An interesting discussion on PayGo has popped up on TPM Cafe. Amitai Etzioni wrote we shouldn't go by PayGo because it'll only lead to surpluses that Republicans will squander on their well-heeled constituents. Point well taken. Paul Krugman recently made a similar point, though less in terms of PayGo and more in terms of the deficit.

But that's not the end of the story. Greg Anrig at TPM Cafe has an interesting response to Etzioni's post. He thinks PayGo is a good way to define Democrats as responsible and competent and Republicans as crazy.

I'd go farther and say PayGo is plain old good policy. And it doesn't, as Etzioni seems to claim, necessarily lead to deficit-reduction. All it does is help keep Congress from making the deficit worse. If Democrats want to invest more in social priorities, they can certainly do so as long as they pay for it.

Perhaps Etzioni is worried that tax receipts will go way up on their own this session, and PayGo will keep the Dems from spending these new revenues. In that unlikely event, which I haven't heard anyone say they expect, maybe Dems should go ahead and spend some of it. But let's cross that bridge when we come to it.

Plus, PayGo doesn't have anything to do with discretionary spending; Dems could spend as much as they want through the appropriations process. Discretionary programs, after all, could use more funding. Why not concentrate on that?

But the bottom line is that PayGo mostly puts up a (surmountable) obstacle for massive legislated increases in entitlement spending or decreases in revenues. If any party wants to do either of those things, they should abide by PayGo and budget for it. Otherwise, it's too easy for present Congresses to reduce future revenues, which makes it harder for future Congresses to pass important policy. Isn't having Congress in such a weakened position all too familiar by now?

The Senate Budget Committee held a hearing today on the $345 billion tax gap- or the difference between what people owe the federal government and what they pay. Overall, there was consensus that a) the tax gap does exist in huge proportions, b) we must do something about it and c) we must try to minimize doing harm to compliant taxpayers when we address the tax gap.

The witnesses, and the Senators in attendance weren't all of the same mind on many important things, though. One point of confusion (more than contention): exactly how big the tax gap is. The data everyone had to go on comes from an IRS research project whose methods seem pretty unreliable. Budget Committee Chairman Sen. Kent Conrad (D-ND) and Robert McIntyre of Citizens for Tax Justice (testimony here) think that the gap is probably much higher than IRS estimates, partly because the data is bad and already out of date, and partly because of the many tax-dodging activities that the research project did not account for.

There was serious contention (and not confusion) over what we know about the causes of the tax gap. John Satagaj of the Small Business Tax Compliance & Fairness Coalition (testimony here) testified to the importance of understanding the nature of tax non-compliance prior to addressing it. Satagaj claimed that nobody really knows why people don't comply with the tax law. Until we know why they aren't complying, he said, we won't be able to keep them from cheating or making errors. However, McIntyre and Michael Brostek of the GAO (testimony here) testified to the many causes of the tax gap that are quite well-known: a lack of disclosure for certain sources of income, offshore accounts, a lack of clarity in the tax law, and inadequate audit rates, among others.

Yet Satagaj still claimed that until we know exactly what's going on, we shouldn't take action. But the problem is, as McIntyre noted, nobody will know the exact size and causes of the tax gap until action is taken. So much income is kept in secrecy that no research effort would disclose this information. It can only be brought into the light of day by changing the rules of the game.

Addressing the tax gap is a gamble, but unless we don't want to do it, there is no risk-free option.

One final point of contention, of course, was what we should do about the tax gap. McIntyre said his two priorities were disclosing offshore tax shelters (which Sen. Conrad strongly supported) and stepping up IRS resources and audits. Brostek said increasing income reporting and simplifying the tax code. And Satagaj said "education."

Brostek and McIntyre were right on the money. Education, however, is far and away an insufficient way of closing the tax gap. Call me jaded, but I think anyone using an offshore account to hide their income is well aware of the ins and outs of the tax code. What is it about effective tax collection that Satagaj, who represents ostensibly honest small businesses who are at a disadvantage when competitors cheat on their taxes, is so afraid of?

In his blog below, my colleague Craig casts a favorable light on the offsets Sen. Max Baucus uses to bring his $8 billion small business tax cut into PAYGO compliance, calling them "progressive" in net affect.

Just one point: if this tax package is ultimately enacted, these particular offsets will no longer be available for other legislative initiatives, whether increased entitlement funding or AMT reform.

As we look at offsets going forward, we should consider the opportunity cost of using them, asking in each case: have we bought what we most need with offsets we can afford?

==========

[By the way, can someone explain to me why, without Baucus' tax package added to it, the GOP will filibuster the minimum wage bill? As House Ways & Means chair Charlie Rangel remarks, "Maybe he (Sen. Baucus) doesn't have a strong feel for the depth of support that this bill has. ... I strongly disagree that this thing would be filibustered."]

Posted by Dana Chasin, 04:35:05 PM



PAYGO at Work

Sen. Max Baucus (D-MT) wants to attach an $8 billion small business tax cut provision to a Senate minimum wage hike bill, because, as he claims, a "clean" minimum wage bill would not sustain a Republican filibuster.

Baucus may be playing smart politics in making an honest effort to pass good policy, or he could be simply be playing politics in staying true to his tax-cutting inner-self . In either case, what is clear is that PAYGO is doing the work that its advocates said it would: Preventing Congress from digging the Treasury deeper into the deficit hole. Not only is Baucus's "sweetener" revenue neutral, but the offsets in it make the tax code a little bit more progressive. Here are a few highlights with their respective revenues:

• Limitation of a tax shelter known as SILO (sale-in, lease-out): $4.1 billion
• $1 million ceiling on deferred income: $800 million
• Punitive damages no longer deductible: $299 million
• Certain fines and penalties no longer deductible: $244 million
• Increases in certain criminal penalties: $5 million

While we would have preferred to see a clean minimum wage bill, PAYGO has enabled revenue-neutral filibuster and veto protection while mildly increasing the progressivity of the tax code.

The last leg of the 100 hours legislative marathon- the Creating Long-Term Energy Alternatives for the Nation Act of 2007- will come up for a vote Thursday. The LA Times has a good summary of the bill here.

The bill addresses a bunch of shameful things that have been in the news recently. It corrects some mistakes in leases to oil companies that have cost the federal government billions. It rescinds a few tax subsidies to Big Oil, and ends a royalty incentive program that has failed to encourage more energy production. And it directs Congress to put the money that these measures bring in- about $14 billion over 10 years- in a fund to promote the development of alternative energy.

All worthy goals. But Congress should be aware that this bill doesn't- and, to my knowledge, couldn't- do anything about the fact that Interior Department auditors have let oil and gas companies get away with not paying royalties on energy recovered on federal property.

Oil and gas on federal property are common assets. When energy companies profit off of these assets, they owe the public some money. Congress needs to hold the Interior Department's feet to the fire until it gets what the public deserves. Bring on the hearings, investigations, and appropriations fights!

This afternoon, the Senate Finance Committee approved by voice vote the $8.3 billion "Small Business and Work Opportunity Act of 2007," co-sponsored by Committee chair Max Baucus (D-MT) and ranking member Charles Grassley (R-IA).

The bill provides an array of tax breaks, mostly geared toward small business, and is basically offset with provisions that are principally aimed at corporations and wealthy individuals. (See JCT scoring for details).

We've been wondering what the minimum wage has to do with tax cuts. Baucus has been making the claim that there aren't 60 votes in the Senate for the minimum wage increase that passed the House last week, 315-116, that a clean minimum wage bill would face a filibuster. Grassley reiterated this questionable point: "a minimum wage hike would likely not pass the Senate without small business tax relief." President Bush has said since the midterm elections that he would sign a minimum wage bill, as long as it included provisions for small business.

So a fairer statement would be this one by Baucus, before the vote:

By acting today, we can help to create a sounder minimum wage bill. We can help to create a minimum wage bill that can get more than 60 votes and pass the Senate. And we can help to create a minimum wage bill that the president will sign.

But the future of Baucus' brainchild is uncertain. Under the Constitution, tax bills must originate in the House, where Ways & Means chairman Charles Rangel (D-NY), who opposes adding a tax measure to the minimum wage bill, has threatened to "blue-slip" (refuse to bring up) the Small Business and Work Opportunity Act of 2007.

David Cay Johnston, ace tax reporter, has an excellent story in today's NYT on the norms at IRS concerning audits. To sum up, IRS auditors are more or less discouraged to do thorough audits, letting billions of dollars get away when it's right in front of them.

Top officials at the Internal Revenue Service are pushing agents to prematurely close audits of big companies with agreements to have them pay only a fraction of the additional taxes that could be collected, according to dozens of I.R.S. employees who say that the policy is costing the government billions of dollars a year.

“It’s catch and release,” said Douglas R. Johnson, an I.R.S. auditor in Colorado for three decades who said he grew so frustrated at how large corporations were allowed to pay far less than what he thought they owed that he transferred to the agency’s small-business division.

For more on this issue, see this post on a recent report from the TRAC program, which monitors government data.

Senator Max Baucus (D-MT) is putting the finishing touches on a minimum wage bill that also cuts taxes for small businesses. Even though the House overwhelmingly passed a clean minimum wage bill, Baucus says the $10 billion in proposed tax breaks are needed to offset the hardship a higher minimum wage might impose on small businesses

Yet the tax breaks may turn out to be a windfall for businesses that don't employ low-wage workers. Only one of the tax breaks is conditioned on employing very low wage workers, and none are calibrated to compensate for the marginal costs of higher wages, assuming they aren't passed on to consumers. In testimony to Congress yesterday, Jared Bernstein of the Economic Policy Institute makes these points generally.

Since many businesses with low-wage workers are already paying wages above $7.25 (or will be by 2009), or are in states with higher minimum wages, it will be very difficult to target any offsets to firms actually facing higher labor costs due to the proposed increase.

Even if Congress could target the cuts, it is not clear what costs these tax cuts are supposed to offset. Since employment effects are negligible at best, these cuts will not lead businesses to retain workers they would have otherwise laid off. This, along with the targeting challenge, raises the possibility that the cuts could end up being a windfall for businesses that have already received billions in tax cuts.

So essentially, tax breaks and the the minimum wage increase have almost nothing to do with each other.

Sen. Baucus is taking a page from a familiar playbook here. Recall that Congressional Republicans tried to tie a minimum wage bill to unrelated tax breaks back in the infamous "trifecta" bill. The new sweeteners aren't in the same league as trifecta, which would have cost nearly $750 billion, but Sen. Baucus is playing the same cynical game of legislative horse-trading.

Call the Senate bill trifecta "lite." Minimum wage workers, denied a raise for the last 10 years, deserve better than this.

Steven Pearlstein, the business columnists for the Washington Post, has a blistering expose on Sen. Finance Committee Chairman Max Baucus (D-MT) in today's paper. Pearlstein wonders how (or perhaps why?) Sen. Baucus was able to work his way to the top of the Democrats' list to lead the Finance Committee when many if not all of his views on committee business are essentially contrary to the Democratic Party platform. A few excerpts:

But while Baucus is surely entitled to his opinions, and entitled to do what is necessary to assure his own political survival, he is not entitled to be chairman of the Senate Finance Committee, which handles such key Democratic issues as health care, trade and tax policy. That position ought to be reserved for a statesman with enough political confidence and backbone that he isn't constantly sacrificing the interests of his party and his country to the narrow interests of his subsidy-addicted constituents.

You'd think Baucus would have learned his lesson in 2001, when he won the enmity of Democrats everywhere by striking the deal that led to passage of the Bush tax cuts, including the phase-out of the estate tax. Apparently not. For on the very day the new Democratic House is set to push through a long-overdue minimum-wage increase, over in the Senate, Baucus has called a hearing on how to offset the "economic hardship" caused by the higher minimum wage with yet another round of business tax breaks.

[...]

Real Democrats know that raising the minimum wage is the right thing to do -- economically, politically, morally. The question is why they have chosen a Senate Finance chairman who can't articulate that position without equivocation or apology even before the first vote is cast.

That's pretty hard hitting stuff, and Pearlstein makes a convincing argument in the full article. It's definitely worth a read.

The taxpayer advocate service (TAS), an independent office within the IRS, put out the taxpayer advocate's annual report to Congress today (click here for the executive summary). The TAS decided that the most important issues facing taxpayers this year is the alternative minimum tax, followed by the "tax gap." Its top legislative priorities: creating a special procedure for IRS appropriations, and repealing the IRS privatization program.

There's a summary of the top legislative priorities after the break.

The Democrats are at great pains not to confirm the hysterical GOP midterm warnings that Pelosi & Co. would tax-and-spend like there was no yesterday. But commentators like Robert Kuttner and Paul Krugman, and others have urged a re-examination of ways to raise revenue for domestic needs Democrats have promised to address, raising the dread specter of tax increases.

To the surprise of many, Nancy Pelosi declared on CBS's "Face the Nation" on Sunday that she too is considering raising revenue by repealing tax cuts on taxpayers making over $500,000 a year:

As we review what we get from ... collecting our taxes and reducing waste, fraud and abuse, investing in education and in initiatives which will bring money into the Treasury, it may be that (repealing) tax cuts for those making over a certain amount of money, $500,000 a year, might be more important to the American people than ignoring the educational and health needs of America's children.

In case that sounded a little tax-and-spendy, Pelosi made it clear it is nothing of the sort:

What we're saying is Democrats propose tax cuts for middle-income families. And we want to have 'pay-go,' no new deficit spending. We're not going to start with repealing tax cuts, but they certainly are not off the table for people making over half a million dollars a year.

What's clear -- and curious -- is that there has been no hysterical hue and cry following Pelosi's pronouncement.

Prompted by Sen. Charles Grassley’s (R-IA) comments on Friday, I started digging into past political debates in LexisNexis about the AMT, and I came across this Washington Post article from May 27, 2001*. Written just a few days after the Senate passed its version of the $1.35 trillion 2001 Bush tax cuts, this excerpt indicates it was pretty clear then that the 2001 tax cuts had set up an AMT debacle that Congress will have to face in the coming years.

Paradoxically, the tax cut will sharply increase the number of taxpayers subject to AMT because it will reduce their income tax liability below the point at which the surcharge kicks in.

Without the tax measure approved yesterday, the number affected would rise to 17.5 million in 2010, according to the Joint Committee on Taxation. But with the tax bill, the number reaches 35.5 million by that date.

White House and congressional negotiators counted the AMT revenue from those taxpayers as a "give back" enabling them to keep the cost of the bill to the $1.35 trillion allowed by the Senate.

(emphasis mine)

So there you have it: President Bush and Congress specifically exacerbated the AMT problem to pass the 2001 tax cuts.

Today, the NYT reminds us that the tax cuts of 2001 and 2003 disproportionately benefited the wealthy over the middle class, the super wealthy over the wealthy, and the wealthy-beyond-your-imagination over the super wealthy.

Tax cuts were much deeper, and affected far more money, for families in the highest income categories. Households in the top 1 percent of earnings, which had an average income of $1.25 million, saw their effective individual tax rates drop to 19.6 percent in 2004 from 24.2 percent in 2000. The rate cut was twice as deep as for middle-income families, and it translated to an average tax cut of almost $58,000.

That means that wealthier people didn't just get more of a tax break because they pay more in taxes. Their rates were cut more than everyone else's.

Which reminds me, why are taxes on the rich still so low?

Why are taxes on the rich still so low when only the rich have seen their wages and salaries grow in this recovery? When the rich have been getting richer, the middle class has been getting nowhere, and the poor have been getting poorer? When workers are more productive, but don't earn more?

Why are taxes on the rich still so low when we're fighting a war where the few are paying the price for the many? When the President is thinking about expanding that war and asking for another $100 billion to fund it?

Why are taxes on the rich still so low when, in the long run, it doesn't really increase economic growth?

Why are taxes on the rich still so low when Congress and the President say we don't have enough revenue for things like Medicaid, Head Start, and student loans?

Why are taxes on the rich still so low when we keep running high deficits? When we'll face even larger deficits when the baby boomers retire?

And so on...

Sebastian Mallaby expresses some sensible thoughts on Sen. Max Baucus’s (D-MT) recent declaration of his desire to repeal the alternative minimum tax (AMT):

[A] prescription so fiscally crazy that not even the Bush administration supports it.

Indeed. Mallaby goes on to suggest a permanent AMT fix - in whatever form it may take - could be used as a chip to sweeten any future revenue-generation package, and Baucaus would be wasting this opportunity.

But, more importantly, Mallaby also makes the case that a repeal of the AMT is highly undesirable for two very important reasons:

• It would be extremely expensive - "$750 billion-plus over a decade" and
• The AMT is a progressive tax which is particularly warranted because "in an era of rising inequality, you don't slay progressive monsters casually."

As we’ve argued before, the AMT does need a few adjustments to restore it to being an equitable part of a tax code riddled with so many loopholes and exceptions that sometimes millionaires pay little or no federal income tax at all, but full repeal is simply indefensible.

BNA ($):

Senate Finance Committee Chairman Max Baucus (D-Mont.) and ranking Republican Charles Grassley (Iowa) Jan. 4 introduced a bill (S. 55) to eliminate the individual alternative minimum tax.

This move is not unexpected. Baucus and Grassley have been clamoring for AMT repeal for years, but I choked on my waffle this morning when I got to this bit:

Grassley has adamantly maintained that the cost of lost revenues from preventing the AMT from further creeping into the middle class should not be offset, given that the revenue was never meant to be collected in the first place.

[emphasis mine]

Never meant to be collected in the first place?* That’s not an entirely accurate statement as President Bush and Congressional tax-cutters, in order to ease the passage of the budget-busting 2001 tax cuts (EGTRRA), relied on AMT revenues to make the tax cuts appear less costly. This fact is quite stark when one looks at the amount of AMT revenues under the Bush tax cuts vs. AMT revenues under pre-Bush tax cuts:

*Honestly, I'm not entirely sure what Grassley is getting at here. Is he suggesting that taxpayers who are liable to pay AMT would not be tax evaders if they failed to pay the additional tax, because the tax was "never meant to be collected in the first place?"

President Bush has fired the opening shot of the 2007 budget battle, writing an op-ed in today's WSJ. The piece is mostly PR, which is an encouraging sign that the President is more interested in repairing his image than pursuing harmful policy. Substance-wise, the President is not asking for much more than the continuation of the status quo.

Some notable budgetary policies and goals mentioned in the op-ed:

• No new taxes:
  "Now is not the time to raise taxes on the American people."
• A balanced budget by 2012:
  "By continuing these policies, we can balance the federal budget by 2012 while funding our priorities and making the tax cuts permanent. In early February, I will submit a budget that does exactly that."
• An vague reference to entitlement cuts as a way to balance the budget:
  "By balancing the budget through pro-growth economic policies and spending restraint, we are better positioned to tackle the longer term fiscal challenge facing our country: reforming entitlements -- Social Security, Medicare and Medicaid -- so future generations can benefit from these vital programs without bankrupting our country."
• Legislative process changes and a line-item veto:
  "It's time Congress give the president a line-item veto. And today I will announce my own proposal to end this dead-of-the-night process and substantially cut the earmarks passed each year."