The Wonk Room

Conrad Pushes Temporary Extension Of Bush Tax Cuts, Calls GOP Tax Plan A Formula For U.S. Decline

Earlier this month, Sen. Evan Bayh (D-IN) said that he agreed with Rep. Eric Cantor’s (R-VA) assertion that all of the Bush tax cuts should be extended, even those for the richest two percent of Americans. The Obama administration has proposed retaining the cuts for the lower- and middle-class while allowing those for the rich to expire on schedule at the end of the year.

Yesterday, Sen. Kent Conrad (D-ND), the chairman of the Senate Budget Committee, called for a temporary extension of all the cuts, including those for the wealthy, adding that “he thinks waiving so-called pay-go rules to extend the upper income rates should be considered”:

“Pay-go is not just a line in the sand,” he said. “There is a reason that you have a pay-go waiver, which requires 60 votes.”

Today, Conrad clarified that he is by no means endorsing the Republican line on a deficit-financed permanent extension of all the Bush tax cuts, saying that “the Republicans’ proposal to me is a formula for the decline of the United States.” His position is that the tax cuts for the rich should only be extended for 18-24 months, “until the recovery is on more solid ground.”

While Conrad’s position is far more nuanced than that of the Republicans, extending the Bush tax cuts is still one of the least stimulative steps that policymakers can take to boost the economy, generating just 29 cents of economic activity for every dollar spent (since the benefits overwhelmingly go to the wealthy, who are far more likely to save a dollar received than is someone from the lower- or middle-class). Extending all of the cuts for two years would cost $558 billion, including debt service costs, according to the Pew Fiscal Analysis Initiative.

Today, when asked if Democratic leaders are willing to consider extending all of the Bush tax cuts, Speaker of the House Nancy Pelosi (D-CA) said, “No. Our position has been that we support middle-income tax cuts.” Treasury Secretary Timothy Geithner also reiterated the administration’s position today:

Mr. Geithner said there is “still some uncertainty about how strong the recovery is going to be,” which may be impacting spending decisions by businesses and individuals. But he discounted that as a reason to extend the Bush-era tax cuts for top earners, saying most private forecasts show moderate economic growth and increasing public confidence in the recovery.

Yesterday, Sen. Ben Nelson (D-NE) “said through a spokesman that he also supported extending all the expiring tax cuts for now, adding that he wanted to offset the impact on federal deficits as much as possible.”

Reagan’s Chief Economist Breaks With Norquist’s Big Spending Plan

Our guest blogger is Sima Gandhi, a Senior Policy Analyst at the Center for American Progress Action Fund.

For years, right-wing lobbyist Grover Norquist has pressured candidates to sign a pledge promising never to repeal expensive tax subsidies for oil companies and other special interests, and hundreds of elected officials have, sadly, complied.  Earlier this week, however, Norquist lost a major ally in his quest to protect hundreds of billions of dollars worth of special tax expenditures—President Ronald Reagan’s chief economist.

In a Wall Street Journal op-ed this week, conservative economist Martin Feldstein writes that “[w]hen it comes to spending cuts, Congress is looking in the wrong place.” Instead of looking at direct spending programs, he argues that “If Congress is serious about cutting government spending, it has to go after [tax expenditures].”

Indeed, if the government cut all of its $1.2 trillion in tax expenditure spending—the special credits, deductions, and preferential rates that deliver subsidies to certain individuals and corporations—it would raise nearly enough to pay off this year’s estimated $1.5 trillion deficit. Or it could use the savings to cut tax rates by over 40 percent.

So Feldstein is right that Congress could massively slash the deficit simply by cutting off big industry’s tax subsidies—tax expenditures amount to nearly 25 percent of total government spending.  Unfortunately, he also correctly observes that there are political barriers to doing so:

Democrats are reluctant to cut such programs, because once built into the tax law they don’t have to be reauthorized each year, but remain on the books unless they are repealed… Democrats can thus cleverly avoid the traditional accusation of being the party of “tax and spend.” Republicans also are reluctant to cut these tax perks, because they regard the additional revenue collected by the federal government as a “tax increase”—even though the increased revenue is really the effect of a de facto spending cut. A Republican who would vote to cut or eliminate an ordinary spending program therefore won’t do so if it is packaged as a tax benefit.

How are tax expenditures, which transfer money by reducing tax liability, equivalent to direct government expenditures, such as a check? Let’s take an example. Suppose the government wants to incentivize businesses to make their facilities more accessible to the disabled. It could cut a check to businesses in order to subsidize the cost of building ramps, making restrooms wheelchair accessible, etc. Or, it could offer an “architectural barrier removal tax deduction” and a “disability access tax credit.” These tax credits, just like the check, transfer money from the government to businesses that make their facilities more accessible. The difference? Businesses get the money by paying lower taxes instead of through a government payment.

When it comes to controlling the deficit, and getting rid of government waste, lawmakers can no longer afford to ignore tax expenditure spending. It’s time to audit the tax code. This means measuring and evaluating tax expenditures, so that subsidies that don’t work are cut or reformed. And subsidies that do work are continued.

More importantly, it means integrating tax expenditures into the budget process. Tax expenditures, because they are largely ignored during the budget process, do not receive the same level of review and scrutiny that direct expenditures receive.  Politicians can no longer afford to ignore one-quarter of government spending every time it drafts the federal budget.

Report: Multinational Corporations And Banks Use Tax Havens To Dodge $37 Billion In U.S. Taxes Per Year

Last month, in Tax Notes magazine, Martin Sullivan laid out the dramatic drop in the effective tax rate of Transocean, which owns the failed Deepwater Horizon rig in the Gulf of Mexico, as it incorporated itself in tax havens like the Cayman Islands and Switzerland. Transocean’s tax avoidance helped it lower its tax rate by nearly fifteen points, despite the fact that it kept most of its operations in the United States.

“These tax-motivated restructurings occur with little or no real change in day-to-day business operations. Top executives, key personnel, and all significant business operations in the United States before the transaction remain in the United States,” Sullivan noted. But Transocean is far from the only company taking advantage of America’s loophole ridden tax code to park profits offshore and avoid taxes.

According to a new report from Business and Investors Against Tax Haven Abuse, an organization backed by Sen. Carl Levin (D-MI) that is seeking to end tax avoidance and evasion, multinational corporations and banks are ducking $37 billion annually in taxes:

Fifty years ago, corporate income taxes accounted for 23.2% of federal government receipts, and individual income tax payments were less than twice those of large corporations’ tax payments. Today, the U.S. Office of Management and Budget estimates corporate tax receipts will account for just 7.2% of federal revenues in 2010, with large corporations contributing less than one-sixth as much as small business and individual taxpayers to the Federal Treasury (small businesses most often pay taxes according to their owner’s individual tax rates).

Eighty-three of the 100 largest publicly traded U.S. corporations and 63 of the 100 largest federal contractors have at least one subsidiary in a tax haven, the report says. Companies as different as Goldman Sachs, Safeway, and Liberty Mutual all share a common penchant for tax dodging. Such widespread avoidance simply shifts the tax burden onto law abiding individuals and businesses, who ultimately have to pay more to make up for the lost revenue.

The report recommends, among other things, the implementation of Rep. Lloyd Doggett’s (D-TX) International Tax Competitive Act of 2010, which “would treat a company as a U.S. company for tax purposes if its management and officers with day-to- day control are located in the U.S., even if its paper incorporation is offshore.” I spoke to Doggett back in April, when he told me, “I always find it impossible to explain why a pharmacist in Bastrop, Texas, or a small retail store in San Marcos is having to pay higher rates on the income that their hard-working small business owners are earning than some multinational that can duck and dodge taxes in Bermuda or the Cayman Islands.”

Of course, doing anything to crack down on tax evasion means incurring the wrath of the Chamber of Commerce and Big Business community, which continually fearmonger about the effect of taking such steps to ensure that companies pay the tax rate that is on the books.

Kyl Selectively Edits Report In Weak Attempt To Refute Legitimate Criticism Of His Deficit Hypocrisy

Our guest blogger is Michael Linden, Associate Director of Tax and Budget Policy at the Center for American Progress Action Fund.

This week the Washington Post ran a sensible editorial highlighting the hypocrisy of Republicans who oppose a $33 billion extension of unemployment benefits but strenuously support an extension of massive tax cuts for very rich people that would cost 20 times more. Specifically, the Post called out Senate Minority Whip Jon Kyl (R-AZ), who, in a recent interview, tied himself into rhetorical knots trying to justify the obvious contradiction. The Post rightly pointed out that such a stand speaks volumes, “about the GOP’s refusal to practice the fiscal responsibility it preaches.”

The Post also, almost as an aside, mocked Kyl’s reliance on, “the tired and unsubstantiated argument that the tax cuts for the wealthy must be extended because otherwise ‘you’re going to clobber small business.’” Today, in a letter to the Post, Kyl responded, and his response really illustrates how weak the Republican position is on the merits:

The Post also questioned my assertion that raising taxes on upper-income Americans would ‘clobber small businesses.’ But facts are stubborn things. Small businesses generated roughly 64 percent of net new jobs in the past 15 years. Of the almost 120 million private-sector workers in the United States, slightly more than half work for small businesses. So if we’re trying to promote economic policies that create jobs, why raise taxes on the job creators? The nonpartisan Joint Committee on Taxation noted this month that half of all income reported by individuals in the top two tax brackets is business income.

Kyl first offered two data points (unsourced, of course) to illustrate how crucial small businesses are to the economy. That’s fine, but it’s also entirely beside the point. Kyl offers no evidence that any of the businesses he referenced would be affected by the expiration of the Bush tax cuts at all, and chances are extremely high that they would not, as fewer than 2 percent of small businesses owners file in the top two income tax brackets.

Kyl then tries again by referencing this JCT report, which states that “half of all income reported by individuals in the top two brackets is business income.” But did you notice anything at all odd about that sentence? Did you notice that the word “business” is not preceded by the word “small?” Maybe it’s because the very next sentence from the very same JCT report that Kyl relies on says:

These figures for net positive business income do not imply that all of the income is from entities that might be considered ’small.’ For example, in 2005, 12,862 S corporations and 6,658 partnerships had receipts of more than $50 million.

So, what we are really talking about here is extremely wealthy people who claim millions and millions of dollars in income as “business income” and have no relationship at all to actual small businesses. In fact, that very same JCT report states that only 3 percent of taxpayers with any net positive business income at all will be affected by the expiration of the Bush tax cuts for the wealthy. The Post rightly dismissed Kyl’s argument as “tired” and “unsubstantiated,” because, as his reliance on cherry-picked data makes clear, that’s exactly what it is.

Sen. Barrasso Calls For Repealing Middle Class Tax Cuts To Finance Tax Cuts For The Rich

In the last week or so, a dizzying array of Republicans have made it their official stance that $33 billion to extend unemployment benefits must be fully paid for, but financing a $678 billion extension of the Bush tax cuts for the wealthy with deficit spending is just fine. “I think we need to be paying for all the spending that’s going on,” said Rep. Michele Bachmann (R-MN). “But when people can keep more of their own money that shouldn’t be considered a cost.”

Today, Sen. John Barrasso (R-WY) tackled this topic and started to go down the same road as the likes of Bachmann, and Sen. Jon Kyl (R-AZ), who was the first to set foot in this fiscal fantasy land. But he then pivoted to suggest that the Bush tax cuts for the wealthy should be funded with unspent stimulus funds:

Q: Are you for extending the Bush tax cuts to the wealthiest Americans, yes or no? [...] Are you paying for them? Or are you for adding to the deficit to continue those tax cuts?

Barrasso: There is so much unspent stimulus money that we ought to use that in a responsible way, which is to help keep taxes low.

Watch it:

This is problematic on two levels. First, it’s simply not true that there’s “so much unspent stimulus money” just lying around. According to the latest data, there is $362 billion in stimulus funding waiting to be allocated (see chart at right), so Barrasso is still $325 billion short of the money he would need to cover the $678 billion cost of extending the Bush tax cuts for just the richest two percent of Americans.

And a longer look at the chart reveals that $125 billion of the unallocated funding is already dedicated to tax cuts. Remember, despite conservative’s constantly portraying it as only federal spending, the stimulus cut taxes for 95 percent of Americans. So Barrasso’s plan to repeal the money amounts to a tax increase on the lower- and middle-classes, which Barrasso wants to then turn around and spend on tax cuts for the rich.

Barrasso didn’t explicitly call for raising taxes on the poor and middle class in order to pay for his preferred policy outcome (which is tax rates for the wealthy that are as low as possible), but that’s what his suggestion would do. A similar sentiment was made far more directly by Wall Street Journal Editorial Board member Stephen Moore, who called for raising the rate of the lowest tax bracket in order to bring down tax rates for the rich.

Why Warren Is Fit To Lead The New Consumer Protection Agency

Tomorrow, President Obama will sign the Dodd-Frank financial regulatory reform bill, moving the task of creating a fair, stable financial system from the legislative phase to the implementation phase. And the highest profile step at the moment is appointing the first director of the Consumer Financial Protection Bureau.

Reportedly, the three leading candidates for the post are Elizabeth Warren, a Harvard Law professor and head of the Congressional Oversight panel for TARP; Assistant Treasury Secretary Michael Barr; and Eugene Kimmelman, deputy assistant attorney general in the Justice Department’s Antitrust Division. Warren is easily the highest profile of the three. The Progressive Change Campaign Committee, Sen. Tom Harkin (D-IA) and Rep. Carolyn Maloney (D-NY) have all circulated petitions supporting her nomination.

It’s obvious to see why Warren is the front-runner for the job. After all, the idea to create an agency solely tasked with policing consumer lending was hers, which she laid out in a 2007 journal article. But lately, there’s been a lot kvetching in Congress, not over whether Warren is qualified, but whether she’s confirmable:

“Elizabeth would be a terrific nominee,” said [Sen. Chris] Dodd, the Connecticut Democrat who leads the Senate Banking Committee. “The question is, ‘Is she confirmable?’ And there’s a serious question about it.”

Of course, if she’s a “terrific nominee” then why is there such a “serious question” about getting her confirmed? Dodd doesn’t deign to say.

The main complaint about Warren seems to be that she’s done her job as chair of the Oversight Panel too well, ticking off various members of Treasury and lambasting the financial services industry. But as Paul Krugman wrote, “Warren really is a pioneering expert on household debt and financial distress, who has also shown an ability to work effectively in an official position. Against that, whatever personal quarrels she may or may not have had shouldn’t count at all.”

In fact, the willingness to speak up against the Treasury Secretary (and the other bank regulators) when the occasion calls for it is an asset for the Bureau’s Director, as the Financial Stability Oversight Council, which is largely composed of the current regulators and chaired by the Treasury Secretary, can veto the Bureau’s rules. The Bureau Director has a seat on the council and can’t be too deferential if the Bureau is to actually implement rules with teeth.

Warren will also help in attracting qualified personnel to the new agency, which is another critical ingredient for ensuring that it doesn’t find itself immediately subservient to the already well-established bank regulators. As the Cambridge Winter Center’s Tim Duncan wrote, “the first Director will have to make recruitment from existing agencies and the outside world his or her top priority and be willing to go to the mat with other agency heads to secure experienced, high-quality people. The Bureau should not be tempted into hiring employees simply for the sake of filling in boxes on an organization chart.” The appeal of working for Warren will help a lot in this area.

Of course, Republicans will gripe about Warren’s nomination, and likely mount a filibuster. But they are going to complain about any nominee, since they are fundamentally opposed to the very creation of the CFPB. Just like the Dodd-Frank bill itself got stronger because of a public fight on the Senate floor, picking a fight over the nominee — and forcing Republicans to go to bat for the big banks against an incredibly qualified, consumer focused choice — could pay significant dividends.