March 5, 2021

Economix Blog: Bruce Bartlett: Getting to Tax Reform

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Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of “The Benefit and the Burden: Tax Reform – Why We Need It and What It Will Take.”

In recent weeks, the odds favoring tax reform in the not-too-distant future have improved somewhat.

Today’s Economist

Perspectives from expert contributors.

The improving deficit means that tax reform need not raise net revenues, as President Obama has demanded; the controversy about aggressive tax avoidance by Apple and other multinational companies has focused Congress’s attention on a key goal of tax reform, which is fixing the multinational tax regime; and the furor over the Internal Revenue Service and accusations that it targeted conservative groups almost certainly means there will be bipartisan legislation to make sure this doesn’t happen again, thus providing a legislative vehicle for tax reform.

What is missing, unfortunately, is the outline of an actual tax reform bill. Some progress, however, has been made.

The Joint Committee on Taxation has recently published a 568-page report on various tax reform options based on the work of House Ways and Means Committee working groups. The committee has even released draft tax reform legislation involving financial derivatives, small businesses and the international sector.

The Senate Finance Committee has released a number of tax reform options papers related to family taxation, business investment and innovation, international competitiveness and other topics. Many insiders also believe that the recently announced retirement of the committee’s chairman, Senator Max Baucus of Montana, improves the prospects for tax reform because his precarious position as a Democrat from a heavily Republican state limited his ability to lead a contentious debate on the subject.

Almost everyone agrees that the ultimate goal of tax reform should be to lower statutory tax rates and that it should be revenue-neutral, that is, neither raising nor lowering net federal revenues over some reasonable time period. This will require the elimination of many tax expenditures benefiting both individuals and businesses.

But at present, no one has put a single specific, significant tax expenditure on the table for elimination, and that is the rub. The tax reform bills that have been introduced thus far are mostly grandiose, utopian plans to completely replace the entire tax system; they have no chance whatsoever of enactment.

In public discussions of tax reform, commentators and politicians tend to blithely assume that all tax expenditures are equivalent to tax loopholes – illegitimate provisions of the tax code that benefit only special interests. But as I have explained previously, all of the really large tax expenditures benefit broad segments of the population or are regarded as legitimate components of the federal tax system that serve vital national interests, like home ownership, helping people save for retirement or providing them with health insurance.

To be sure, many tax loopholes cannot be defended. But they tend to be small and do not provide much revenue to pay for more than a trivial reduction in tax rates.

One problem for tax reformers is the disparate impact of specific tax deductions on different people. For starters, only about a third of tax filers itemize; the rest use the standard deduction. Among those that itemize, those with high incomes are much more likely to do so than those with more modest incomes. This fact is illustrated in the following table from a recent Congressional Research Service report.

Congressional Research Service analysis of Internal Revenue Service Data

Moreover, use of certain deductions depends on one’s income. For example, the very wealthy get little value from the mortgage interest deduction because the law limits it to mortgages of less than $1 million. But the wealthy are much more likely to use the charitable contributions deduction and to deduct large amounts. The average charitable deduction for those with incomes above $1 million was almost $140,000 in 2010.

Consequently, ending or restricting particular deductions will have very different economic and distributional effects at different income levels. Some of these effects are reviewed in a May 21 report from the Congressional Research Service.

The report notes that the most commonly discussed option for raising revenue by restricting itemized deductions wouldn’t abolish them entirely but would limit their availability in some way. The total amount of deductions claimed could be limited by a dollar amount, they could be limited to a certain percentage of income, there could be floors that allow deductions only over a certain amount and various other schemes.

One problem is that phasing out deductions in some way creates disincentives equivalent to raising marginal tax rates. According to the report, simply eliminating all itemized deductions would be equivalent to raising the top income tax rate by 4.4 percentage points. Eliminating the deductions for state and local taxes or for charitable contributions is equivalent to raising the top rate by 2.2 percentage points.

This means that even if statutory rates are simultaneously reduced, there may not be any reduction in effective marginal tax rates, depending on what deductions are restricted or eliminated and how it is done. Only careful analysis can determine the net impact of any particular proposal.

This is why it is essential to have a detailed tax reform plan to analyze. Vague talk about broadening the tax base and lowering statutory tax rates is insufficient to guide legislation. And it takes more time than most people imagine to work through all the effects of various tax reforms, especially when many provisions of the tax code are being changed simultaneously that may move in opposite directions, economically.

Thus far, the Obama administration has been disengaged from the tax reform effort. But if it is going to happen, this must change. That is one lesson of previous tax reform efforts in 1969, 1976 and 1986, all of which were guided into enactment by strong Treasury Department leadership.

Article source: http://economix.blogs.nytimes.com/2013/05/28/getting-to-tax-reform/?partner=rss&emc=rss

Treasury Nominee Weathers a Wave of Questioning

As the Senate gears up to vote on the next Treasury secretary, President Obama’s choice for the job, Jacob J. Lew, has been forced to navigate through something of a political minefield.

As White House chief of staff and a former budget director, Mr. Lew has sought to show he has enough Wall Street experience to handle turbulent financial markets, but not enough to prevent him from reining in the powerful banking industry.

Mr. Lew, who is expected to win an initial nod from the Senate Finance Committee on Tuesday and sail on to approval in a full Senate vote, has battled a range of criticism, including questions about his lucrative tenure at Citigroup, a Cayman Islands investment and housing assistance he received as an administrator at New York University more than a decade ago.

To shore up his support, Mr. Lew has met privately in recent weeks with 41 senators and responded to 738 questions for the record. On Tuesday, he is scheduled to head to Capitol Hill for another meeting.

Much of the vitriol surrounding Mr. Lew’s nomination concerns the terms of his employment at Citigroup, which seemed to reward him for leaving the bank if he took a high-ranking position in government.

During Mr. Lew’s confirmation hearing, Senator Orrin Hatch, Republican of Utah, peppered Mr. Lew with questions about the terms of that contract, specifically challenging whether the contract violated the president’s efforts to “close the revolving door.”

Under the terms of Mr. Lew’s contract with Citi, he kept certain bonus compensation if he left for a “high level position with the United States government or regulatory body,” but not a competitor in the private sector, according to several people with direct knowledge of the contract.

Many of the most exacting questions have come from Senator Charles Grassley, Republican of Iowa, related to a money-losing investment in a fund based in the Cayman Islands.

Mr. Lew had a $56,000 investment in the Citigroup fund, leading to questions from Republican senators about whether the investment had been put there to dodge taxes.

At one point during the hearings, Senator Pat Roberts, Republican of Kansas, held up a huge picture of Ugland House, an office building in the Cayman Islands where thousands of companies, including Mr. Lew’s fund, have registered. The display struck a particularly discordant note because Mr. Obama has used the Ugland House as a symbol for tax havens in his first campaign for president.

“Well there’s a certain hypocrisy in what the president says about other taxpayers, and your appointment,” Mr. Grassley said during the hearing.

Mr. Lew responded by saying that he did not get any tax advantages because of the investment’s location and sold it for a loss.

Senator Grassley also pressed Mr. Lew for more details on hundreds of thousands of dollars in loans that New York University provided while he was an executive with the school.

“N.Y.U. provided the financing over a decade ago,” Mr. Lew wrote in a response to Senator Grassley’s follow-up questions, providing details on the dollar figures and construction of the financing. “During the intervening time period, I repaid the university and privately refinanced the mortgage on my home multiple times. I am still living in the same home today.”

Senator Grassley was not satisfied with Mr. Lew’s written responses, saying he still had concerns about the transparency of Mr. Lew’s compensation. “Mr. Lew has a lack of knowledge or a poor memory of some of the perks he received through his tenure at New York University and Citigroup,” the senator said in a statement. “Most people who receive a $1.4 million loan from their employer remember the terms.”

Privately, officials involved in the confirmation process called the spate of attacks on Mr. Lew politically motivated, arguing that the Cayman Islands criticisms are a direct reprisal for attacks leveled at Mitt Romney during the presidential campaign for his offshore bank accounts.

Much of the battle over Mr. Lew’s income and former status on Wall Street is inconsistent, the aides contended, pointing out that Republicans broadly backed Henry M. Paulson Jr., who left his position as chief executive of Goldman Sachs to become Treasury secretary in 2006.

This article has been revised to reflect the following correction:

Correction: February 25, 2013

An earlier version of this article incorrectly included one senator as a source of questioning about loans received by Jacob Lew while working at New York University. The questions came from Senator Charles Grassley alone; Senator Orrin Hatch did not join in raising them. The article also misstated when Mr. Lew worked on a Eugene McCarthy presidential campaign. It was while he was in grade school, not after he arrived in Washington.

Article source: http://www.nytimes.com/2013/02/26/business/economy/treasury-nominee-works-to-address-concerns.html?partner=rss&emc=rss

Treasury Pick Tries to Cast His History as Right for the Job

As the Senate gears up to vote on the next Treasury secretary, President Obama’s choice for the job, Jacob Lew, has been forced to navigate through something of a political minefield: As White House chief of staff and a former budget director, Mr. Lew has sought to show he has enough Wall Street experience to handle turbulent financial markets, but not enough to prevent him from reining in the powerful banking industry.

Mr. Lew, who is expected to win an initial nod from the Senate Finance Committee on Tuesday and sail on to approval in a full Senate vote, has battled a range of criticism, including questions about his lucrative tenure at Citigroup, a Cayman Islands investment, and housing assistance he received as an administrator at New York University more than a decade ago. To shore up his support, Mr. Lew has met privately in recent weeks with 41 senators and responded to 738 questions for the record. On Tuesday, he is scheduled to head to Capitol Hill for another meeting.

Much of the vitriol surrounding Mr. Lew’s nomination concerns the terms of his employment at Citigroup, which seemed to reward him for leaving the bank if he took a high-ranking position in government. During Mr. Lew’s confirmation hearing, Senator Orrin Hatch, a Republican from Utah, peppered him with questions about the terms of that contract, specifically challenging whether the contract violated the president’s efforts to “close the revolving door.”

Under his contract with Citi, Mr. Lew kept certain bonus compensation if he left the bank for a “high level position with the United States government or regulatory body,” but not a competitor in the private sector, according to several people with direct knowledge of the contract.

Many of the most exacting questions have come from Senator Charles Grassley, Republican of Iowa, related to a money-losing investment in a fund based in the Cayman Islands. Mr. Lew had a $56,000 investment in the Citigroup fund, prompting questions from Republican senators about whether the investment was stashed there to dodge taxes.

At one point in the hearings, Senator Pat Roberts, Republican of Kansas, held up a huge picture of Ugland House, an office building in the Cayman Islands where thousands of companies, including Mr. Lew’s fund, have registered. The display struck a particularly discordant note because Mr. Obama used the Ugland House as a symbol for tax havens in his first campaign for president.

“There’s a certain hypocrisy in what the president says about other taxpayers, and your appointment,” Mr. Grassley said at the hearing. Mr. Lew responded by saying that he had not received any tax advantages because of the investment’s location and ultimately sold it for a loss.

Senator Grassley also pressed Mr. Lew for more details on hundreds of thousands of dollars in loans that New York University provided while he was an executive with the school.

“N.Y.U. provided the financing over a decade ago,” Mr. Lew wrote in a response to Senator Grassley’s follow-up questions, providing details on the dollar figures and construction of the financing. “During the intervening time period, I repaid the university and privately refinanced the mortgage on my home multiple times. I am still living in the same home today.

Mr. Grassley was not satisfied with Mr. Lew’s written responses, saying he still had concerns about the transparency of Mr. Lew’s compensation. “Mr. Lew has a lack of knowledge or a poor memory of some of the perks he received through his tenure at New York University and Citigroup,” the senator said in a statement. “Most people who receive a $1.4 million loan from their employer remember the terms.”

Much of the battle over Mr. Lew’s income and former status on Wall Street is inconsistent, the aides contended, pointing out that Republicans broadly backed Henry Paulson, who left his perch as chief executive of Goldman Sachs to become Treasury secretary in 2006.

This article has been revised to reflect the following correction:

Correction: February 25, 2013

An earlier version of this article incorrectly included one senator as a source of questioning about loans received by Jacob Lew while working at New York University. The questions came from Senator Charles Grassley alone; Senator Orrin Hatch did not join in raising them. The article also misstated when Mr. Lew worked on a Eugene McCarthy presidential campaign. It was while he was in grade school, not after he arrived in Washington.

Article source: http://www.nytimes.com/2013/02/26/business/economy/treasury-nominee-works-to-address-concerns.html?partner=rss&emc=rss

Slow Recovery Worsens Financial State of Medicare

The estimates, in the annual report by the Medicare trustees, were immediately swept up into the already inflamed political battle over federal spending, debt and the future of entitlement programs.

The trustees said that payroll tax revenues, which provide most of the money for Medicare’s hospital insurance trust fund, were lower than expected last year because earnings were “considerably lower than projected” and the economy was weaker than expected.

Republicans said the bleaker picture for Medicare showed a need for immediate action to shore up the finances of the program, which insures 47.5 million people who are 65 and older or disabled.

“The biggest threat Medicare faces right now is the status quo,” said the House speaker, John A. Boehner, Republican of Ohio. “The trustees’ report makes it clear that if we do nothing, Medicare will not be able to pay promised benefits to American seniors.”

Democrats said that the financial outlook for Medicare would have been much worse without the new health care law. The law, which President Obama cites as one of his greatest political accomplishments, promises to be a central point of conflict in the 2012 presidential election.

Without the new law, said Kathleen Sebelius, the secretary of health and human services, “Medicare would have gone bankrupt in 2016, only five years from now.”

Senator Max Baucus, Democrat of Montana and chairman of the Senate Finance Committee, said, “The current economic crisis has hit the Medicare trust fund, and hit it hard.” Mr. Baucus, an architect of the new law, and other Democrats vowed to resist Republican efforts to repeal it.

The trustees said the financial outlook for Social Security had changed little. They said the Social Security trust fund would be exhausted in 2036, one year sooner than projected in last year’s report, and even then, they said, tax revenue would be sufficient to pay three-fourths of promised benefits through 2085.

It is inconceivable that politicians would allow either program to run out of money. The projected dates of insolvency are widely used as a measure of the financial condition of Social Security and Medicare, which together account for more than one-third of all federal spending.

In unveiling the new estimates, Treasury Secretary Timothy F. Geithner, the managing trustee of the trust funds, noted the need for additional borrowing to keep the government’s myriad commitments in other programs.

“On Monday,” Mr. Geithner said, “just three days from today, the United States will reach the debt limit set by Congress. Because Congress has not yet acted, we have now set in motion a series of extraordinary measures that will give Congress some additional time to raise the debt limit.”

As a condition of increasing the debt limit, many Republicans are demanding changes in benefit programs. But House Republicans have discovered that they are playing with political dynamite when they propose major changes in Medicare.

The reports were signed by the six trustees: three cabinet officers, the Social Security commissioner and two public representatives.

The Medicare report included a disclaimer by the chief Medicare actuary, Richard S. Foster. “The financial projections shown in this report for Medicare do not represent a reasonable expectation for actual program operations” in the short term or the long range, said Mr. Foster, a civil servant whose independence is protected by law.

The projections assume that Medicare will cut doctors’ fees by 29 percent on Jan. 1, as required under current law, but Congress routinely intercedes to block such cuts.

Moreover, the report says that projected Medicare costs over 75 years are about 25 percent lower because of the new health care law.

Under the law, Medicare will hold down payments to hospitals and other health care providers to reflect presumed increases in productivity. But, Mr. Foster said, if these constraints are kept in place, Medicare payments to providers will eventually be “far below the levels paid by private health insurance.”

Article source: http://feeds.nytimes.com/click.phdo?i=a2cdd2adf7ec023684b061b4a7a400f4

Oil Chiefs Lash Out Against Tax Proposal

 Rex W. Tillerson, chief executive of Exxon Mobil, called the proposed tax changes “misinformed and discriminatory” as well as “counterproductive.” He added: “By undermining U.S. competitiveness, they would discourage future investment in energy projects in the United States and therefore undercut job creation and economic growth.” 

His remarks came at a hearing of the Senate Finance Committee on a proposal from Democratic senators to end tax subsidies for five oil companies: BP, Exxon Mobil, Shell, Chevron and Conoco Phillips. Except for BP, which saw its profit fall because of the costs of the gulf oil spill, the companies’ first-quarter profits rose sharply, with Exxon reporting a 69 percent rise in quarterly profits.

The proposal, from Senators Robert Menendez of New Jersey, Sherrod Brown of Ohio and Claire McCaskill of Missouri, would use the money saved to reduce the federal deficit. In announcing the legislation, Mr. Menendez said earlier this week that “we simply can’t afford to keep giving away billions in taxpayer handouts to oil companies that are doing nothing to help lower prices.”

A group of Democrats from the Finance Committee wrote to the oil executives earlier this week, effectively urging them to unilaterally renounce the subsidies, an action that seemed unlikely.  “We urge you to take this opportunity to publicly admit that, given your companies’ prodigious profits, you no longer need taxpayer subsidies,” the letter said.

The now-intertwined issues of gas prices and the federal deficit have taken on such angry undertones that the hearing was expected to be something of a showdown.

 By linking the two volatile issues, senior Democrats said earlier that they hoped to press Republicans to back the measure or explain their refusal to taxpayers facing the increasing burden of high gas prices. 

But many Republicans, along with Democratic senators from energy-producing states, appear sure to oppose the plan, and Democrats will probably have difficulty obtaining the 60 votes needed to overcome a filibuster. One oil-state Democrat, Mary L. Landrieu of Louisiana, said this week that oil and gas subsidies account for less than 13 percent of all United States energy subsidies.

The ranking Republican on the committee, Senator Orrin Hatch of Utah, suggested that Democrats were playing a cynical game, seeking to blame oil companies while, he asserted, intending to raise gasoline prices in order to reduce consumption.

“So while the American people ask Congress to do something about high gas prices,” he said, “the response of Democrats is to rail against oil executives, to mask the fact that their policy is actually to make the price at the pump more painful.”

He called the hearing a “dog and pony show” and displayed a blown-up picture of a dog riding a pony, to make the point that the hearing was just a chance for Democrats to score political points, without doing anything about high gas prices or a sensible energy policy.

Marvin E. Odum, president of Shell Oil Company, argued Thursday that high oil prices result not from oil companies’ greed but from an ever-changing confluence of political, economic and climatic factors. “No one person, organization or industry can ‘set’ the price for crude oil,” he planned to say, according to advance remarks. The resumption of world economic growth, and the weakness of the dollar — the currency used in oil transactions — were now driving up prices, he said.

Senate Democrats, however, were not the only ones adding to pressure on the oil companies. President Obama said in his weekly address that while he had no problem with any company reaping the rewards of success, “I do have a problem with the unwarranted taxpayer subsidies we’ve been handing out to oil and gas companies — to the tune of $4 billion a year. When oil companies are making huge profits and you’re struggling at the pump, and we’re scouring the federal budget for spending we can afford to do without, these tax giveaways aren’t right. They aren’t smart. And we need to end them.”

The hearing, which started at 9 a.m. Eastern time, can be viewed on the committee’s Web site.

John M. Broder contributed reporting.

Article source: http://feeds.nytimes.com/click.phdo?i=db6688b9e99f87132f62d2e1813b14b8