absence of any type of tax on income.

Later this month, legislators will be meeting in a special session to try to close the state’s $2 billion shortfall. Governor Gregoire has taken the uninspired and unimaginative approach of proposing only spending cuts to fill the gap. Her proposed plan will simultaneously harm working families and ensure that Washington State’s tax structure remains the nation’s most unfair.

Governor Gregoire and legislators need to think outside the box, and specifically consider  the Washington State Budget and Policy Center’s (WBPC) proposal to tax capital gains income.

 The Institute on Taxation and Economic Policy (ITEP) found that a modest tax on capital gains income could raise as much as a $1 billion annually, and a full 97 percent of Washingtonians wouldn’t be impacted. To read more about WBPC’s proposal and ITEP’s analysis read A Capital Reform.  

Elected officials must move beyond the cuts-only rhetoric and look to budget solutions, like taxing capital gains, that help to create long term fiscal solvency and create a tax structure that works for everyone.

Photo of Governor Chris Gregoire via WS DOT Creative Commons Attribution License 2.0

Kentucky GOP gubernatorial candidate, longtime Senate President and American Legislative Exchange Council (ALEC) “Legislator of the Year” awardee, David Williams, was rebuked by Blue Grass State voters last week.

Williams staunchly advocated for eliminating the state’s personal and corporate income taxes during his campaign, that is, eliminating the most progressive and fair taxes levied in Kentucky and creating a colossal hole in the state’s budget at the same time.

Governor Steve Beshear, who defeated Williams and won a second term on November 8, estimated the budget hole from eliminating these two vital sources of revenue would equal 43 percent of the state’s general fund.  Beshear also suggested it would have to be made up with a sales tax hike – which is always hardest on the poorest families.

Kentucky voters had their say and voted down Williams’ radical agenda 36  to 56 percent (an independent candidate garnered 9 percent of the vote).

This isn’t the last we’ll hear of ALEC and its state-by-state plan to advance its corporate-authored agenda . But it’s encouraging that the good people of Kentucky didn’t fall for it.

Photo of Governor Steve Beshear via Gage Skidmore Creative Commons Attribution License 2.0

A slew of tax credit programs in Iowa that have failed to live up to their job-creation promises is further evidence that while companies will happily take taxpayer money when it’s offered, no amount of corporate pork can make a company hire people when there’s no demand for its products.

An excellent piece of journalism from The Des Moines Register reveals that 15 companies enjoying tax credit dollars given to them by the state have defaulted on the job-creation requirements tied to those credits.  All together, those companies created one-third fewer jobs than they promised when they took the money.  (This story echoes a recent report from Texas showing that just 26 percent of projects receiving funding from the Texas Enterprise Fund (TEF) fully complied with their 2010 job creation requirements.)

The reasons for these failures should be obvious.  When the economy is weak, businesses generally can’t sell as much of their product as they used to.  You can throw money at them and ask them to hire more people, but ultimately it doesn’t make sense for a company to bring on more employees unless there’s some new, unmet demand that needs to be filled.  In good economic times, companies simply rake in tax credit dollars and create jobs they would have created anyway. But in bad economic times, companies rake in tax credit dollars, the façade collapses, and you end up with exactly the situation we see in Iowa.

Iowa State University economist David Swenson provided some valuable insight to The Des Moines Register on this issue: “Tax credits in Iowa are used very injudiciously.  Everybody qualifies for something. It makes no sense from a business or government point of view. … But government officials can’t take credit for job creation if they don’t hand out some sort of subsidy.”

He goes on to provide an important recommendation to legislators currently reviewing 35 of Iowa’s tax credits: “Everybody is living with a lot less,” due to the down economy. “That really does mean businesses should be living with a lot less public subsidy.”

Photo of Iowa State Capito via  Jimmy Wayne Creative Commons Attribution License 2.0

Coburn Report on Hand-Outs for Millionaires Misses the Worst of All

Republican Senator Tom Coburn of Oklahoma, who made news earlier this year when he broke with right-wing ideologues by suggesting that Congress could raise some amount of revenue greater than zero dollars, has issued a report this week claiming to lay bare the various spending subsidies and tax subsidies benefiting millionaires. There are many problems with this report but the most enormous is that it ignores the biggest and most unfair tax subsidy for the rich — the lower tax rates that apply to investment income like capital gains and stock dividends.

Remember, the entire reason why Warren Buffett complains that he pays a lower effective federal tax rate than his secretary, and the inspiration for President Obama’s Buffett Rule, is this tax subsidy for investment income.

It is quite a feat to write a 37-page report about various government hand-outs for millionaires and yet fail to mention the one that the Buffett Rule is designed to address. But Senator Coburn’s staff has done exactly that.

Investment income is taxed less than other types of income in two ways. First, the personal income tax has special, low rates for two key types of investment income (long-term capital gains and qualified stock dividends), including a top rate of 15 percent. The majority of this income goes to the richest one percent of taxpayers. Second, the payroll taxes that apply to wages do not apply to investment income.

A previous report from CTJ explained how these tax breaks for investment income allow millionaires in some situations to pay lower effective federal tax rates than many middle-income people. Another CTJ report compared taxpayers making between $60,000 and $65,000 with taxpayers who make over ten million annually. In the first group, only about 2 percent receive most of their income from investments, while in the second group, about a third receive most of their income from investments and consequently have a lower average effective federal tax rate than most of the $60,000-$65,000 taxpayers.

This is an outrageous situation and the Buffett Rule is the principle that tax reform should reduce or eliminate this unfairness. Any plan to end hand-outs for millionaires that fails to implement the Buffett Rule is not worth the paper it’s written on.

A report from Macroeconomic Advisers, one of the most respected economic forecasting firms, concludes that unemployment would rise from 9 percent to 18 percent in 2012 if Congress had to cut spending to comply with the type of constitutional balanced budget requirement that Republicans and some Democrats tried but failed to pass today.

Most mainstream economists agree that the last thing the federal government should do during a recession is cut spending. Reducing government jobs, or cutting government programs that maintain consumer spending in a way that indirectly creates jobs, is the last thing we need when the economy is already contracting. But that’s exactly what would happen under a balanced budget requirement.

Recessions often cause budget crunches because they reduce revenues (because fewer people and businesses are generating income and paying taxes) and increase government spending (because more people receive unemployment insurance and other benefits). These automatic reductions in taxes and increases in spending can stabilize the economy to an extent. But a balanced budget requirement would make it far more likely that Congress would respond to a recession-induced budget crunch by slashing unemployment insurance and other programs that help offset the economic contraction.

That’s why Macroeconomic Advisers found that if Congress had to cut spending to balance the budget in 2012, another 15 million people would become unemployed and economic growth would drop from an expected 2 percent to negative 17 percent.

Such a proposal would seem too outrageous to even be discussed seriously —  except that a majority of the House of Representatives just voted for it. (The measure thankfully did not receive the two-thirds vote requires for approval of a constitutional amendment.)

The version considered today would not take effect for five years, but it’s important to remember that even the most conservative deficit-reduction plans discussed today would not result in a balanced budget for decades. And America will undoubtedly face recessions in the future when the balanced budget requirement would be in effect.

Citizens for Tax Justice has joined 275 other national organizations on a letter to members of Congress blasting the proposed balanced budget amendment as, to borrow the term used by Macroeconomic Advisers, “catastrophic.”

And just in case you were wondering, the balanced budget amendment considered today was the less extreme of the two versions that have been discussed lately. The version supported by anti-tax activist Grover Norquist would require approval by two-thirds of both chambers of Congress to pass any revenue increase, ensuring that efforts to balance the budget during recessions would definitely be done entirely through spending cuts and have the effects described above. Of course, the fact that a proposal is slightly less extreme than the one preferred by Grover Norquist is no indication that it’s a great idea.

Many lawmakers have apparently decided that they would address difficult fiscal problems with what seems like a simple answer. A rule making Congress balance the federal budget every year probably sounds reasonable to many people until they learn of the horrific consequences. Lawmakers have no such excuse, because they and their staffs are quite aware of mainstream economic research, which this recent report only reaffirms.

Make no mistake; those lawmakers who voted today for the balanced budget amendment have voted to destroy millions of jobs during a recession.