Following up on reports that the IRS plans to eliminate almost half of its estate and gift tax audit team, Chief IRS overseer and all-around good guy Rep. Steve Rothman (D-NJ) has sent a letter signed by 22 other representatives to IRS Commissioner Mark Everson expressing their "serious concerns" about the planned reduction and requesting that the IRS "immediately delay this decision until Congress has adequate time to review [the] plan."

Rothman continues to find himself on the right side of enforcement issues at the IRS. Whether it is forcing the IRS to stop wasting taxpayers dollars to line the pockets of private companies, or fighting a back-door repeal of the estate tax by weaking its enforcement, Rothman is doing a wonderful job minding the people's business within the Internal Review Service.

Great work Rep. Rothman! Keep it up.

The question of whether the Senate will return to consider the estate tax again this year is intimately connected to the fate of the pension conference report.

It appears meeting of the pension conference committee last night was tense and saw lawmakers expressing their frustrations with the current situation. According to media reports, a number of members present were quite forthright in their unhappiness about the House boycott of the meeting and recent events.

Senators Enzi and Kennedy expressed disappointment that House leaders failed to show up and Congressman Charles Rangel (D-NY) wondered, "How in the devil is this small group of people so powerful that they can hold hostage legislation that affects millions of working families?" Sen. Max Baucus (D-MT) and Rep. Robert Andrews (D-NJ) stated the only reason the pension conference has broken down is because of the GOP's efforts to reduce the estate tax.

But by far the most forthright comments came from Sen. Charles Grassley (R-IA):

I don’t know why you wouldn’t have guts enough to come forward and cast a vote [and be very transparent]. Nobody’s going to lose any blood by coming over here and being a man or a woman.

I don’t know what’s up, but I’m a bit shocked that others who were parties to the agreement and who accepted the benefits of the agreement and [were] the beneficiaries of my credibility are so reluctant to live up to it. I’ve kept my word and I will still keep my word even if I am knifed in the back.

It may be difficult for the conferees to repair the damage with only one day left before the House adjourns for the August recess.

Drama continues to unfold on Capitol Hill as the hot summer heat seems to be getting to members of Congress. We posted yesterday of a "showdown" meeting of members of the long-stalled pension reform conference committee that took place last night. But the meeting did not go as conference chairman Sen. Michael Enzi (R-WY) planned as House GOP conferees boycotted the meeting

Enzi called the meeting to force a vote on whether to strip a package of tax cuts (callled "extenders") from the pension bill or not and bring an end to an impasse that has delayed the reform bill in its final stages. But the strategy backfired as only two House conferees, both Democrats, showed up for the meeting. It now appears as though the entire pension reform agreement may be about to collapse. House and Senate leaders are rumored to be taking one more stab at compromise today before the House recesses until September.

The effort to pull out the extenders package is being undertaken in an effort to give the Senate one more chance at passing a roll-back of the estate tax this year. Sen. Majority Leader Bill Frist (R-TN) hopes by holding the popular extenders package until September and adding an estate tax cut to it, he will finally be able to push through another tax cut for the richest of the rich in the Senate. He has failed at three other attempts this year to do so.

More info will be posted here as events play out in Washington today.

The House is unexpectedly expected to vote on a minimum wage bill today. House GOP members are trying to tie the $2.10 minimum wage hike to a health insurance provision affecting small businesses. There is also speculation that Republicans are going to attempt attaching a permanent estate tax cut to the bill.

BNA (subscription required):

House Republicans July 27 appeared close to a deal on a legislative package that would link a minimum wage increase to wage-related sweeteners for business and a plan to allow small businesses to provide health insurance to their workers via association health plans (AHPs), according to lawmakers close to the negotiations.

The package, which would raise the federal minimum wage from $5.15 to $7.25 per hour over two years, also would allow restaurants to use "tip credits" when calculating wage rates for employees and would permit employers to offer a "training wage" for younger workers, the lawmakers said.

A vote on the package could occur as early as July 28, according to several moderate Republicans who have been pressing House Majority Leader John Boehner (R-Ohio) for a vote on the minimum wage before the House adjourns for an August recess.

[...]

Rep. Steve LaTourette (R-Ohio) said lawmakers involved in crafting the package are making a concerted effort to avoid including tax provisions. "Democrats are daring us to put a package up that has tax cuts so that we dare them to vote against the minimum wage. That's the game," he said. "I think that anybody who's expecting poison pills and tax cuts is going to be sadly mistaken."

[...]

Democrats wasted no time in responding to rumors of a minimum wage deal, calling for an up-or-down vote on the wage hike. "Before Congress goes home for August recess, we must have a vote on the House floor to raise the minimum wage to $7.25. But that means a clean bill--a straight up-or-down vote on increasing the minimum wage, without the usual Republican poison pills of attaching tax cuts for the wealthy or other so-called sweeteners for the Republican special interests," House Majority Leader Nancy Pelosi (D-Calif.) said in a statement.

(Recall that Boehner is blocking the Labor-H approps bill from seeing the floor because of the minimum wage amendment that is attached to it. A vote on a standalone minimum wage bill would obviate that amendment, so the House could conceivably be done with its funding work before the end of the fiscal year.)

Supply-siders argue that tax cuts do not cause budget deficits because they create so much economic growth that total tax revenues will increase, even at the lower tax rates. In short: tax cuts pay for themselves.

The Treasury Department released a report today which analyzes the economic effect of President Bush's tax cuts and concludes that tax cuts do not, in fact, pay for themselves.

From page ii of the Office of Tax Analysis, U.S. Department of Treasury's A Dynamic Analysis of Permanent Extension of the President’s Tax Relief:

The analysis reveals that the long-run effects of these policies depend crucially on whether they are financed by lower spending or higher taxes in the future and are sensitive to assumptions on underlying parameters. The issue of how, or even if, these policies need to be financed remains a source of discussion among economists. The analysis presented here suggests these policies will result in substantially more economic activity if they are financed by a future reduction in government spending than if they are financed by future tax increases.

So, there you have it. The only remaining question is: Should the government raise taxes or cut spending?

Just this morning I stumbled across this enlightening report released earlier this year from the folks up at Syracuse University who run the TRAC database. (For those who don't follow arcane data analysis groups as closely as OMB Watch does, TRAC is the Transactional Record Access Clearinghouse - a data gathering and analysis group that uses the Freedom of Information Act to access and analyze government information. See them at http://trac.syr.edu.)

The report shows that the tax returns of Americans earning over $1 million a year are the least likely to be audited by the IRS. Using the lastest available data from the federal government, TRAC found only 30 out of 180,000 returns showing over $1 million in income in 2004 were audited face-to-face. The report also found that Americans making less than $25,000 per year were six times more likely to be audited face-to-face than those making over $200,000 per year. Even when the more common "correspondence" audits are included, poor taxpayers were still more than twice as likely to be audited.

With the recent news that the IRS intends to drastically reduce its estate and gift tax division, a pattern appears to be emerging out of the government's revenue collection agency - a pattern that indicates it is easier for the rich to avoid paying taxes. Considering wealthy Americans already have both more incentive and more means to manipulate the tax code to their advantage, logic seems to dictate higher income returns should be reviewed more, not less, than low-income ones.

Does the IRS really need to go farther and make it even easier for the rich to cheat on their taxes?

Running out of ways to cut federal taxes, Congress looks to other jurisdictions. A bi-partisan effort to give federal tax breaks to corporations at the expense of the states has gained the attention of the Washington Post editorial board:

The Congressional Budget Office estimates that the Business Activity Tax Simplification Act (BATSA) would drain $1 billion from state government treasuries during its first year in effect and $3 billion a year by 2011 as corporations rejigger their activities to take advantage of this new tax avoidance opportunity. This is an unwise shift of resources from state treasuries to corporate bottom lines -- as the National Governors Association put it, "a federal corporate tax cut using state tax dollars."

[...]

The measure, sponsored by Virginia's Robert W. Goodlatte (R) and Rick Boucher (D), would limit states' ability to impose "business activity" taxes, chiefly corporate income taxes, on out-of-state corporations. It would allow states to tax only businesses with a "substantial physical presence" in the jurisdiction -- not a sensible standard in an Internet era when being there and doing business aren't necessarily one and the same.

In today’s Washington Post, Robert Samuelson chides President Bush for boasting about a $300 billion deficit, but finishes his column by shifting some of the blame for the atrocious fiscal policies of the Republican Congress and President to the Democrats.

For fiscal 2006, which ends in September, the administration projects a $296 billion deficit; for fiscal 2007, the estimate is $339 billion. How could anyone boast about that? [...]

I have reserved my harshest scorn for Republicans, who are (after all) in power. But Democrats aren't much better. The nub of the matter is spending. When Republicans passed the Medicare drug benefit -- the biggest new program in decades -- Democrats actually advocated a more costly version. Whenever anyone suggests curbing spending, Democrats screech: Spare Social Security and Medicare. But Social Security and Medicare are the problem.

Just as Republicans now say their policies have cut deficits, Democrats contend their policies produced budget surpluses from 1998 to 2001. Nonsense. Those surpluses resulted mainly from the end of the Cold War (which lowered defense spending) and the economic boom (which created an unpredicted surge of taxes).

Nonsense, indeed. Mr. Samuelson’s treatment of Democrats with respect to the current fiscal situation omits several critical facts that completely undermine the thesis that Democrats should share blame for the current budget deficit: Democrats support PAYGO, Democrats are willing to raise taxes, and Democrats are not in power.

Firstly, Democrats support fiscally disciplined "pay-as-you-go" rules, or PAYGO; Republicans do not. PAYGO rules require that increases in spending or decreases in revenue be matched with offsetting revenue or spending measures. These rules were in place until 2002; the same year that the federal budget flip-flopped from surplus to deficit.

Republicans have consistently thwarted Democratic attempts to re-implement PAYGO to restore fiscal discipline. The most recent and salient example of how Democrats and Republicans fundamentally differ is the recent Senate Budget Committee passage of Sen. Judd Gregg’s (R-NH) Stop Overspending Act 2006. By a party-line vote, Republicans defeated ranking committee member Sen. Kent Conrad’s (D-ND) attempt to attach a PAYGO amendment to the bill.

Another significant difference between Democrats and Republicans with respect to the budget is the Republicans’ rigid opposition to tax increase (and conversely, their unquenchable thirst for tax cuts). Mr. Samuelson likes to thrash the spending policies of Democrats, but fails to appreciate their preferred tax policies. Mr. Samuelson attributes the surpluses of the 90s to defense spending cuts and a booming economy. While both of these things occurred, you can see on the chart below that defense cuts are only a fraction of the story. Where that red line begins a precipitous drop is the same moment when President Clinton and a Democratic Congress raised taxes in 1993.

And finally, the Democrats control nary a branch of the government. So, it seems quite odd that Mr. Samuelson lays any of the blame of the budget deficit on the Democrats. He cites their support for a more expensive Medicare drug plan - a plan that didn’t pass Congress - as part of the reason why Republicans pass such expensive spending measures and refuse to find revenue sources for those measures. Yet, somehow, because Democrats voice opposition to spending cuts in Medicare and Social Security, - never mind that these two programs are wildly popular among all Americans, red and blue state alike - we are saddled with unending budget deficits. This is a bit of Mr. Samuelson’s logic I truly fail to grasp.

While the economy, as Mr. Samuelson asserts, "has little to do with the White House's economic policies", PAYGO rules and tax policy are fully controlled by the federal government. So, while the Democrats cannot take credit for the booming economy of the 90s, they can take credit for the federal budget policies that lead to the surpluses of the 90s. Blame for the train wreck that is our federal budget can be put squarely on a Republican Congress and President that have no appetite to raise taxes or to implement budget rules that force fiscal discipline.

click on image to englarge

In advance of a Senate Appropriations subcommittee markup, opponents of current efforts to prohibit the IRS from outsourcing its collection of outstanding taxes have come out in force. The head of the Association of Credit and Collection Professionals sent a letter to Senate appropriators on July 14 asking them to oppose any amendment that would prohibit the IRS from using any of its fiscal year 2007 funds to hire private debt collectors.

This effort to allow the IRS to continue with a controversial program to outsource its tax collection is shameless and self-motivated. Under the provisions of the program, the companies being used to collect overdue taxes would be allowed to keep 22 - 24 percent of the money they collect.

Thanks to the dedicated effort of Rep. Steve Rothman (D-NJ), the House passed the FY 2007 Transportation-Treasury appropriations bill with an amendment prohibiting the use of any resources to implement the outsourcing program. After hearings on the issue with the Commissioner of the IRS, it was discovered the IRS could expand its enforcement and compliance efforts and collect the same money, but without the almost 25 percent "users fee" imposed by the private collection agencies.

Unfortunately, no Senator offered the Rothman amendment yesterday during the markup of the Senate version of the appropriations bill. The bill will be on the Senate floor tomorrow and if no amendment is offered to stop funding for this ridiculous waste of government resources, the issue will move to a conference commitee on the appropriations bill. It is very likely the Rothman amendment will be stripped at that time.

More to come on this program as the week moves on.

When the president repeats his mantra "cut the deficit in half by 2009", one could reasonably assume that the downward trend in deficits would continue past 2009 - as if "half in 2009" was a milestone of sorts. But, au contraire! The "half in 2009" is not a just a milestone but a turning point - the point where deficits start growing again. It’s right there in black and white in the president’s FY2007 budget, but it’s starkly absent in his speech.

From page 223 in the Analytical Perspectives document of the President's FY 2007 Budget:

(click on image for expanded view)

Is Bush is aware that many, many more people hear his words than read his budget? Perhaps he should tell the whole story when speaking and not assume that his audience is familiar with the relvent material. I'm just saying...

This time from the Wall Street Journal’s Washington Wire - a great analysis of President Bush’s tax policies:

Treasury long-run analyses of the effects of President Bush’s tax cuts “may ultimately” raise total national output of goods and services by 0.7%.

[...]

The Center for Budget Policies and Priorities...says..."A 0.7 percent increase in the economic output that the Congressional Budget Office has projected for 2016 would represent an additional $146 billion [in gross domestic product]," it says. "If new revenues equaled as much as 20% of the additional output, the increase in revenues resulting from making the tax cuts permanent (assuming Treasury’s best-case assumptions) would be $29 billion."

The congressional Joint Committee on Taxation, using conventional analyses, says making the president’s tax cuts permanent would reduce federal revenues in 2016 by $314 billion. That is more than 10 times what the Treasury analysis suggests tax cuts would generate...

(via Brad DeLong)

Washington Wire: Do Tax Cuts Pay for Themselves?

As the spender-in-chief pats himself on the back for managing to shirk the deficit to the fourth largest in U.S. history (via ThinkProgress), let’s take a look at a few things:

1. The surge in tax receipts is the result of a growing economy. Economic expansion is not dependent on tax rates. In fact, President Clinton raised taxes and the economy grew at what most would call a "good" pace. If marginal tax rates are 1% or 99%, an expanding economy will result in increased revenues.

2. The OMB has a habit of projecting of unrealistically large budget deficits so that the president can laud his tax policies for producing lower-than-expected deficits.

• In 2004, the president’s budget projected a $521 billion deficit for FY2004 that turned out to be $412 billion
• In 2005, the president’s budget projected a $426 billion deficit for FY2005 that turned out to be $318 billion

3. In numerous speeches and comments, the president repeats the refrain "we are on track to cut the deficit in half by 2009." Today, at his self-congratulatory press conference he said "We're way ahead of cutting the federal deficit in half by 2009. As a matter of fact . . . we're now a full year ahead of schedule."

But half of what? In the past twelve months, in the 43 speeches in which he mentions "cutting the deficit in half by 2009", Mr. Bush never - not once - mentioned what he is "on track" to cutting in half of. What OMB’s many budget documents state, but the president never says, is that he is "on track" to cut a $521 billion deficit in half. That’s right - Mr. Bush is going to cut a wildly-off-the-mark and never-materialized budget deficit.

4. The "surprise" surge in tax receipts comes mainly from corporate profits, executive bonuses, and capital gains. Only the well-off are seeing increased earnings, while for the rest of the country, real wages decreased in 2005. See, in other words, there’s a widening income gap. This supposed rising tide is lifting only yachts.

5. When Mr. Bush took office in 2001, he inherited at surplus of $236 billion. Today, he’s bragging about a $296 billion deficit. Things have certainly taken a turn since 2001.

6. The national debt in 2000 was $5.6 trillion. Since then, Mr. Bush has added $2.3 trillion in additional debt.

The Office of Management and Budget released their Mid-Session Budget Review today, and has revised down by $127 billion the projected FY 2006 budget deficit from $423 billion estimated earlier this year to $296 billion.

Despite the rhetoric coming out of the administration, this short-term improvement is not the good news they would like it to be. Most of the improvement stems from the horrific job the OMB did earlier this year estimating the budget deficit. Over the last several years, OMB has developed a consistent and dishonest strategy of predicting drastically over-inflated deficits early in the year so that the reality gives the appearance of improvement by the end of the year. This latest review is no different.

Furthermore, claims by the president that the increased tax receipts show a robust economy where all Americans are prospering are seriously off the mark. The mid-session review showed increased tax receipts, mostly from corporations - which rose 19 percent, and individual taxes that were not withheld from paychecks. This type of federal revenues are almost always from executive bonuses and stock market gains - income typically reserved for the most well-off.

Checking the average income growth so far this year underscores this point. Even as the upper end of the income scale is doing well, average wages for workers have not kept pace with inflation, lagging more than 1 percent behind inflation over the last year, adding to a growing income disparity in our society.

The federal budget is on an unsustainable track and the long-term fiscal outlook of the nation is not bright and growing dimmer. Although OMB and the president will trumpet the positive news about short-term budget prospects, several important facts are either obscured or outright hidden in this discussion of the deficit. The current policies creating structural deficits will endanger the ability of the government to repay its obligations, both now and especially in the future. The longer this administration puts off straight talk about the budget and the deficit, the more daunting the challenges of the future will become.